The Coppock Guide

A couple of the lesser known technical indicators that I follow closely are the Advance/Decline line and the Coppock Guide. 

I like to watch the A/D line (as measured by the daily NYSE advancing stocks less declining stocks, plotted cumulatively) for signs of divergence throughout a bull market. This happened in textbook fashion during the second half of 2021. The market (S&P 500) continued to rally, but it was being led by a smaller and smaller group of stocks. This divergence was a warning of weak leadership in the market, and a good time to move more defensive.

 

A lesser known, but still valuable technical indicator is the Coppock Guide. The Coppock Guide doesn’t do much good during bull markets, but it has a terrific history of indicating when the market has bottomed. The story goes that Sedge Coppock, the inventor and namesake, felt market setbacks mimicked mourning periods for people. A religious man, he asked his church bishop how long a typical bereavement period lasted when someone lost a loved one. The bishop responded 11 to 14 months, so Coppock developed a momentum oscillator using the 10 month moving average of the 11 and 14 month rate of changes. 

Here is how it works: once the moving average of the rate of change goes negative (the red line goes below zero), the oscillator has reset. Then, when it bottoms and starts to move back up, this is viewed as a “buy” signal. So in the graph below, ignore everything above zero. When it drops below zero, as it has 14 times since 1960, including earlier this year, pay attention. Once it bottoms and shows a positive month, it’s a strong indication that a new market expansion has begun.

This isn’t to say it will call the market bottom. It’s a momentum oscillator, so by definition it will lag the actual bottom. On average, it reverses 4.2 months after the market bottom. 

In 62 years of history, we have had 14 signals (not including the current downturn). That averages a signal once every 4.4 years. Only one of those signals was false (January 2001), leading to a false signal ratio of 1/14th (7.1%).

We also see that the average gain post signal is impressive. On average, one year after a signal, the market is +17.6% higher (this includes the January 2001 false signal).

The Coppock finished November at -9.975. To get it to signal by year end (December 31 being the next reading point), we would need the S&P 500 to rally to 4,400. 

While the Coppock isn’t a short-term indicator, and won’t help with your day trading, it is a reliable indicator of long-term market health. I wouldn’t advise using either the A/D line or Coppock Guide to time the market, but they can be useful in helping get your hands around market risk and portfolio positioning. 

Please let me know if you’d like to discuss the Coppock in more detail.

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