Capitulation

     When I was a young broker at Dean Witter in the 1960’s they formed a department called COMPARE (COMPuter Assistance to Research).  One of the calculations they made back then, and which I have kept up to date since that department went kaput years ago, has to do with a short-term oscillator which measures the percent of divergence between the three major stock market indices (DJIA, S&P500, and the NYSE Composite), and their time-weighted moving averages.  When all three indices are simultaneously in double digits below those respective moving averages, we have Capitulation.  The most recent occurrence of Capitulation is shown below. The 15 dates, market levels, and the subsequent returns over various timeframes are shown below.  You’ll see that the end of the last 8 bear markets were signaled, and 3 of the 7 before that. Some bear markets end, however, with a whimper, hence no Capitulation indication.

The Schannep Capitulation Indicator
Data from 31 December 1953 forward (available in real-time since 1969)
1st Day Signal S&P 500

Proximity to Low*

Subsequent Returns in Percentage:
Date

Level

Days

%

6 months

1 Year

3 Years

5 Years

22-Jun-62

52.68

2

0.6

18.9

33.4

61.8

48.5**

25-May-70

70.25

1

1.4

21.1

41.6

53.7

43.6**

23-Aug-74

71.55

28

13.0

15.5

17.8

36.4

26.0**

30-Sep-74

63.54

3

2.0

32.0

32.0

51.9

41.9**

19-Oct-87

224.84

0

0

14.7

23.2

38.9***

84.4

3-Dec-87

225.21

1

0.6

18.3

20.7

43.9***

90.9

23-Aug-90

307.06

34

3.8

19.1

28.4

48.3

81.4

31-Aug-98

957.28

0

0

29.4

37.9

20.2**

n/a

20-Sep-01

984.54

1

1.7

17.0

-6.5**

n/a

n/a

19-Jul-02

847.76

57

8.4

6.4

17.2

45.0

83.2

9-Oct-02

776.76

0

0

11.5

33.7

54.0

101.5

7-Oct-08

996.23

32

20.0

-18.1***

11.8

21.6

12-Nov-08

852.30

6

8.8

6.6***

29.8

48.3

23-Feb-09

743.33

10

8.0

31.3

47.3

83.4***

8-Aug-11

1,119.46

39

1.4

14.1

25.3

Averages

14.3

4.6

15.9

26.2

46.7

66.8

Median

3

1.4

17.0

28.4

48.3

81.4

*Trading days away and percentage down to S&P and/or DJIA Bear market lows
**Closed out due to Bear market definition (-16% on DJIA & S&P) being met during the period shown
***Not closed out at definition due to simultaneous new capitulation offset



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