Capitulation

Capitulation is treated as a mean-reversion signal rather than a trend-following signal. The capitulation indicator is a mean-reversion tool rather than a trend-following tool. Capitulation describes fear-driven selling that can produce a severe market sell-off. The recommended initial position at capitulation is 50% until confidence in the signal is high. Since 1953, the capitulation indicator identified 18 clear capitulation events. Nine of the fifteen capitulation signals occurred within 2% of market lows. The capitulation signal historically appeared a median of 2.5 days before bear market lows and about 1.6% above those lows. Not every bear market ends in capitulation, but the analysis found identifiable capitulation in the last eight covered bear markets. Capitulation is a 21st-century enhancement to Dow Theory rather than a term used by Dow, Hamilton, or Rhea. Capitulation occurs when selling pressure becomes extreme and fear dominates investor decisions. Capitulation exhausts the supply of sellers through emotional pressure and the financial need for cash. Capitulation follows an accelerating decline and can mark the bear-market end or a level close to the bottom. The capi…