Those who have read my thoughts in this space for the past couple of decades know that I’m not the most patient guy. So, when I see people who I respect, looking at extremely long-term indications, I take notice. I usually file those long-term signals away for a look in a month or two.
But this time, a signal has an interesting backstory and I’d like to show you this indicator now, especially since it just gave a bullish signal for the S&P 500, after already triggering for the Dow Jones Industrial Average back in October. We’ll look at both of those most recent signals below.
The Coppock Signal, also known as the Coppock Curve or Coppock Indicator, is one of the older technical analysis tools around—dating back to a 1962 introduction, best I can tell. Many analysts like John Murphy, Robert Prechter, Tom McClellan and Charles Kirkpatrick have written about its usefulness for spotting potential bottoms in bear markets, providing investors with a way to enter or re-enter the market after a bear run. I have to emphasize that this is a really slow and really long-term indicator.
Economist E.S.C. “Sedge” Coppock crafted this indicator in the early 1960s. It was reported in some sources with a 1962 origin and was for sure in a Barron’s article in 1965. Eventually, it would be christened the “Coppock Curve.” Coppock himself never referred to it as such. He preferred the moniker Very Long Term (VLT) Momentum Index.
Coppock’s ambition was to devise an indicator capable of pinpointing those important bottoming opportunities that materialize once in a blue moon, yet are so hard to look for, let alone identify in the moment. The Coppock Curve signals these opportunities when it plummets to a deeply negative value and subsequently rebounds. The upswing is the critical component. As the Curve dips below zero and descends further, stock prices tend to follow suit.
Technical wizards have since repurposed the Coppock Curve as a more general trend direction identifier. However, this application can be fraught with complications. I find it tough to interpret for those types of uses and don’t suggest trying it as a pure trend indicator.
I do love the unconventional mathematics underpinning Coppock’s indicator. They can be traced back to an intriguing conversation he had with a clergyman. While managing funds for an Episcopal church, Coppock discovered that the typical mourning period following the loss of a loved one spans roughly 11-14 months. Drawing a parallel between relationship grief and investors’ sentiments about financial losses, Coppock combined the 11-month and 14-month momentum of the index and applied a smoothing factor to the indicator signal.
To compute the Coppock Signal, first calculate the 14-month and 11-month rate-of-change (ROC) for a given index, such as the S&P 500. Then, sum the two ROC values and apply a 10-month Weighted Moving Average to the result. The final output is a smooth curve that oscillates above and below a zero line, with positive values indicating bullish momentum and negative values indicating bearish momentum.
The primary use of the Coppock Signal is to identify buying opportunities in the aftermath of significant market downturns.
The signal that occurred in October was identified by Tom McClellan:
It’s interesting to note that the 2020 Covid drop happened so fast that it didn’t trigger a Coppock signal! The curve above was published before the actual signal triggered (much to Tom McClellan’s credit)!
The current signal was reported by Jay Kaeppel of the excellent sentimentrader.com analysis site.
This chart does show the turn up that occurred in the S&P 500 at the end of March. A 92% win rate for this signal is pretty hard to ignore but the data set is small because of the extreme length needed to generate a signal.
Again, these are very long-term signals! We’ll take a look at them from time-to-time to see just how they fare.
I always love to hear your thoughts and comments, especially your additional insights. Please send them to drbarton “at” vantharp.com
Great trading and God bless you,
D. R. Barton, Jr.