Does the Coppock Indicator tell us anything?

11th Jun '09 by MrT

14 comments 7811 reads

I am not much of a fan of Technical Analysis, principally because I have never really understood it, but I did note with interest the current Hullabaloo about the Coppock Indicator apparently FLASHING big-time. According to the Investors Chronicle, Coppock has turned positive for nine major markets (not including the FTSE 100 but it's close) and another seven in the emerging world.

My (limited) understanding of how it works is as follows - Economist, Edwin Coppock, used the idea of bereavement (where it typically takes 11 to 14 months to mourn a death) in order to develop an indicator that would predict a sustained rally after an economic downturn.

The Coppock indicator is the sum of a 14-month rate of change in an index and 11-month rate of change, smoothed out by a 10-period weighted moving average.

A buy signal is generated when the indicator is below zero and turns upwards from a trough. The deeper it starts from below zero, the more powerful the rally. The Coppock indicator has predicted 16 U.S. rallies from 17 "buy" signals.

Coppock got it right in 1975 and again in 1982, one of the best times in the past hundred years or so to have been bullish on shares. The indicator turned positive in November 1992 and rewarded investors with a 27pc gain in 14 months. It did it again in May 1995 and they booked 61pc in just over two years.

Source: http://www.telegraph.co.uk/finance/comment/tom-stevenson/5497576/Coppocks-score-will-encourage-investors-to-strike-up-the-recovery-band.html

However, it also can get it horribly wrong...

For example, in 1931 there were two deeply oversold signals (using DJIA data), when the Coppock indicator value was actually at or below the current and 1938 levels of the indicator. The first turn up of the Coppock Curve was in February, 1931, and the Dow closed at 190.30. The second turn up of the Coppock Curve was in August, 1931 with the Dow at 139.40. In both cases, the indicator turned down 1 month later, and the ultimate low was at Dow 40.60. Ouch!

Source: http://www.safehaven.com/article-13500.htm)

So what do you reckon? Load of hogwash or a clear indicator that we should be filling our boots?

http://www.investorschronicle.co.uk/Tips/Buy/CityTrades/article/20090603/8df40f0a-5011-11de-b1d6-0015171400aa/City-Trades-Bullish-omens-for-FTSE-SP.jsp

http://en.wikipedia.org/wiki/Coppock_curve

http://www.ft.com/cms/s/0/9fba5690-561f-11de-ab7e-00144feabdc0.html

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MrT

11th Jun '09

The other related point of interest is a survey recently from Barclays Capital which said that investors held a historically high average of 14% of their portfolios in cash and that 80% are planning to reallocate that money this year.

http://www.barcap.com/About+Barclays+Capital/Press+Office/News+releases/PR,Hedge+Funds+To+See+At+Least+$50+Billion+Of+New+Allocations+Before+End+Of+2009,+Says+Barclays+Capital

Gradders73

In my view, the most important thing to remember in investing is the price is what someone will pay for it, nothing else matters. I've had years of exposure to all sorts of technical analysis and although I am less scathing now than before, it only really matters if other people think it matters.

I'm also a firm believer that economic is an art not a science and economics seems to have more pseudo-science than any other subject I can think of.

The general basis of this theory seems to be if there has been a prolonged bottoming period, things are about to start going back up again, but there is nothing in the theory that involves any analysis of the health of the economy, or of a particular business, what interest rates are or where they are going. In fact, there is no economic analysis in there at all.

Does this matter? Well, not if it is widely accepted as a buy signal, but even then, for example, the looming Treasury bond crisis, the prime mortgage default wave or the Israeli's deciding they need to start world war three may make people say, why did we pay attention to that poppycock?

I am also very surprised that people only have 14% cash - this is very low given where we are....

emptyend

14th Jun '09

You are leaving out the question of timescales. I have a very clear idea of what someone will pay for most of the stocks I own.......but it is very difficult to tell WHEN a deal will be done. In the meantime, prices wander all over the place - but only by small amounts.....and yet TA people delude themselves into thinking this "noise" is significant. It is not.

Incidentally I don't believe that the Coppock indicator tells us anything about Iranian politics....... we may well find that the next crisis is a geopolitical one. In any situation where there can be over-riding fundamental factors (such as wars, collapses of banking systems etc etc) the Coppock indicator (and any other TA measures) are reduced to dangerous hogwash. They only "work" on general market sentiment - and then only if there is nothing major going on regarding fundamentals (ie there are no over-riding factors that move prices substantially).

phil

3rd Nov '09

In reply to emptyend (post #3)

coppock has had a very good success rate,and i would not dismiss it lightly.

In reply to phil (post #4)

I don't think I did "dismiss it lightly". Collapse of banking systems, wars and major geopolitical events are hardly "light" matters! As I said, if there is nothing much going on then Coppock may be a useful indicator....though whether the overall situation is for the dull and boring recovery that some seem to expect may well be another matter!

Stockhound

16th Dec '09

Yes the Coppock does tell us a lot. It's based on grieving cycles and works exceptionally well... the chart below shows that the Coppock called the bottom of the last 2 bear markets almost precisely. It's always been the best long term buy indicator. Confusing ourselves over analyses of interest rate cycles, macro-economics and the like can only lead to poorer investment decisions due to the subjective nature interpretation. Such grey areas of the dismal science are best left to the dismal scientists. We as investors should be acutely aware of what actually works in the market, rather than what ought to work.

We all have to beware something that Edward de Bono calls 'The Intelligence Trap' in our thinking...

A highly intelligent person will often take a certain view on a subject and then use his or her thinking just to support that view. This will be done with arguments that make a great deal of sense. But the more able a thinker is to support a point of view the less inclined is that thinker actually to explore the subject. Since the original point of view may be based on prejudice or habit, this failure to explore the subject is bad thinking. The ability to support a particular point of view never removes the necessity to look for other points of view. By choosing our values and our perceptions it is usually possible to construct support for almost any view we like. The only protection we have against fooling ourselves is the ability to explore other views. In the end we may choose to come back to our first view but this is after exploring other views. So we sometimes find that the intelligent person is trapped into one point of view by his or her ability to defend that view.

AbAngus

To my rheumy eyes it looks as though the lowest points of the Coppock Indicator are synchronised with - but do not predate - the Dow Jones troughs. They may even lag the DJIA a little. That being so, where is the predictive value?

AA

They do lag the market... that's the whole point. It's an extremely long term indicator, and due to the fact that markets trend, the indicator shows you when the market has bottomed and started trending up. You could try and guess those points yourself but often you'll get in too early and be burned. It's a safe predictor.

Most traders who have been around a while know that it's important to buy high and sell higher, rather than catch the lows. An indicator like the Coppock gives you a clear reference for long term asset allocation decisions. The whole point of me posting on this thread was to note that it turned earlier this year, and in review it has worked exceptionally well again.

It's important to ignore the sell signals. Coppock himself never placed any importance on the sell signals, although interestingly the IC does.

OK! I unerstand now. Thanks.

AA

In reply to StockHound (post #6)

We all have to beware something that Edward de Bono calls 'The Intelligence Trap' in our thinking

I would put this issue slightly differently to De Bono: IMO the more intelligent investors are the more they will be inclined to rationalise their positions over the long term and will be wholly incapable of taking shorter-term trading views that are not supported by logical arguments.

I don't trade actively - because I know that I'm not very good at it!

Indicators like Coppock can be a very useful shorthand aid for people who are not very good at trading but whom, depsite that, want to follow a trading/momentum style......but to act upon it one still frequently needs to completely suspend rational thoughts about the markets and operate on blind faith ("it has worked before so it will work again" etc). Personally I find this very difficult (and often impossible) to do - which is why I didn't reposition my holdings for the rally we've had in 2009, just as I didn't reposition them for the 2003 rally.......

.....though I can't say that "missing" these "opportunities" has done me much harm ;-)

I think you are talking your own book there. Short/Medium term trading views can be based on extremely logical arguments by extremely intelligent people. I know a lot of traders that hold positions for sometimes periods as short as hours, who are some of the most intelligent and educated people I know on macro and risk factors.

I take a balanced view on stocks - screening for fundamental factors, and buying on technical factors. Both minimise risk and IMO make for better decision making. The Coppock is just another tool in the investors toolbox that has been proven far more reliable than any economic or macro fundamental factor - I wouldn't dismiss it lightly.

In reply to StockHound (post #11)

I think you are talking your own book there.

Fair comment.

It is certainly possible to be both intelligent and a skilled trader. However, in my experience of working with many excellent traders, trading skills are the key requirement - whereas intelligence may be a handicap! I'd say that a majority (perhaps 70-80%) of the really great traders I have worked with had fantastic trading skills and street smarts......but weren't particularly intelligent or indeed interested in matters outside of trading. OTOH I'd say that the vast majority (95-99%) of intelligent people I know are completely rubbish at trading (and indeed many are disinterested in finance in general!).

I do concede, though, that there are a small(ish) number with both skill sets .....and perhaps that there are likely to be more of them in the 25-35 age range than in the 45+ age range that I am mainly basing my comments on. I'm sure that the demands of modern trading techniques will have brought about such a change in skill requirements.

lfc

Maybe I'm being overly simplistic but it appears to me that Coppock is saying nothing more than 'invest after a big fall'. And looking back at the US economy (and therefore by proxy the stock market) it has over the past 100+ years been a success story with recovery after every downturn. The notable exception of course was the 1930's and lo and behold Coppock got it wrong!

What would Coppock have said about investing in Japan post 1990 or gold post 1980? Or even oil post 2008, would it have waited until the price fell back to $35?

I'm not saying Coppock is wrong but that one has to be very careful about the dangers of historic and selection bias when exploring it. It's also important to not just look at the chance of an outcome but the relative size of the consequences on either side (something Taleb points out). The odds of great depression II starting in 2009 were less than the odds of it not happening but the consequences for investment could have been far greater.

A quick word on DeBono, I like him and even used some of his ideas when i worked in industry but his comment about intelligence is IMO true only to a degree. The few genuinely very intelligent people I've met have also been amongst the most self-critical and uncertain and also those prepared to explore and challenge the most. Having fixed views, no matter how well backed up by arguments and data, is not a sign of great intelligence and should not be confused with it.

lfc

ohisay

5th Jun '10

Thought I'd post this as I was looking to see where the indicator was at the moment (having watched the US sell off last night on Bloomberg).

Seems that if the S&P closes below 1095 at the end of June (as seems likely I would say) we will have a technical sell from the Coppock for the first time since November 2007.

http://www.tradersnarrative.com/coppock-curve-hints-at-an-aging-bull-market-4155.html

Stock picking skills will need to be at the fore it seems over the summer months.

Does the Coppock Indicator tell us anything?

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MrT

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