You may be familiar with Jay Kaeppel from his K-ratio which measures the ratio of the price of gold relative to the share price of gold stocks. In a recent piece he uses the Coppock Guide which we’ve looked at there on the blog several times to create a long term timing model for the stock market.
The result is very impressive. In the chart below, the blue line is the equity line for the signals provided by Jay’s own version of the Coppock curve and the red line the Dow Jones Industrial index:
“Jay’s Coppock Model” has two inputs: the Coppock Guide and the Dow Jones (both levels and momentum). More specifically:
I use three measures in one to generate a green, yellow or red light, using end of month Dow readings. One measure uses just the Coppock Guide, another uses the Coppock Guide plus a moving average of monthly Dow closing prices and another uses two moving averages of Dow monthly closing prices (do I know how to have a good time or what?). Each measure is graded as a +1 or a zero at the end of each month. The three are then totaled together to arrive at “Jay’s Coppock Model.”
Measure #1: The first measure simply compares this month’s CG reading with the reading of two months ago. If this month’s reading is greater than the reading two months ago then the JCM gets one point added to it.
Measure #2: Yes this involves a little “double dipping.” For Measure #2, if the CG is above its reading of two months ago AND the Dow is above its 12-month moving average (calculated using the last twelve monthly closes for the Dow) then the JCM gets another point added to it. If the Dow is below its 12-month moving average then Measure #2 is a zero regardless of the action of the Coppock Guide itself.
Measure #3: This requires - you guessed it - a few more calculations.
- A = (Last month’s 5-month exponential moving average of Dow closes * .6666)
- B = (This month’s Dow close * .3333)
- C = (Last month’s 10-month exponential moving average of Dow closes * .82)
- D = (This month’s Dow close * .18)
- E = (A + B) or the new 5-month exponential moving average
- F = (C + D) or the new 10-month exponential moving average
- G = (E - F) or 5-month exponential MA minus 10-month exponential MA
So to put it into plain (albeit admittedly fairly unintelligible) English, Measure #3 goes like this:
- If this month’s value for G is less than zero AND this month’s value for G is below last month’s value for G, then no point is added to the JCM.
- Under any other circumstance - i.e. if the 5-month average minus the 10-month average is positive or if the 5-month average minus the 10-month average at the end of this month is greater than the value for last month (like I said, thank God for the spreadsheet), then Measure #3 adds one point to the JCM.
Based on these 3 inputs, Jay is either long/short or in short term T-Bills. Personally, I prefer the S&P 500 index but it has a much shorter history so I can understand why Jay used the Dow Jones (with a +100 year history). More importantly, Jay provides a model for how a real market master approaches an indicator like the Coppock Guide.
Most will learn about it and take it at face value - checking in once in a while to see where it is. But he uses it as an ingredient for further research. Having just attended Jake Bernstein’s DSI webinar, this is very familiar territory by the way.
You can read Jay’s complete piece here: Forecasting the Stock Market in 5 Minutes a Month
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