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Defending The Coppock Guide at Trader’s Narrative




Defending The Coppock Guide


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The Coppock Guide. Just a while ago no one knew it even existed. I’m willing to bet even if you mentioned it in a room full of TA buffs, you would get quizzical looks all around.

But now suddenly it is the belle of the ball! Everyone is talking about it. There is a buzz in the blogs, Bloomberg, MarketWatch (WSJ) have stories on it and even CNBC’s Fast Money, which normally has the attention span of a fruit fly gives it a mention (see below for video). To be honest this is exactly what I was afraid of when I first hesitatingly brought it to your attention in Conditions of a Bull Market. I’d rather it remain the esoteric indicator it used to be (hopefully everyone will forget all about it).

The question remains: is it useful?

I tend to think so but some disagree.

Mark Hulbert looks back all the way to 1896 and calculates the success of Coppock Guide signals on the Dow (see article). His conclusion is that the returns are not indicative of an edge.

However, what Hulbert doesn’t point out is that although the Coppock Guide for the Dow Jones Industrial may be a poor indicator, that doesn’t mean that it is for other, more respectable indexes like the S&P 500. What Hulbert does point out in a subsequent article is that even for the Dow Coppock numbers, the two false signals in the 1930’s skew the results and if we look at more recent data, the indicator does have an edge. So the question is how relevant is the 1930’s to the current market?

Guy’s analysis at the Technial Take also falls into the same trap as Hulbert by looking at the Dow Jones Industrial. I don’t want to rehash why the Dow is inferior to the S&P 500 (price weighted vs. capitalization weighing and small sample size of 30 vs. 500). The only time I give the Dow more respect is in the Dow Theory analysis of the market.

On the other side, there are those that see the Coppock Curve as a valuable guide:

James Stack of InvesTech is one of them. Formerly an engineer by training (who worked for IBM) Stack’s whole approach is a blend of quantifiable edges (whether technical or fundamental) and sentiment analysis. But he doesn’t rely on the Coppock exclusively.

Another is Steve Leuthold of Leuthold Weeden Capital Management. He calculates a similar indicator that he calls the VLT Momentum (”very long term”). I consider Leuthold as one of the ‘grey beards’ who get my respect for their successful navigation of the market over decades. Recently Leuthold has turned even more bullish (after nailing the March low).

Next is Jason Goepfert of SentimenTrader. Recently Jason did a complete analysis of the Coppock signals (using the S&P 500) and showed that it has a definitive edge, especially on a risk adjusted basis. To see the data get a 14 day free trial and take a look.

In the end, the headline is rhetorical because I’m not really going to defend this or any other indicator.

First of all, it is just that, an indicator, with all the inherent flaws and limitations. I don’t expect anyone to exclusively trade off it. In fact I think that would be nuts.

Second, one has to just look at the data. How you want to take advantage of the Coppock Curve, if at all, is really up to you. Above you’ll find enough information to make up your own mind. But treat it as a starting place and do your own research. Then drop me a note - whether positive or negative.

Finally, the Coppock Curve is just one of the conditions for a new bull market - I’ll cover the others soon. I pay much more attention to the weight of indicators, rather than just any one in particular, no matter how impressive its historical performance may be.

Here’s an incredibly shallow analysis of the Coppock Guide (what else did you expect from CNBC?):


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4 Responses to “Defending The Coppock Guide”  

  1. 1 Holly

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    Pretty sure it’s a false signal this time.

  2. 2 Babak

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    just a hunch? :)

  3. 3 Guy Lerner

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    Babak

    Guy from TheTechnicalTake blog!

    That is correct I used the Dow and noted the two failed signals in 1931; plus I noted the marginal signal in 1938; yes, there were some nice signals along the way, but when I take all signals -below zero and then the indicator turns up - it is just fair; I can do a lot better—better returns, less time in the market, and less drawdown ( a lot less). The problem with the SP500 before 1957 is that it was the S&P90 so that index is synthetic.

    Another point not mentioned is the fact that the Coppock guide doesn’t really work all that well across other assets, and I think this is a definite criteria when thinking about what makes an indicator good. It should work in multiple. I will tell you that Coppock probably works best in the currency market.

    I have developed an interesting way to use the Coppock and it involves my trading bands that I cited in my article. Lastly, I have been aware of Coppock for over 6 years now and I am familiar with Jim Stack’s use of it. If I thought it was useful and made trading easier, I would bring it to the attention of those who read. But alas, we can disagree as I only think it is fair.

    Looking forward to see what other indicators you use to define the new bull market.

  4. 4 Babak

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    Guy, thanks for your comments. Yes, the S&P 500 is synthetic but even so, the fact that a metric works best for a certain index and not others, or that it works only in equities, isn’t a negative. That’s just the way it is. I suggest you take a look at the quantification of the Coppock edge from Jason Goepfert. In any case, this is just one indicator.

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