The Coppock Indicator

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Edwin Coppock is not a name that trips off many investors' tongues, but he devised one of the most accurate ways of determining if a new bull market trend has begun.

An American economist based in San Antonio, Coppock was a devout churchgoer. So, strange to relate, the Episcopalian Church asked him to devise a way for godly investors to identify long term buying opportunities.

After some reflection, Coppock concluded that setbacks in the stockmarket were rather like bereavements. They took time to get over, and required a period of mourning before things could return to normal. He asked the Episcopalian bishops to say how long, in their experience, it took for an individual to get over the death of a loved one, a divorce, illness, unemployment, events he called "the greatest stresses we have to cope with". The consensus was that it took between 11 months and 14 months.

Coppock took this answer and used it to convert stockmarket data into a 10-month weighted average of the percentage difference between the market index now versus where it was 11 and 14 months ago. More recent months carry greater weight than those further in the past.

What this really means is that if the index is less than zero - the weighted average is still showing that the index is down each month on its position 11-14 months previously - then the market is still 'grieving' over past losses and should be avoided. A 'buy' signal is given when the index rises consistently from below the zero level, indicating that our period of mourning is over. The index is only ever calculated on a monthly basis.

Often it takes courage to follow the signal because at the time it is given, the market outlook may not appear to be particularly attractive. Indeed, the market may continue falling for a spell after the signal urges buying. But judged over a period of years, Coppock's indicator rarely fails. In the US market for example, it has given a false positive only once since 1919 (in 1930). In London in the period since 1945, it has proved a false guide just once, in 1948.

Coppock's guide is designed solely to work on identifying the transition from bear market to bull market.

Because it based on the idea of the purging of grief over previous losses, it will not work identifying market tops. It does, however, seem to do the job for which it is designed in most markets where there is a reasonable amount of long term investment activity and some participation by private individuals.

It does not, however, appear to work in markets that are dominated by short-term trading by professional investors, such as foreign exchange. And it works for markets as a whole, not for individual stocks.

The Coppock indicator has become more widely known than it was, but it still isn't in common use. Barrons, a US investment publication, introduced the Coppock indicator in 1962 and Coppock published his research in a paper - long since out of print - for a conference in 1967 titled Realistic Stock Market Speculation.

In it, he articulates a wider philosophy than simply the one that led him to create the indicator that bears his name, a philosophy that tends to question the traditional norms of stock market investing.

Peter says

But Coppock's ideas are interesting nonetheless, because they focus on the emotions of investors and the motives of speculators and advisers. Coppock advocated that psychology must play a part in the successful reading of any market, something that few investors would contradict these days.

More controversially, he also suggested that traditional ways of valuing the market using fundamental data from company accounts was not particularly efficient, because what markets regarded as normal or appropriate levels for certain key ratios, such as price-earnings ratios or yields, in one era might not carry through to the next phase.

For the record, the Coppock indicator for the FTSE 100 (UKX) flashed a 'buy' signal in June of this year, since which time the market has moved up substantially. It is currently in the 'hold' position, the normal status after the 'buy' signal has been triggered. Data on Coppock is published on a monthly basis in The Investors Chronicle and can be derived from most decent share price charting software like Sharescope and Updata.