‘Emotional’ Gauge Turns Bullish for U.S. Stocks: Chart of Day
June 1 (Bloomberg) -- U.S. stocks are worth buying for the first time in six years, according to an indicator that has signaled bull markets all but once since World War II.
The CHART OF THE DAY shows this barometer, known as the Coppock guide or Coppock curve, for the Standard & Poor’s 500 Index. The S&P 500 is also depicted.
The gauge was named for E.S.C. Coppock, who introduced what he described as a “very-long-term buying guide” in an October 1962 story for Barron’s. Leuthold Group LLC has a version known as VLT Momentum that Steve Leuthold, the research firm’s founder, developed after reading the Barron’s article.
Coppock, who died almost two decades ago, wrote that his indicator gave “a picture of the emotional factor” behind stock swings. He advised investors to buy shares in anticipation of “an important, sustained advance” when the guide started to increase from less than zero.
That kind of shift occurred last month, according to data compiled by Bloomberg. The guide climbed to -409.4 from April’s -417.2, the lowest reading since June 1938. Calculations based on the Dow Jones Industrial Average showed a similar reversal.
Coppock calculated the difference between an index’s value at the end of each month and its closes 11 months and 14 months earlier. He added these figures together and computed a 10-month average that gave greater weight to the latest numbers. While he used the Dow industrials in Barron’s, he wrote that a broader benchmark might be an enhancement.
The S&P 500 sent more accurate signals than the Dow in the postwar era, Bloomberg’s data show. U.S. stocks advanced 16 of 17 times in the first year after the broader index’s Coppock curve turned higher. The exception followed a December 2001 reversal. For the Dow, the success rate was 13 of 19.
(To save a copy of the chart, click here.)From Trader's Narrative:
"Coppock Guide Signals The Start Of New Bull Market
While we were in the thick of the 2008 , I looked ahead and provided a road map for the conditions of a new bull market. Among them was the Coppock Guide.
At the beginning of the year I provided a hypothetical projection to demonstrate that would have to go on one hell of a bullish rampage to pull the Coppock Curve up from its death spiral. A few months later, a rally that almost no one foresaw took us 40% higher.
Then at the beginning of May, I reiterated that a Coppock buy signal would be arriving by the end of the month, as long as the market held it together and didn’t fall any further.
Well, we are finally here and the Coppock guide has provided a definitive signal by turning up - this is the buy signal that we had been anticipating:
I know, I know, it is impossible to see on the chart but believe me, it is there. To see a zoomed in view of the chart, check out the previous links. The S&P 500 Coppock Curve stopped going deeper into negative and actually increased from -417 at the end of April to -409 at the end of May 2009. All it would have taken was a one point increase but we got 8 points.
Now that we have a signal, what does it mean?
Well, obviously, it means we have the wind at our backs. The Coppock Guide has been a reliable indicator of the long term market trend. But, like everything else, it isn’t full proof - as you can see from the false signals. So with that in mind, here are three major observations:
First: The signal isn’t just for one index or market. We are seeing the Coppock Curves for many different markets around the world turn up at the same time. The Australian All Ordinaries, the Nikkei, the FTSE and all 3 major US market indexes: S&P 500, Dow Jones Industrial and the Nasdaq.
While most of the signals are occurring concurrently, some like the (Chinese) Shanghai market and the Nikkei gave signals last month. Check out all the major world markets to see how just how much confirmation we are getting from them.
Second: Valid signals are those that turn up from under the zero line. And historically, the deeper the level at which the signal arrives, the more strength the following bull market has. This most recent signal is coming from a deeply oversold level - the most since 1938 (-417 to -400) and even further, 1932 (-643 to -616).
Of course, that doesn’t mean that from now on the market has only one direction - up! Based on the sentiment and technicals covered before (Wedge Formation), I think it is probable that we will head down, but won’t break the previous low. This will allow for the long term to flatten out and begin to support, rather than hinder prices from going higher.
Third: Although the Coppock Curve has given its share of false signals, we haven’t seen any occur when the metric has curled up from such a deeply negative level. There are very few examples of this, so it is difficult to extrapolate a rule but so far, this has been the case."