June 30th, 2010
Let me take you back to those bad old days of the second half of 2007. In the real economy, the housing bubble broke during the summer and the stock market, although hitting a new all-time high of 1576.09 in the S&P on October 19, 2007, was struggling to hold its ground. By January 2008, the financial crises was becoming more ominous and a significant market downdraft was immanent. A year later and nearly 50% lower, there were signs that a bottom had been reached with the market on the mend and finally turning up.
I’ve written about one tool for flagging those turns in long-term trend before, it is the Coppock Curve:
“The indicator is designed for use on a monthly time scale. It’s the sum of a 14-month rate of change and 11-month rate of change, smoothed by a 10-period weighted moving average. “Coppock, the founder of Trendex Research in San Antonio, Texas, was an economist. He had been asked by the Episcopal Church to identify buying opportunities for long-term investors. He thought market downturns were like bereavements and required a period of mourning. He asked the church bishops how long that normally took for people, their answer was 11 to 14 months and so he used those periods in his calculation. A buy signal is generated when the indicator is below zero and turns upwards from a trough. No sell signals are generated (that not being its design)……” (from Wikipedia)
I don’t want to alarm you but based on today’s closing index for June, the Coppock Curve has again turned down for the first time since December 2007 (click on images to enlarge):
The blue line in the above chart is the Coppock Curve and the brown is the S&P 500 Index. The arrows indicate each pointon the Coppock Curve chart where the direction changed. Each decisive (10% of more) directional change in the Curve has marked a decisive change in direction of the S&P.
There is one consolation. The Coppock Curve seems to be more consistently reliable when identifying buy points (when turns up) than sell points (when it turns down). Gerald Hoopes included the following chart in an article on Safe Haven on Jul 16, 2004 covering the Coppock Curve from 1960-2003:
Clearly each time the Curve fell below -150 signaled a buy opportunity. However, not all the times when the Curve turned down when it was above 250 did it continue declining or result in a valid sell signal. The Curve is above 300 and has turned down. At a minimum it is one more indication of a reversal in market momentum.