Institutional Advisors Capitulation Model
Credit David Brown & Bob Hoye
Falling Knives
Although a chilling metaphor, its equivalent for senior stocks and senior indexes can be turned to advantage.
Our view has been that if valuations were rationalized on the way up the mania, they would be of little consequence in determining buying levels on the way down. Instead, measurable market dynamics common to previous forced liquidations would likely be the key.
As the tone of the financial markets changed in October, 2000, the term "capitulation" became widely but prematurely used.
Appropriate research developed by the ChartWorks has provided a methodical discipline for the eventual buying opportunities as each of a series of liquidity crises culminate.
Method:
One of the ironies of the investment business is that no matter how dramatic, shocking, or costly a big reversal is, within a week there is no one who didn't make the call.
In recognizing the professional hazards of being too early or too late or complacent on extreme moves, the Model clinically reads the dynamics of dramatic change. This greatly assists equity investing or trading in an increasingly volatile financial world.
Developed by the ChartWorks over many years, the capitulation model is successful in determining upside Capitulation at the end of a great speculation as well as at the consequent downside Capitulations.
Capitulation:
The "Buy" is disciplined by the sequential completion of three steps:
Exhaustion:
Often a persistent decline will produce only a minor exhaustion reading. When this occurs with a positive divergence in the Demand Index, a tradable rally is possible.
Double: This additional parameter does not occur with every high or low reading; but when it clicks in, it is usually within a few trading days of the turnaround.
Although a chilling metaphor, its equivalent for senior stocks and senior indexes can be turned to advantage.
Our view has been that if valuations were rationalized on the way up the mania, they would be of little consequence in determining buying levels on the way down. Instead, measurable market dynamics common to previous forced liquidations would likely be the key.
As the tone of the financial markets changed in October, 2000, the term "capitulation" became widely but prematurely used.
Appropriate research developed by the ChartWorks has provided a methodical discipline for the eventual buying opportunities as each of a series of liquidity crises culminate.
Method:
One of the ironies of the investment business is that no matter how dramatic, shocking, or costly a big reversal is, within a week there is no one who didn't make the call.
In recognizing the professional hazards of being too early or too late or complacent on extreme moves, the Model clinically reads the dynamics of dramatic change. This greatly assists equity investing or trading in an increasingly volatile financial world.
Developed by the ChartWorks over many years, the capitulation model is successful in determining upside Capitulation at the end of a great speculation as well as at the consequent downside Capitulations.
Capitulation:
The "Buy" is disciplined by the sequential completion of three steps:
- Recognition of the downside exhaustion condition, which can take up to a few weeks.
- Recognition of diminished selling pressures and a proven test of demand at the low.
- The "Buy" is signaled by an upside reversal in demand and price. At this point, the risk/reward ratio is optimized.
Exhaustion:
Often a persistent decline will produce only a minor exhaustion reading. When this occurs with a positive divergence in the Demand Index, a tradable rally is possible.
Double: This additional parameter does not occur with every high or low reading; but when it clicks in, it is usually within a few trading days of the turnaround.
