Trader’s Narrative

Since the last time we looked at the Coppock Guide indicator, a few readers have been asking me about updates for it. So here it is:

Since this indicator needs monthly data, with the end of December 2008, we have another data point. The latest Coppock level is -286 which is even more extreme than the last. And it is only second to levels which we last saw in the brutal bear market of the 1970’s:

But what does that mean? Well, first, the extremely negative level means that when the signal arrives, it will be powerful. And since the Coppock Guide foretells bull markets by curling up, we are watching for an increase - even if it as small as +1. Although we’d prefer a more decisive signal, of course.

To give you an idea of how the Coppock guide responds to the market, let’s propose that for the next few months we see the following S&P 500 levels:

• November 2008 — 896.24 (actual)
• December 2008 — 903.25 (actual)
• January 2009 — 1000 (hypothetical)
• February 2009 — 1100 (hypothetical)
• March 2009 — 1200 (hypothetical)
• April 2009 — 1300 (hypothetical)

In other words, the S&P 500 goes up by 100 points each month for the next 4 months. In that hypothetical scenario, the Coppock curve would turn up by the end of February 2009 by the minimum. And in March, it would turn up significantly (+20).

You can see this on the chart at the extreme right - light blue.

Put another way, if by the end of this month the S&P 500 by some miraculous device ends at 1128, it will be enough to cause the Coppock curve to turn up the minimum +1 for a signal. That would be an astronomical 25% rise in one month. Crazy, I know, but that’s how much it would take in a short time to move the Coppock guide to a signal.

So that gives you an idea of how slow this indicator works. On the one hand it lags the market significantly but on the other hand, its signals have been very accurate historically.

Of course, this is assuming that the market doesn’t fall or tread water but rise. And it assumes that the signal given as a result is not a false one.

A little known but important technical indicator which many consider to be a vital prerequisite for the birth of a bull market is still mired in negative territory.

This summer, the Coppock curve fell below zero and since then, I’ve been watching this indicator for the eventual upturn. Here’s a quick update with more background information on this indicator.

Right now we are at -243, which is almost at the same level at which the market turned around in March 2003 (corresponding Coppock guide level at that time was -246).

The deepest level we’ve seen this indicator fall was in 1932, when it plumbed -643 for the S&P 500 index. That shouldn’t be that surprising when you consider that it was the most brutal bear market for US stocks.

While I haven’t measured this pattern, it is observable that, often, the more negative the Coppock Guide is when it finally turns up, the longer and stronger the bull market that follows it.

If the market continues to rise, the Coppock curve will eventually turn up from this deeply negative level. Depending on how fast the market rises, it will take at least 2-3 months or more for that to happen.

That’s assuming that the eventual signal is a valid one.

False Signals
No technical indicator is foolproof. Including the Coppock Guide. As it is based on monthly data, it moves so slowly, but in its history there have been a few whipsaws:

• 1941
• 1947
• 2001

Interesting Facts

• Coppock curve first published in Barron’s in 1962
• Edwin Coppock was an economist from Texas
• originally called “long-term buying guide”
• Coppock was asked by Episcopal Church to find long term opportunities
• saw bear markets as “bereavements” requiring mourning before recovery
• based formula on length of time people need to recov: 11 to 14 months
• a daily Coppock curve can be calculated as well