As it happens, back testing has demonstrated that there is in fact no predictive power at all in the January barometer (not to be confused with the January effect, the tendency for small-caps to outperform large over the month) – in other words, it’s right half the time, as the laws of probability would dictate. And whatever the case, January 2018 was still an up month for all important US markets, including the S&P 500 and Dow Jones, which are set to close out at record month-end highs.
You will have noticed last week that I published a year’s worth of Coppock data, and it’s likely that the indicators are still in buy territory for these key markets, as has been the case since the middle of 2016. I plan to publish this data at the start of every month, because I’ve concluded that the most important thing when trying to interpret Coppock signals is to see a longer-term view of how the moving average is developing, and how strong the momentum is. Take fixed income, for example. Our trading columnist Nicole Elliott noticed that many government bond indices had given buy signals in late 2017, which seemed to be at odds with the general threat of a bond sell-off. Yet what the longer view of the data tells us is that this is not a strong signal, merely a very small shift in an uncertain market, and that means it could be easily reversed. Coppock reflects a similar hesitancy among investors in European equity markets; the commitment of US equity investors is much plainer to see, even if the power of the trend is starting to wane.
Understanding such nuances helps to make Coppock a more useful tool in the investor’s arsenal – it does not give definitive guidance, but points us away from dangerous currents. I think this is true of technical analysis more generally, which is why we’ve also added moving averages to our tip charts – the mistake people often make is to put their trust in any one approach too fully.
All that said, systems can work. Analysis by my former colleague Dominic Picarda who built the Coppock tool we currently use shows that a strategy of blindly following its signals still beats the market. Algy Hall’s stock screens do, too: much human insight goes into designing the screens, but the output is utterly mechanical, and since inception only one of his screens has underperformed its benchmark. This week we reveal Simon Thompson’s much-anticipated Bargain Shares for 2018, a more manual effort but based on a tried-and-tested stockpicking system that has beaten the market in 15 out of 19 years. If nothing else, such successes should remind us that systematic approaches can instil in us the disciplines we need to seek and find alpha.
