Photo: Of Gods and Men
Earlier today, we pointed you to Albert Edwards’ note about the “killer wave,” a formation in the Coppock Indicator signaling an impending 40% sell-off in the S&P 500.
We were intrigued, so we did some investigating. And we were surprised by our findings.
E.S.C. Coppock introduced the world to this indicator on October 15, 1962 in a Barron’s article titled “The Madness of Crowds.” We have yet to locate a complete copy. However, one reader pulled some quotes from the article:
“Crowds do too much too soon”, he wrote. “They overdo. When they get an urge to speculate, their concerted demand forces prices up at a rate far greater than the growth of the company into which they are buying. Likewise, when they liquidate holdings or make short sales during a panicky decline, they ignore basic economic facts. They overdo because they are motivated by emotion rather than reason.”
From what we understand, Edwin “Sedge” Coppock was commissioned by the Episcopal Church to help find long-term investment opportunities. Here’s what Finance Glossary says:
Coppock thought setbacks in the stock market were like bereavements and required a period of mourning before normal spirits revived. So he asked the bishops how long it took people to get over the death of a loved one. The answer was between 11 and 14 months. From this Coppock developed a series of calculations – based on 11 and 14 month rates of price change – designed to signal when stock market mourning could be said to be over.
Steve Leuthold summarized how to calculate the Coppock indicator in the summer 1990 issue of the Market Technicians Journal:
- Calculate the percentage change in the DJIA from 14 months ago
- Calculate the per cent change in the DJIA from 11 months ago
- Add these two percentage changes together
- Calculate a 10 month weighted moving total of the figure in step 3 and post this on a chart each month
- When the line starts to rise after being below the zero line you have a low risk buy signal
The Coppock indicator is not for day-traders. In his own words, it “is of no value whatever to an in and out trader.” According to Leuthold, “It typically gives a buy signal not at the moment of a trend reversal, but when the risk is low, just prior to the start of an important sustained advance (the high amplitude second phase of a bull market).”
The Coppock indicator in itself isn’t airtight. But, in the context of the “killer wave,” it is very reliable. According to Dominic Picara, Chief Market Technician of Investor’s Chronicle, “All the previous signals have ultimately proved successful. However, it is not uncommon for the second sell-signal to be reversed a couple of times before the selling proper begins.”
Investor’s Chronicle, which has been following the Coppock curve since its inception, has a video here.
Anyway, since the once-vaunted “Hindenburg Omen” failed to turn into a major crash, we figure we’re due for another ominous indicator to obsess over, and this definitely seems like the one.
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