January 9th, 2009

The Coppock Guide and MTI Agree

Everyone is looking for indicators that might tell them whether the market has hit a bottom and how far along the correction might have come so far. Even though those never having experienced a Bear Market think that their quandary is new, rest assured it’s not.

I was reminded of this while reading “Coppock Guide Update & Forecast for 2009” at Trader’s Narrative, a blog I first came across while doing research for my upcoming book, “Run with the Herd”. (Yes, it is “upcoming” even though it’s now about 6 months late. Please be patient. I’m still working on it.) The following is excerpted from the chapter on Classical Market Timing:

“An economist and investment advisor named Edwin Sedgwick Coppock was asked in 1962 by his Episcopal Church to find a way to identify opportunities for long-term investors like themselves. Knowing his audience, Coppock translated the request into terms his clergy likely understood. As the apocryphal story goes, he characterized market downturns as “periods of bereavement leading to periods of mourning” and asked the church bishops how long those periods normally lasted? Their answer was 11 to 14 months so he based his study of market volatility on that answer.

Barron’s, the business weekly, published an article in 1962 describing his conclusions. The study resurfaced periodically since then, especially during times of market stress. Although relatively little mentioned today, it was featured in the November, 1994 issue of Technical Analysis of Stocks & Commodities, the “bible” and reference for technical stock analysts. In it, the “Coppock Guide”, as his findings were later called, was described as follows:

‘Coppock reasoned that the market’s emotional state could be determined by adding up the percentage changes over the recent past to get a sense of the market’s momentum. So if we compare prices relative to a year ago – which happens to be the most common interval – and we see that this month the market is up 15% over a year ago, last month it was up 12.5% over a year ago, and 10%, 7.5% and 5%, respectively, the months before that, then we may judge that the market is gaining momentum and, like a trader watching for the upward crossover of the moving average, we may jump into the market.’

His approach compares changes over two periods of time to see whether the rate of change has accelerating or decelerating and smoothing a combination of those changes through an exponential moving average. Coppock interpreted that change from down to up as a buy signal or from up to down as a sell signal.

As recently as July 27, 2007, Forbes.com ran a story based on the Coppock Guide that turned out to be fairly prescient. And that was unfortunate because, believe it or not, the Coppock Guide was indicating a turn in market sentiment and momentum to the negative.”

Readers of Stock Chartist know that I’ve been projecting various S&P 500 growth rates to determine when the Index might cross the 180-day moving average, an “all-clear” sign according to the MTI with a high probability of success and low risk of further stock market decay (most recently on January 5). In that, I wrote:

Over the next several months, the 180-day MA will continue to edge down – slowly but it will come down. The amount it comes down depends on what happens to the market in the next several months. If the Index increases at the rate of 8%/month, for example, the Index will cross above the 180-day at 1079 by February 12 and an “all-clear” will be issued. If the market hits some bumps along the way and increases at half the rate (an average 4%/month) then the cross over will be on March 11 at 1041…..

In all likelihood, neither of the above two situations will actually happen….we’re in the earliest stage of this bottoming process. In all likelihood, there will be a retest of the November low and it may or may not hold. What can be said with some confidence, however, is that the Index will not rocket through the remaining moving average benchmark hurdles without some retracements and retesting.

What is most interesting is how closely this MTI “all-clear” signal conforms to the message given by the Coppock Curve. According to Trader’s Narrative:

….the extremely negative level [of the Coppock Guide] means that when the signal arrives, it will be powerful. And since the Coppock Guide foretells bull markets by curling up, we are watching for an increase – even if it as small as +1……if by the end of this month the S&P 500 by some miraculous device ends at 1128, it will be enough to cause the Coppock Guide to turn up the minimum +1 for a signal. That would be an astronomical 25% rise in one month. Crazy, I know, but that’s how much it would take in a short time to move the Coppock Guide to a [buy] signal.

So while the Coppock Guide was conceived in 1962 and I developed the MTI in 2007, they both indicated that a move by the market to around 1100 by either the end of February or March would be an unequivocal buy signal. In the unlikely event of these best of conditions actually occurring (we’re just not used to good news any more), we may see a more constructive market in 2009. Let’s keep our figures crossed.

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