Capitulation and the rule of 35
Managing risk on the downside
Equity bears are capitulating. The priority is to protect their portfolios from further underperformance by getting closer to their benchmark equity weight. Our models have always shown that the worst sample periods for our process are between 29-35 weeks. The behavioural explanation would be that fund managers are allowed to be wrong for two quarters in a row, but not for three. Cutting a losing position during the third quarter of the mistake tends to be more damaging than doing it early in the second.