Tactical Composite Trend Model – Bottom Composite

The Bottom Composite identifies oversold conditions and divergences in downside participation, signaling that fewer and fewer stocks are showing signs of exhaustion in the decline, laying the groundwork for a potential bottom.

Composite Construction and Signals

The composite integrates ten independent inputs derived from market breadth, index price behavior, and momentum indicators. Breadth components are based on S&P 500 constituents, while price and momentum measures are taken from the S&P 500 Index itself.

How it works

Using a voting system, the composite tallies the number of components that have generated an alert over a two-month rolling window. A signal is generated once five or more components, representing at least 50% of the total, issue alerts while the TCTM Long-Term Trend Model is positive. If the Long-Term Trend Model is negative, a higher confirmation level of 60% is required.

Component Signals Across Bear Markets and Corrections

Bear market lows are almost always marked by deeply oversold conditions and a clear divergence in new lows or oversold stocks—signs that selling pressure is becoming exhausted even as the index makes a final push lower. In nearly every instance, at least 50% of components have triggered an oversold alert as part of this bottoming process. The 1980–82 bear market was a notable exception: the decline was heavily concentrated in the Energy sector, which pulled the S&P 500 down even as most other sectors were already stabilizing or improving, creating an atypical bottoming pattern compared with other bear market lows.

The bottom composite, which was designed specifically to identify exhaustion points within bear markets, rarely reaches oversold territory during shallow corrections of around 10%. These modest pullbacks typically lack the level of fear, volatility, and selling pressure that the model is calibrated to capture. However, during larger declines in the 15–20% range, the composite often registers high readings, reflecting the kind of capitulation and widespread pessimism that tend to accompany more meaningful market lows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Following TCTM Bottom signals, the S&P 500 displayed a strong tendency to rally strongly over short- to medium-term horizons. The bounce back was especially evident at the five-week mark, where gains occurred in 86% of cases. Moreover, several intervals showed returns that were statistically significant relative to random outcomes over the study period.

Over the subsequent eight weeks, a maximum loss exceeding 10% occurred in two cases. In contrast, ten precedents produced gains of similar or greater magnitude, suggesting an advantageous risk/reward setup.

Over the next year, the S&P 500 rose 84% of the time with a median gain of 20.2%. Remarkably, the world’s most benchmarked index has posted a gain in this period for 16 consecutive occurrences, with the last loss dating back to 1969.

Over the following 12 months, maximum losses surpassing 10% occurred in nine cases, whereas 29 precedents produced gains of similar or greater magnitude, suggesting a favorable risk/reward profile.