Rudi's View | Jul 31 2008
By Rudi Filapek-Vandyck, editor FNArena
This may seem like an odd thing to say but what we are witnessing on international
equity markets is the preparation for the next bull market. I am not making
this statement for the sake of finding someting positive to say; this month
the Coppock Indicator has fallen below zero, indicating the next bull market
lies ahead of us.
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Total Recommendations (past week)
Recommendation Changes (past week) |
I realise that most of you will have never heard of this indicator. That’s
not so strange given the Coppock Indicator is rather seldom used and referred
to. This is not because it’s unreliable, or too exotic -in fact the Coppock
Indicator has a solid reputation- it’s just that this particular indicator
was originally designed to help long term investors in deciding when to step
into the share market; it signals when a new bull market is being established
and as such, as everyone will understand, this indicator only becomes useful
every six years or so.
The last time the Coppock Indicator signalled the birth of a new bull market
was in May 2003 – we all know now that was when the commodities driven uptrend
of the past four years found its origin. The second last time was in 1995:
back then Australia was climbing out of the doldrums of the “recession we had
to have” and banks were at the early stages of what would ultimately become
a golden era for the financial sector.
Though the Coppock Indicator was originally designed for the US share market,
at the time of its original inception in the 1960s, it has been successfully
applied to many other share market indices, like the All Ordinaries index in
Australia, with technical analysts finding the indicator has withstood the
challenge of backtesting data up to 100 years into history.
If you look at the chart below you’ll see the indicator also successfully
flagged the previous steep bull market from 1982-1987. Since then the Coppock
Indicator has successfully flagged the next wave up five more times and only
the share market movement between 1988 and 1989 appears a bit “wishy washy” (though
still accurate).
As I said above, the indicator has now started to signal the next sustainable
uptrend is coming. It will be number seven since 1982.
So how does this indicator work?
The Coppock Indicator, which is also referred to as the “Coppock Curve” and
the “Coppock Guide”, was first published in 1962 in Barron’s. It was developed
by economist Edwin Sedgwick Coppock who at the time had been asked by the Episcopal
Church to develop a tool for longer term oriented investors. As the story goes,
Coppock thought share market downturns were comparable to bereavements and
thus a natural period of mourning was required. (I am not making any of this
up).
According to the legend, Coppock asked the church bishops how long do people
usually mourn? Their answer was 11 to 14 months and so he used those periods
in his calculation. Without going too much into detail, the Indicator is specifically
designed for longer term signals (Coppock originally used monthly periods for
his base calculations), it has a solid reputation for not confusing the next
bear market rally with the start of a new sustainable uptrend, and as said
above, it tends to pick the correct signals for when a new bull market is being
established.
Others have finetuned the original setup; UK magazine Investors Chronicle
developed its own modified version which generates Sell signals as well as
long term Buy signals, but it is widely recognised the Coppock Indicator is
best used to pinpoint the next sustainable uptrend in the share market.
A Buy signal is generated when the indicator falls below zero, reaches a
bottom and subsequently starts trending upwards again. By then you are likely
to have missed out on the early gains in the share market (two to three months),
as the Indicator takes its time to establish whether we have something sustainable
in place, but at least you know it’s genuine, and not the next bear market
trap.
So where are we now according to this Indicator? Well, as I said above, the
Indicator has turned negative this month, for the first time since 2002, not
only for the All Ordinaries but also for the main indices in the US, Japan
and the UK. But investors better not get excited just yet; last time it took
11 months before the Indicator gave a Buy signal after it first fell below
zero (July 2002-May 2003), but in 1995 and in 1992 it only took 5 months.
It’s probably fair to say we are still months away from the Indicator’s next
Buy signal, but at least we know it’s coming (as opposed to between December
last year and June this year).
Personally, I always try to match these Indicators with the fundamental picture
and the likely news flow ahead. Maybe it is no coincidence the Coppock Indicator
only fell below zero in July; the global finance sector is likely to generate
many more negative events, as will the slowing of global economic growth. At
some point most of the negative news will truly have come out, and the worst
of the worst will have been priced into equity markets and into securities
analysts forecasts – I suspect that soon after all this has happened the Indicator
will start trending upward again.
Buy/Hold/Sell Breakdown