It has been a few months since we last checked in with the Coppock curve. If you’re not familiar with this indicator (also referred to as the Coppock Guide), check out the previous link for background information.
If you recall, back when we were still in the thick of the recent bear market, many saw the rally off the March 2009 lows as nothing more than rigor mortis. Sentiment was so bearish, that even when the Coppock curve finally gave its blessing - rather late as its nature dictates - many still questioned the possibility of a bull market and cast aspersions on this noble indicator.
At the beginning of May 2009 I mentioned that the Coppock guide was about to give a bullish signal. Since then the S&P 500 index has climbed more than 200 points or 25%.
Below is a chart of the Coppock indicator since 1940. The signal occurred when it went from -417 to -409, an increase of 8 points. This was also an incredibly negative level that it had not seen in modern history.
From those depths, the Coppock indicator has increased 1139 points (from -417 to the current +305) in just 14 months. That is the largest absolute move since 1940 - no doubt partly due to the extreme oversold condition from which it started. As an oscillator, we now find it very close to the other extreme end of the spectrum. While the Coppock curve is not traditionally used to find market tops, extremely high levels such as those above +300 or +400, usually correspond with either market tops or plateaus in stock market prices.
This month was the weakest showing for the month of May since 1940 with most indexes down 8%. If the S&P 500 index closes at the end of June below 1095, then the Coppock curve will have curled down for the first time since November 2007. Otherwise, it will continue to climb.
This scenario dovetails with the recent commentary from Lowry Research about moving away from a primary buying phase where one is allowed more leeway to be an almost indiscriminate buyer to a more selective stage as the bull market matures.
As well, it agrees with the comprehensive study of the Aftermath of Secular Bear Markets. That study suggest we are about to enter a more low return environment where the market chops in a sideways trading range. There will still be plenty of opportunity to make money. We just are not in the same high momentum environment we were in before.
Fish Head Soup
A number of years ago I had the pleasure of meeting the senior partner of a boutique brokerage and asset management firm in Europe. He reminded me of Mr. Potter with his bushy eyebrows and his gruff manner (and the constant cigar chomping). Over drinks he told me his secret to making money. Chopping the table with both hands he said, “Trading is like fish - just give me the middle of the trend, others can have the head and the tail.”
I think that about sums up the implication of the current Coppock guide. The low risk “middle” of the trend has been served. It isn’t necessarily the last we’ve seen from this cyclical bull but what remains will be messier and come with higher risk than what we’ve seen this past year.
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