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The Coppock Curve:
Coppock's signal has always worked for me: INVESTMENT STRATEGY: Brian Marber commends a technique that has been brought into play by recent events
Financial Times; Feb 23, 2002
By BRIAN MARBER
The Dow Jones Industrial Average received a Coppock "buy signal" on January 31, confirming December's signal in the Standard & Poor's index. Also on January 31, the FTSE received its fifth Coppock signal since 1982.
A Coppock "buy signal" is an indicator followed closely by some stock market watchers. In his 1962 paper Emotions Make Prices, Edwin Coppock wrote: "Do major long-term buying of strong stocks when the curve first turns upwards from below the zero line." In the light of experience, however, signals are equally valid if given when the curve is just above zero.
"The technique is of no value whatever to an in-and-out trader," said Coppock. "It is a technique for long-term investors; their low-risk buying guide." The signal is not the sign of a trend reversal, but shows that the risk factor in the market is low and usually heralds a sustained advance.
Although Coppock applied his signal only to the Dow, its rationale makes it applicable to all markets. I have applied it successfully to many, the only non-performer being the foreign exchange market. Since 1919 the Coppock technique has given only one false signal in the Dow (1930), and, since 1945, just one in London (1948).
Coppock, a devout churchgoer, was asked to devise a long-term low-risk buy signal for church funds. The administrators wanted to know when to step up purchases and when to stand aside.
Coppock asked: "How long does it take for the human mind to adjust to bereavement, divorce, illness, unemployment, losing money, moving house, retirement, i.e. the greatest stresses we have to cope with?" The ministers' answer of 11 to 14 months was adopted as a yardstick by Coppock.
The technique does not give "sell" signals - Coppock would become incensed if followers tried to use a trend-line downturn as one.
How is the curve or trend line derived?
* Compare the Dow's end-month level with those prevailing 11 and 14 months earlier.
* Express the differentials as percentages.
* Combine them and multiply by 10.
* Repeat this exercise each month, when the previous month's figure is multiplied by 9. In the third month, multiply by 8 and so on. After 10 months you get a weighted average of the previous 24 months' data.
Since the 1987 stock market crash there have been only three Coppock signals in the Dow: September 1988, February 1991 and January 2002.
In the 12 months following 1991's signal, the Dow rose 38 per cent. Following September 1998's signal, when the trend line was below zero, the Dow rose 31.6 per cent in 12 months.
The FTSE's five signals since 1982 came in September 1988, February 1991, November 1992 (the trend line was marginally above zero), May 1995 and January 2002. Following the first four, the advances lasted 5, 6, 14 and 28 months. The respective gains were 21.9 per cent, 12.5 per cent, 26.7 per cent and 60.6 per cent.
The outlook is usually unattractive when a Coppock "buy signal" occurs. But history tells us to be guided by the signal rather than the outlook, even if not immediately. Six weeks after 1988's signal and nearly 10 months after 1991's, the Dow was off 3.5 per cent and 3.9 per cent respectively.
Four months after the 1988 FTSE signal it was down 4.8 per cent. Six weeks after 1991's and 1992's it had fallen 5.1 per cent and 4.3 per cent.
Copyright: The Financial Times Limited 1995-2002
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Best regards, J.T. |
