The implication is that over the next 18 months or so, share prices should rise by about a third. Followers say the indicator has never been wrong.
The Coppock Indicator was devised by a Texan called Edwin Coppock. A leading Coppock expert, Richard Marshall of the Cambridge chart firm Investment Research, says it was originally devised for a group of nuns who had income to invest. Like our pension funds, they had more income than they could spend, never intended to sell, and only wanted to know a sensible time to buy. Like the rest of us, they wanted to buy when share prices were about to rise. The indicator is intended to answer only that question. There have been attempts to use it to generate 'sell' and 'buy' signals for individual shares and sectors. All such uses are suspect, though Richard Marshall notes that investors who liquidated their portfolios whenever the indicator turned down from a positive level (see chart) would have been out of the action through all the big post-war bear markets. If they had then kept their money in cash, they would also have benefited from the high interest rates which usually accompany bear phases in the stock market.
How does it work? Non- mathematicians will find it fiendishly complicated. Although it has characteristics of a moving average, it actually measures the year-on-year rate of change in the market for a moving series of months and then weights the results to put progressively more emphasis on the most recent months' changes. The series of figures produced (effectively a smoothed calculation of the upward or downward momentum of the stock market index being monitored) is plotted on a graph to give 'buy' signals and the less reliable 'sell' signals.
A valid 'buy' signal requires two conditions to be met. First, the index should drop below the median line (see chart) or become negative according to the figures calculated (on a slightly different basis) and published monthly in the Investors Chronicle. Coppock imposed this condition because he wanted shares to become cheap before deciding to buy.
But he then argued that shares could stay cheap for a long time, so he said that shares should only be bought if the indicator reversed direction and turned up from a negative position. This is the signal just given. Confusingly on our chart, the indicator has touched the line, rather than dropping below it, before turning up, though Marshall says that is good enough. On the IC's figures, it did become negative before turning up. The good news is that this should mean a big bull market lies ahead. This is only the ninth such 'buy' signal since the Second World War. Other than a 'buy' signal in 1965, which produced only a 5 per cent rise in the indices, every other signal since then has been followed by at least a 29 per cent rise. The best signal was in May 1980, which was followed by a stunning 449 per cent rise.
I believe this 'buy' signal is more exciting than the two previous ones in 1988 and 1991, because conditions seem ripe for the index to push into new high territory. Less than three months ago, the UK financial pages were full of talk of 'depression', not mere 'recession'. That looks more and more like the bell which rang to signal the bottom for both the economy and the stock market.Reuse content