Extreme Fear: How to Identify "Capitulation" Stocks

Before you go, we thought you'd like these...
Before you go close icon

Debt, foreclosures, a credit downgrade, high unemployment, dismal consumer confidence, slashed earnings estimates, and more have each taken their toll on the stock market. At what point will all the bad news be priced in?

It's referred to as "capitulation," the moment when the market ceases to be shocked by headlines. The market forms a bottom from which stocks can move higher -- a reversal of fortune.

After all, the best part of a market bottom is that there are few other directions to go but up.

For example, the closely watched Bank of America (NYS: BAC) stock has fallen almost 50% year-to-date while creating panic in the markets. Analysts are estimating the bank will have to raise $50 billion to meet new global capital requirements, but famed value investor Warren Buffett thinks its the stock is attractively priced and likely to rebound. Is capitulation for BAC under way? 

Identifying the point of capitulation is no easy task, and while many see opportunity, some investors are growing increasingly skeptical of how a possible Greek default on its debt could send the economy into another great depression.

CNBC reports: "The latest Investors Intelligence survey -- which polls newsletter editors on their market feelings -- saw bullish sentiment slip to 27 percent in August. The CBOE Volatility Index, often used to gauge investor fear, is on track for a three-week closing high."

So, where can you find stocks that may be witnessing capitulation?

To help you find ideas, we looked at a universe of about 200 stocks that appear to be oversold, according to the Relative Strength, or RSI(14), indicator. All of the stocks mentioned below have RSI(14) readings below 40, which usually signals oversold conditions.

In addition, all of these stocks have seen a sharp increase in shares shorted over the last month, an indication that short-sellers think there's more downside to these names.

Is this excessive pessimism justified? Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)

1. Express Scripts (NAS: ESRX) : Provides a range of pharmacy benefit management services in North America. RSI(14) index at 39.03. Shares shorted have increased from 54.95M to 60.53M over the last month, an increase which represents about 1.15% of the company's float of 484.40M shares.

2. Alpha Natural Resources (NYS: ANR) : Engages in the production, processing, and sale of coal in the United States. RSI(14) index at 39.93. Shares shorted have increased from 8.77M to 12.02M over the last month, an increase which represents about 1.44% of the company's float of 225.08M shares.

3. TIM Participacoes (NYS: TSU) : Provides mobile telecommunications services through global system mobile (GSM) technology to business and individual customers in Brazil. RSI(14) index at 29.51. Shares shorted have increased from 3.97M to 6.78M over the last month, an increase which represents about 1.48% of the company's float of 190.01M shares.

4. Ball Corporation (NYS: BLL) : Ball Corporation, together with its subsidiaries, supplies metal packaging to the beverage, food, and household products industries worldwide. RSI(14) index at 39.01. Shares shorted have increased from 4.64M to 7.68M over the last month, an increase which represents about 1.89% of the company's float of 160.62M shares.

5. CB Richard Ellis Group (NYS: CBG) : Operates as a commercial real estate services company worldwide. RSI(14) index at 38.65. Shares shorted have increased from 6.68M to 11.01M over the last month, an increase which represents about 1.5% of the company's float of 288.72M shares.

6. Albemarle (NYS: ALB) : Develops, manufactures, and markets engineered specialty chemicals in the United States and internationally. RSI(14) index at 36.86. Shares shorted have increased from 803.10K to 2.10M over the last month, an increase which represents about 1.43% of the company's float of 90.89M shares.

7. Whirlpool (NYS: WHR) : Engages in the manufacture and marketing of home appliances worldwide. RSI(14) index at 34.81. Shares shorted have increased from 7.03M to 8.65M over the last month, an increase which represents about 2.13% of the company's float of 75.96M shares.

8. LPL Investment Holdings (NAS: LPLA) : Provides technology, brokerage, and investment advisory services through business relationships with independent financial advisors, financial advisors employed by financial institutions, registered investment advisors, and financial institutions in the United States. RSI(14) index at 37.62. Shares shorted have increased from 1.45M to 1.87M over the last month, an increase which represents about 1.2% of the company's float of 34.96M shares.

9. Level 3 Communications (NAS: LVLT) : Engages in the communications business in North America and Europe. RSI(14) index at 33.93. Shares shorted have increased from 167.07M to 185.55M over the last month, an increase which represents about 1.07% of the company's float of 1.72B shares.

10. Fortinet (NAS: FTNT) : Provides network security appliances and unified threat management network security solutions to enterprises, service providers, and government entities worldwide. RSI(14) index at 37.01. Shares shorted have increased from 2.42M to 4.10M over the last month, an increase which represents about 1.38% of the company's float of 121.45M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Becca Lipman and Eben Esterhuizen do not own any of the shares mentioned above. Data sourced from Finviz. Data gathered Sep 13.

At the time this article was published The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners