The Schannep Timing Indicator and TheDowTheory.com Newsletter was a private letter available only to investment professionals from 1977 until 1998 when it opened to public subscription by individual investors. Since then Jack Schannep has been quoted widely and his interpretation of the Dow Theory used as the basis for updating the current edition of "Technical Analysis of Stock Trends" by Edwards, Magee & Bassetti. Today Schannep credits the elusive concept of capitulation with 'predicting' this Dow Theory Buy signal and emerging Bull market. Read the comments from this authority on the market whose constant monitoring of the market could create a true cushion to your portfolio and provide guidance for systemically profitable investments!

Capitulation Preceded Dow Theory Buy Signal Once Again

Total capitulation only occurs at or near the end of bear markets and it occurred on Thursday, September 20th, the day before THE low of the bear market. Subscribers of the Schannep Timing Indicator and TheDowTheory.com received an e-mail that day informing them "to BUY…(this) is the stuff of market lows." While it doesn't always happen during each bear market's death throes, when capitulation does happen it is identifiable and ends bear markets.

What is capitulation? Capitulation as it relates to the stock market is when investors, speculators, whomever 'throw in the towel' because they are so disheartened, fearful, need to meet margin calls, or whatever. It is often called a 'selling climax' as stocks cascade down into a cataclysmic sell-off. The word 'capitulation' is not uttered in writings about the Dow Theory, but it was clearly alluded to in the early 20th century. The third phase of a bear market was described in "The Dow Theory" by Robert Rhea in 1932 as "caused by distress selling of sound securities, regardless of their value, by those who must find a cash market for at least a portion of their assets". "After a market has drastically declined…and then goes into a semi-panic collapse, it is wise to cover short positions and even perhaps make commitments for long account".

Turning the generality of capitulation into a specific identification has been tried by a number of methods, but very few have consistently identified them as they occurred. In fact, in CAN be measured and identified quite specifically. From a database starting in 1953 there have been seven total capitulations. They were on 6/22/62, 5/25/70, 8/23/74, 10/19/87, 8/23/90, 8/31/98 and recently on 9/20/01. They were within 0.5%, 1.6%, 18.9%, 0.0%, 5.0%, 0.0% and 1.7% of the lows, respectively, for an average of within 4% of the lows. Only once was the bottom over 5% lower, and that was during the 1974 Arab Oil Embargo.

The calculations that determine these capitulations are rather complex and are proprietary. Suffice it to say, however, that they utilize a Short-term Oscillator, which measures the percent of divergence between the three major stock market indices (Dow Jones Industrial Average, Standard & Poor's 500 and the New York Stock Exchange Composite) and their ten-week, time-weighted moving averages. They can be calculated during a trading day but are determined by closing prices. Total capitulation on a closing basis is a unique happening, certainly valuable information to know about and act upon. Comparing the dates shown above for capitulation with the dates that Schannep's interpretation of the Dow Theory gave Buy signals shows a direct correlation. Buy signals have followed from two weeks to five months (seven weeks this time) after total capitulation on all seven occasions, and bull markets have always followed.