October 6th, 2009
It’s been a while since we touched base with Mr. Coppock and his Curve. If you remember, it was one of the indicators that signaled that the market was turning over in November, 2007 and one of the indicators that gave me confidence that we had hit bottom in April (along with the “Reversion to the Mean” indicator in both cases).
So if it was so accurate in calling the top and and the bottom, I was wondering how the indicator would perform if the market did take a tumble in the near future. Actually, the correct question to be answered is “what sort of a drop would it take for the Coppock Curve to again signal a market top?”
To find out, I projected forward from the September close (the Curve is based on monthly data only; see “The Coppock Curve, Another Constructive Indicator“) and came up with some disturbing results. They were disturbing but not in the way you might expect. What I discovered was that the extent and rapidity of the market’s recovery (50% in six months), either: 1) precluded any risk of a significant market top in the foreseeable future, or 2) the Coppock Curve is an inconsistent indicator and it’s being “on the money” concerning both ends of this past crash was merely a coincidence.
Here’s what the data reveal (click on image to enlarge):
- A relatively flat market projected through June, according to the Curve, increases the chances a decline in the second half of 2010:
- A decline to the March-April lows projected to occur by year-end followed by a modest recovery would not cause the Curve to turn down:
We could hypothesize hundreds of other future paths for the market. The bottom line purely from a technical perspective is, however, that last year’s decline and this year’s recovery have been so dramatic and extreme that a momentum indicator like the Coppock Curve appears to be less reliable for indicating significant changes in the long-term trend. Complacency due to the Curves current unward trend is, therefore, dangerous and to be avoided; other long-term trends should be considered.
I’m not an expert in the Coppock Curve and welcome alternative interpretations from others.