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Coppock: Awash with sells

The Coppock indicator is mostly negative for emerging and developed stock markets right now

The world's most important national stock-market index gave a sell signal last month. The S&P 500's Coppock indicator turned downwards, along with that of the Dow Jones Industrials. Germany's DAX 30 also gave a sell signal at the end of March. With many developed and emerging stock markets already having given such signals in previous months, the overall picture worldwide is negative.

The state of Coppock

Does this all mean that we are now headed for a bear market in the US and elsewhere? While it may sound very worrying, the reality is rather different. Coppock sell signals actually happen rather often without any lasting effect. The S&P and Dow also turned negative on this basis last August, but then reversed their signal just a month later.

March Coppock buy signalsMarch Coppock sell signals
FTSE Bursa Malaysia KLCI S&P 500 (US)
Bovespa (Brazil)Dow Jones (US)
Sensex (India)Athex Comp (Greece)
DAX 30 (Germany)
Eurostoxx 50 (Europe)
OMX Stockholm 30 (Sweden)

That said, the risk of a more serious correction in US equities is clearly greater today than it was last summer. After months of rampaging gains, stock prices are much higher than they were. More importantly, the Fed is withdrawing its money-printing stimulus. Overall, however, the trend in US and German shares - as well as in many other markets - is plainly still upwards by any sensible definition.

S&P sell

Not all markets are in bearish mode, according to Coppock. Ironically, the technology-laden Nasdaq 100 index - which has sold off hard just lately - has not given a sell signal. The FTSE Bursa Malaysia KLCI index, India's Sensex and Brazil's Bovespa index have generated buy signals. These upturns would have carry more weight were they matched by other emerging markets.

My suspicion is that the sell signals of this month and of earlier months will be overturned before too long. And I would respond to a clutch of buy signals from the leading markets much more enthusiastically than I would to these sell signals. While the Coppock purist should be largely switching towards cash right now, I am keeping faith with the bull market.

Fresh start for Coppock

Investors Chronicle has been tracking Edwin 'Sedge' Coppock's indicator since 1963, almost for as long as it has existed. We have done so, however, in a rather quirky way. In working out the indicator, we have been at odds with its creator and almost every other present-day Coppock user.

Coppock's indicator - which he called his "long-term momentum guide" - is a 10-month weighted moving average of the 11- and 14-month moving averages of a market's monthly price. Legend has it that he chose these period lengths on the advice of his local vicar, who told him that parishioners generally took 11 to 14 months to recover from personal traumas.

Instead of the 11- and 14-month moving averages that Coppock himself used, the IC has opted for the 12-month average instead. This was a logical time-saving measure in the 1960s, when our statisticians had to do the number-crunching by hand. In today's computerised world, this short-cut is redundant.

The IC has also always used monthly average prices to calculate the Coppock indicator. Once again, Coppock himself used end-of-month closing prices, which nowadays are freely and instantaneously available to anyone, unlike monthly averages. I can see little justification for using monthly averages, which also demand significantly more data to calculate. I therefore have switched our house method to using monthly closing prices.

My other updates aim to simplify the interpretation of Coppock signals. Until now, we have made a distinction between 'official' and 'unofficial' signals, and have also issued 'hold' or 'wait' recommendations. From now, any new signals will simply be 'buy' or 'sell', recommending investors in a certain market be either long of it, or in cash.

The intention behind the methodological updates is to bring the IC's Coppock coverage into line with Coppock's own approach and with current practice. The recommendation changes reflect the principal finding of my research, namely that Coppock signals can produce market-beating returns over time, if followed systematically.