Buoyant bonds

We have, of course, discussed the merits of Coppock sell signals at length on several previous occasions, concluding that one should be careful following them - because in recent months there has been a tendency for these signals to be quickly reversed. Back testing of the Coppock system suggests this quirk commonly appears in long-term bull markets, when minor, short-term wobbles occur in a longer-term uptrend.

That has again proved the case again on one of the markets we follow this month, with the June sell signal on the Hang Seng cancelled a mere month later after a 6.8 per cent rally in July to reach its highest level in three years. The same sudden reversal also took place on the corporate bond index we track, the Markit iBoxx Liquid £ Corp Long-dated bond index.

Bond bounceback

That's may seem at odds with the current commentary on the bond market, and especially the high-yield segments of the bond market which many observers suggest have become dangerously overheated. But, in Coppock terms, it only brings corporate bonds into line with recent signals on government paper. That cancelled sell (for long-term followers of Coppock that’s an unofficial buy, where the signal is already in the positive phase) and the buy signal given by Index-linked gilts this month means that the system suggests we should be long of all of the fixed income indices we track - and in many cases should have been so for several months.

Corporate bond divergence

As we wrote in June, back testing of Coppock also suggests we should be wary of paying too much attention to its signals when it comes to fixed income - following Coppock signals would have produced lower returns than sticking to a buy-and-hold strategy, partly the result of the additional dealing costs it would have incurred but also because gilts are fundamentally less volatile than equities. That said, its recent performance has proved impressive - the signals to sell 10-year gilts, treasuries and bunds came in August 2012, the month which marked the end of the long bull run - you would also be in further profit had you bought them once again on the signal in March this year.

Fixed-income fears

But should we, as Coppock appears to suggest, really still be buying bonds and gilts at the moment? It’s hard to ignore the current concern that bond markets could come in for a prolonged period of weakness when, as expected, interest rates around the world start to rise from record lows. And government bond yields are still hovering close to extreme lows - even Greek 10-year debt only offers a 6 per cent yield, and healthier Germany little more than a per cent.

UK 10-year gilt yield

Such is the concern that the FCA went to the unusual length of issuing a consumer warning on corporate bond funds last week. While stopping short of suggesting retail investors avoid bond funds altogether, it strongly encouraged them to take a hard look at the makeup of bond funds they may be holding, and particularly the ease with which they could exit their investments should a bout of weakness occur. Some have accused the FCA of meddling in matters best left to financial advisers – but given rush of income-hungry retail punters into high-yielding bond funds, by nature often exposed to less liquid underlying assets, I think it’s a fair intervention.

Exchange traded product (ETP) providers, meanwhile, are poised to pounce on any consumer distaste for all things fixed income - Boost launched Europe’s first leveraged short fixed income ETPs. However, if you are of the view that when times get tough it pays to pay for quality - and, just as importantly, liquid - blue-chip corporate bonds such as those tracked in the iBoxx are still worthy investments for the long haul, even at current levels. Perhaps Coppock is telling us to ignore the noise.

Europe stuck in a rut

Despite our reservations about the veracity of Coppock sell signals, recent European sell signals have held firm so far, as have some longer-standing signals on other developed markets. Sentiment towards the Dax, in particular, has been weakened disproportionately by German companies’ exposure to Russian sanctions. While markets may not have sold off savagely since, Germany and France continued to drift in July. If August fails to offer any respite - or geopolitical events take another lurch for the worst - the slide could well become entrenched. Even another bit of Draghi magic may not fail to lift the mood in such a circumstance.

That brings us neatly onto another matter, namely the May buy signal on Russia’s Micex, which highlights another Coppock shortcoming. While the index did indeed rebound after the last signal, the system did not anticipate the latest grizzly turn of events in the Ukraine, and the sanctions that followed. But should it really be expected to? The Coppock system was devised as a long-term buying guide, and has been adapted by us to improve its usefulness by becoming a long-term selling guide, too - it is certainly not a technical indicator in the truest charting sense, and should not be treated as such, even if it often proves frighteningly prescient. You'll find all of this month's readings on our website.

July's new Coppock signals

Coppock July readings

*New signal