Join our community of smart investors

Sell, sell, sell

More sells in September - but should we be paying attention to Coppock's warnings of a topping market?
October 10, 2014

The sells came thick and fast on the Coppock front in September - there were no fewer than eight sell signals given on the equity markets we cover. Most notable of all, if the indicator is correct, the mighty Nasdaq 100's stellar run could be coming to an end.

The signal follows the sell signal given on the wider 3000-stock Nasdaq Composite index at the end of April, and reverses the unofficial buy given at the end of July 2013. Since then the index has returned a useful 25 per cent, outperforming its Composite counterpart and other major US indices including the Dow Jones Industrial Average and S&P 500.

 

US Indices

Source: Bloomberg

 

Before we proffer too much praise toward the system, however, we should note that Coppock's timing has not been especially great in regard to the US indices. It suggested selling both the DJIA and S&P in March, and the Nasdaq Composite a month later - all three indices have continued to climb since, even if the latter has exhibited some recent weakness.

We could trot out the defence - as we have before - that Coppock isn't meant to offer up sell signals (it was designed as a long-term buyers' guide after all). But even on the buying front its record has been somewhat patchy with regard to the US markets. Sure, it got the big buy call right in spring 2009, but followed it with a sell a year later as the eurozone crisis escalated and didn't reverse that position until July 2012, once much upside had been missed. It has appeared indecisive ever since - although, to be fair, that is only a reflection of the wider market uncertainty related to the direction of central bank action around the world.

We have never claimed, though, that Coppock is a perfect market timing system (does such a thing even exist?) nor is it a nitty-gritty technical analysis tool - to remind ourselves again, it is a long-term buyers' guide which at best can serve as an early warning system of major market tops.

To illustrate, if we had followed the only official buy signal given on the Nasdaq 100 back in April 2009 and hung on ever since we'd be sitting on a 185 per cent gain, the best performing major US index by far. Simple back testing shows that if we'd slavishly followed Coppock's signals our gain would be significantly lower - a mere 56 per cent, taking into account neither the additional dealing costs nor the (likely paltry) rate we'd have got on cash in the periods when we weren't invested.

Does this suggest that we shouldn't pay any attention to Coppock? I don't think so, but I am increasingly of the mind that it is at its best when timing entry rather than exit points. And it appears to work best after periods of major market weakness when giving official buy signals - ie, when the indicator is in the negative phase. At the moment this is something of a hunch based on my observations from compiling the indicator for some time, but the refreshed methodology we developed earlier this year means I am now armed with the means to back-test this theory more fully. I will do so in the coming weeks.

Moreover, the performance differential between a simple buy-and-hold strategy on the Nasdaq 100 rather than following signals to the letter is still only measured over a relatively short timeframe. Back-testing by Dominic Picarda suggests that Coppock can beat the market over a much longer time frame, because it means investors will miss the periods of major market weakness that are so damaging to returns.

So, with that in mind, while Coppock has cried wolf before when it has come to the US market, we ignore its latest signal at our peril - the last few days have seen a significant retreat across all global markets, and the Nasdaq 100 looks somewhat vulnerable from a valuation perspective - according to Bloomberg it's trading on a PE ratio of 23, admittedly lower than the Nasdaq Composite on 58 times but higher than the S&P 500 on just under 18. And there are lots of reasons why investors may be on edge - Middle Eastern war, eurozone recession, and African disease add to a general feeling of uncertainty and are just the kind of excuses investors need for jumping out of a toppy market.

 

A word on Europe

Most of Europe's markets gave buy signals when in July 2012 ECB chief Mario Draghi promised to “do whatever it takes” to save the euro. Since then most of those have been reversed, and yet somehow Spain's Ibex 35 - incidentally one of the last eurozone markets to give a buy signal at the time - managed to cling on throughout, despite representing one of the eurozone's more broken countries. Only this month has the Coppock system said sell. Again, the system appears to have done its job - if you'd followed Coppock's advice you'd have banked a 32 per cent gain on the Ibex, which as the chart shows has outperformed a selection of major European markets. Certainly Spain's economic recovery has been surprising - even if it is coming from a very low base - but I am still somewhat surprised by the chart below. As for the UK, its rapid economic recovery has seemingly been of very little benefit to investors in its blue-chip index.

 

European indices

Source: Bloomberg

 

Latest Coppock readings and signals

BuysSells
None

Nasdaq 100

Hang Seng

Taiwan SE Weighted

Australia ASX 200

South Africa JSE Top 40

Belgium Bel 20

Spain Ibex 35

Norway Oslo Exchange All Share

Cancelled sellsCancelled buys
NoneNone

North AmericaJuneJulyAugSepLatest signalLatest signal (date)
SPX43.7942.2342.0639.34SELLMar-14
DJINDUS30.7228.5627.7225.6SELLMar-14
NASDAQ 10058.6258.6560.2458.53SELL*Sep-14
NASDAQ COMP59.6257.356.5452.63SELLApr-14
S&P/TSX29.1132.336.5436.73CANCEL SELLJul-13
Asia Pacific, Africa
BANGKOK S.E.T. - PRICE INDEX-10.95-7.76-2.92.22BUYJun-14
FTSE BURSA MALAYSIA KLCI - PRICE INDEX19.3818.3816.7714.57SELLMay-14
FTSE CHINA B 35 - PRICE INDEX-11.54-13-11.55-7.28BUYAug-14
HANG SENG - PRICE INDEX4.677.6911.1410.26SELL*Sep-14
KOREA SE COMPOSITE (KOSPI) - PRICE INDEX2.684.065.996.12CANCEL SELLMay-14
IDX COMPOSITE - PRICE INDEX0.113.8698.00711.931CANCEL SELLJun-14
STRAITS TIMES INDEX L - PRICE INDEX-1.820.62.463.06CANCEL SELLJul-14
TAIWAN SE WEIGHED TAIEX - PRICE INDEX24.2625.1826.6925.21SELL*Sep-14
TOPIX - PRICE INDEX49.1841.8534.3330.1SELLJan-14
ASX 20021.320.92117.4SELL*Sep-14
NZ 5023.8122.3321.4619.56SELLSep-13
JSE TOP 4047.4147.1947.244.13SELL*Sep-14
SENSEX35.6743.0250.2554.63CANCEL SELLMar-14
South America
MEXICO IPC (BOLSA) - PRICE INDEX-6.56-2.492.936.81BUYMay-14
BRAZIL BOVESPA - TOT RETURN IND-15.55-9.331.835.72BUYMar-14
MSCI EM LATIN AMERICA U$ - PRICE INDEX-23.44-17.525-8.92-6.98BUYApr-14
Europe/UK
AEX INDEX (AEX) - PRICE INDEX31.1529.529.3127.62SELLJun-14
ATHEX COMPOSITE - PRICE INDEX72.9666.5662.2751.72SELLJun-14
ATX - AUSTRIAN TRADED INDEX - PRICE INDEX16.4810.796.710.67SELLDec-13
BEL 20 - PRICE INDEX39.8638.5938.8237.58SELL*Sep-14
DAX 30 PERFORMANCE - PRICE INDEX47.0643.5440.435.89SELLJun-14
EURO STOXX 50 - PRICE INDEX38.74636.51835.3632.648SELLJun-14
FRANCE CAC 40 - PRICE INDEX35.3931.2729.0825.57SELLJun-14
FTSE 100 - PRICE INDEX14.9312.8212.539.49SELLDec-13
FTSE 250 - PRICE INDEX38.132.4128.9422.81SELLDec-13
FTSE ALL SHARE - PRICE INDEX18.6716.0115.2111.7SELLDec-13
FTSE MIB INDEX - PRICE INDEX57.4355.7255.552.22SELLJul-14
IBEX 35 - PRICE INDEX55.4756.2456.4253.49SELL*Sep-14
IRELAND SE GENERAL (ISEQ) - PRICE INDEX52.1846.6142.1337.92SELLApr-14
OMX STOCKHOLM 30 (OMXS30) - PRICE INDEX32.8931.5130.9929.22SELLJun-14
OSLO EXCHANGE ALL SHARE - TOT RETURN IND47.3349.0850.7649.76SELL*Sep-14
PORTUGAL PSI-20 - PRICE INDEX42.635.6129.8322.08SELLJun-14
RUSSIAN MICEX INDEX - PRICE INDEX0.690.970.910.15SELLAug-14
SWISS MARKET (SMI) - PRICE INDEX26.4623.2321.7120.66SELLAug-13

*New signals in September