By 7:45 a.m. Merrill Lynch had downgraded its former Focus One favorite, IBM, and the market looked like it would roll over again. Helping it decline was Prudential, which recommended its clients sell some bonds to raise cash and downgraded bellwether General Motors. . . . In order to put in a bottom you have to pretty much lose every last bull. These two signs of capitulation on top of the myriad death-of-the-bull clues all week set the correct psychological tone — despair — for a rally. . . .The negative reaction to a half-decent payroll report also gave rise to a capitulation bottom.
—James Cramer, "Cramer Calls the Bottom," TheStreet.com, April 7, 1997
Stock traders are the world's greatest optimists. Their natural state is bullishness and they see the world from an "up-and-to-the right" slant. (That is, they believe things will always get better — particularly, that stock prices will rise — over time.) When tough times hit the stock market, this optimism wanes, but it's usually still easy to find a few traders who remain undauntedly upbeat. But if things stay awful for a long time, or if the markets are battered by one piece of bad news after another, then even these last few optimists abandon ship. When that happens, when everyone just surrenders to the bear and no one has anything left to sell, then a bottom is reached — the
capitulation bottom — and the market should soon resume its rising ways.
