The world’s stock markets look ever more bearish, at least according to Sedge Coppock’s famous indicator. Of five new signals for April in the 39 developed and emerging indices that we currently track, four were sells: America’s tech-heavy Nasdaq Composite, Taiwan’s Taiex, South Africa’s JSE Top 40, and Belgium’s BEL 20 index. Only the MSCI Latin America index switched back to a buy, no doubt strongly influenced by the upturn in Brazil’s market, which gave its own buy signal in March.
As the accompanying map shows, the bulk of markets covered here had already given Coppock sell-signals in previous months. There are a few standouts among developed markets, including Canada, Norway, Italy, and Iberia, while India and South America are still bullish among the emerging markets. Of course, the picture has looked this way for some months now. A swathe of European markets went to sell in January and February, as did Asian ones.
|MSCI Latin America||Nasdaq Composite|
|GSCI Precious Metals||Taiex|
|JSE Top 40|
Sedge Coppock never meant his invention to be used for the purposes of deciding when to sell. While we have come to call it the Coppock ‘curve’ or ‘indicator,’ he actually named it the “Very Long Term Investor’s Buying Guide.” However, as I have learnt through extensive back-testing, there is no reason why his cannot be used for timing market exits. In fact, a lot of its usefulness over time comes from getting out of a market ahead of a really big fall when the Coppock reading is above zero and then turns lower.
Nevertheless, quite a few of Coppock’s sell-signals do turn out to be false. A good example of this was in May 2006, when many Asian stock markets simultaneously went bearish according to this indicator. These sell-signals were reversed in the following months, after which equities powered ahead once more. The sell-signals confirming the end of the bull market in Asia then happened at the end of 2007 and start of 2008.
My instinct at this point would be to treat the Coppock sell-signals as a warning, rather than a call to action. The price action across developed markets in particular is still very bullish, with the main indices still in plain uptrends. I will only back away from my own bullish stance once these trends reverse.
Commodities: A Coppock view
Conventional wisdom has it that the Coppock indicator works best for stock markets. After all, its creator came up with it in order to spot major buying long-term opportunities on Wall Street. The Investors Chronicle has largely stuck to his approach, originally using it to analyse the FT 30 index, and gradually extending its application to individual equity industry groups and foreign markets.
By contrast, it has often been said that Coppock is less handy when it comes to commodity markets. After all, commodities behave somewhat differently to equities. In particular, they are said to form major bottoms slowly and major tops very sharply, the opposite of the conventional pattern in the stock market. For the main commodity indices, I have found Coppock actually does work, though.
Had you bought into the Goldman Sachs Commodity Index upon every Coppock buy-signal between 1970 and 2013, and switched into interest-earning cash upon every sell-signal, you would have made a compound annual return of 8.1 per cent a year, versus 7 per cent for simply buying and holding. What is more, the level of volatility and bear-market losses you’d have suffered would have been much lower.
The GSCI – which is tradable through various exchange-traded products – is heavily dominated by energy products. However, Coppock signals have also mostly worked well over time for its various sub-indices, to which exposure can also be bought via funds. These include precious metals, livestock and agricultural products.
Currently, GSCI Precious Metals, Livestock and Agriculturals are all on buy-signals, with a fresh “buy” in Industrial Metals. Separately, gold bullion remains on a Coppock “buy” too.