Tactical Composite Trend Model – Capitulation Composite

The Capitulation Composite identifies extreme selling pressure or oversold conditions consistent with panic selling or market crashes, often pinpointing when market breadth is at its absolute worst. Traders often refer to this point of maximum pain as the internal low.

Composite Construction and Signals

The composite combines four independent inputs using several short-, medium-, and long-term market breadth measures and price momentum indicators. For the breadth measures, it utilizes stocks within the S&P 500 and S&P 1500 sub-industry groups, while for the price momentum measures and the Bollinger Band component, it uses the S&P 500 Index.

How it works

Using a voting system, the composite tallies the number of components that have generated an alert over a one-month rolling window. A signal is issued when at least three components, or 75% of the components, issue a capitulation event.

Component Signals Across Bear Markets and Corrections

As illustrated in the table below, not every bear market low is associated with a broad composite signal. In some cases, such as 1929, 1973, and 1982, none of the components issued an alert, indicating that no crash-like event preceded the final low in the S&P 500. However, one caveat is that a composite signal occurred at the start of the 1929–32 bear market, where the crash effectively launched the broader drawdown.

Capitulation Composite signals have appeared more frequently since 1998 during market corrections of 14% to 20%, possibly reflecting the growing complexity and financialization of markets driven by the proliferation of derivative instruments such as leveraged ETFs.

 

 

 

 

 

 

 

 

 

Following TCTM Capitulation signals, the S&P 500 tended to rally strongly over short- to medium-term horizons. The bounce back was especially evident at the three-week mark, where gains occurred in all but one instance. Moreover, five of the eight measured 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, seven precedents produced gains of similar or greater magnitude, suggesting an advantageous risk/reward setup.

Over the next year, the S&P 500 advanced every time, posting a median gain of 24% and displayed significance in all but one horizon. However, in 1929, 1946, and 2008, investors had to withstand meaningful drawdowns along the way. Additionally, the 1929 signal coincided with the very start of the ensuing bear market.

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