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Your guide to the Coppock Guide
Commentary: Get ready for a buy signal from an obscure indicator
By Mark Hulbert, MarketWatch
Last Update: 1:16 AM ET May 12, 2009
ANNANDALE, Va. (MarketWatch) -- According to a number of the technically oriented newsletters I monitor, a highly regarded but little-known market-timing model is poised to declare that we're in a brand new bull market.
All that must happen for such a buy signal is for the stock market not to decline by more than 4.6% from current levels.
Interested in the identity of this obscure indicator?
I thought so.
It is the Coppock Curve, also known as the Coppock Guide. It is named for Edwin Coppock, who introduced the indicator in an article for Barron's in 1962. Though that indicator is not widely known among individual investors, it is highly respected by the cognoscenti: Coppock himself was given a lifetime achievement award by the Market Technicians Association in 1989, and a number of the newsletter editors I monitor make reference to the indicator.
In essence, the Coppock Guide is a momentum indicator that filters out shorter-term market swings in order to focus on the market's long-term trend. Its calculation involves a number of steps:
At the end of each month, calculate the percentage change of the market relative to where it stood 14 months earlier.
Also at the end of each month, calculate the percentage change of the market relative to where it stood 11 months earlier.
Calculate the sum of these two percentages.
Calculate a 10-month moving average of this sum, front-weighting that moving average to give greater weight to more recent readings.
Though technical analysts over the years have introduced various ways of using the Coppock Guide, it is traditionally interpreted to issue a buy signal whenever it turns up from a negative reading. That means that a buy signal could have happened any time since May 2008, when it first went negative. Each month-end since then, however, has seen an even lower reading -- including that registered at the end of April.
This indicator's followers readily admit that it will be late in identifying a market bottom. That's hardly a surprise, since it is based on 11-month and 14-month rates of change.
Nevertheless, many of the indicator's adherents also insist, it is a very reliable indicator of a new bull market when it finally does send a buy signal. The editors I monitor who follow the Coppock Guide refer to it in glowing terms, using phrases like "uncanny" and "nearly infallible."
But I'm not so sure.
Yes, the indicator has done an impressive job of flashing buy signals at major market bottoms, such as the summer of 1982 and early 1975.
But it also has had some major missteps. The Coppock Guide gave a buy signal in December 2001, for example, nearly a year prior to the final low of the 2000-2002 bear market. And the indicator appears to have also flashed two premature buy signals during 1931, at levels well above the market's mid-1932 low.
To statistically gauge the indicator's worth, taking both its successes and failures into account, I calculated the Coppock Guide back to 1896, when the Dow Jones Industrial Average $INDU was created. Following every buy signal, I measured the market's return over various periods, and then compared those returns to what happened on average the rest of the time.
The results were not overwhelming. Over the three months following buy signals, for example, the Dow produced an average gain of 1.6%. That compares to an average gain of 1.5% the rest of the time -- hardly a big advantage for Coppock Guide buy signals.
Or consider longer time frames: Over the three years following buy signals from the indicator, the Dow produced an average gain of 22.5%, statistically indistinguishable from the average gain the rest of the time of 21.3%.
To be sure, after testing enough different time frames, I did find some that suggested that Coppock Guide buy signals had value. Unfortunately, there was little consistency to the results: What worked in the first half of the sample didn't necessarily work in the second half, for example.
The bottom line? Don't get seduced into believing that the Coppock Guide has some magical ability to identify new bull markets. Yes, a buy signal from the indicator would suggest that the market's trend has shifted. But, as history has amply illustrated, that trend could quickly reverse course.
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