Thursday, December 4, 2008

Capitulation in real-time

I have written about Freeport McMoran (ticker FCX), a copper miner that also mines a little gold. Yesterday, the stock demonstrated features of capitulation. This term is best thought of as a "giving up" by investors. A critical mass number of the investing herd throws in the towel and capitulates to the existing trend, buying or selling in a fury as an exhaustion end to a stock's directional move.

Capitulation is most often talked about on the down side as a signal that a downward trend has come to an end. A high volume aggressive sell-off at the very end of a trend is a signal to go long in the right setting. I got into FCX on the last plunge in late November. The re-test of this low that probably completed yesterday created a capitulation scenario and is bullish. The short-term bounce/rally that could generate gains of 100% within 2-4 months should have begun today.

Here's the chart, which includes examples of other capitulation days:

A capitulation is the exclamation point for the exhaustion of a trend. When everyone and their mother is selling the stock at the very end of a vicious decline, everyone and their mother is selling at the exact wrong time. It fits with the principal of contrarian investing, or buying when everyone else is selling to get ahead of the herd. If you want to get out of a stock, you shouldn't sell it at the completion of a panic, but rather on the bounce out of that panic so you can get some of your money back.

Make no mistake, I am not a long-term bull on this stock, but probable 100% gains in the span of a few months without the use of leverage are rather hard to come by, no? There are other stocks with similar potential throughout this sector and buying the double bullish ETF with ticker UYM is an easy way to play this coming rally and get double leverage as well as diversify risk within the basic materials sector (FCX is a bellweather blue chip member of this sector). I am trading both vehicles in a quest for short-term profits.

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