The Coppock curve has the ability to signal the end of a bear market or a major correction, provided it bottoms from under the zero line and goes back into positive territory.
The indicator was introduced by economist Edwin "Sedge" Coppock in an October 1965 issue of Barron's. After being commissioned by the Episcopal Church to find long-term investment opportunities, the economist reportedly asked church leaders how long it took for people to grieve and get over the death of a close loved one. Coppock concluded the process of getting over a big loss on an investment might work the same way in terms of human psychology, and so he incorporated that timeframe into his indicator. What he wanted was a way to identify the really important long-term buying opportunities. The advice he got varied between 11 and 14 months, and he developed a series of calculations based on the 11- and 14-month changes.
The curve is calculated as WMMA [10] of (ROC [14] + ROC [11]), where WMMA is weighted monthly moving average and ROC is rate of change.
Note: The Coppock curve is not validated for use for individual stocks, narrow indexes or commodities.
The stock market normally has rounded tops and sharp bottoms, which the Coppock curve is very good at identifying. The reason for rounded tops is because greed is slower to turn into fear at the top as opposed to fear turning into greed at market bottoms.
A long term buy signal is generated when the indicator falls below zero and turns upward from a trough and crosses the zero line again. Because the Coppock curve is a trend-following indicator, it does not pick an exact market bottom. However, it is an excellent measure for confirming established rallies and revealing when a new bull market has begun. This is consistent with the pragmatic thinking that it is better to be approximately right than exactly wrong. The Coppock is less sensitive as a "sell" signal - though some investors feel that getting out of the market when the Coppock goes below zero, kept them out of the worst of the bear market.
As the 50-year monthly chart of the S&P 500 and Coppock curve below shows, the empirical truth that once the curve has bottomed and come back into positive territory,we are good for at least one year (and usually more) for the rally to continue. In fact, in the past three recessionary bear markets (1990, 2001 to 2003 and 2007 to 2009), the recovery lasted several years. The Covid-19 bear market, however, was not recessionary as unprecedented government stimulus prevented a recession and the bear market was very short-lived.
While it is still too early to confirm we are in the clear of the bear market, the curve has curled up to -19 in April from -23 in February and -25 in January (three months in a row). Only in 2001 to 2003 did we experience a double dip in the Coppock curve when it curled downward after curling up, finally breaking the zero line in 2003 to give the "all clear". Given that the greatest returns occur early in the rally out of the bear market, I would err on the side of being early than late.
Source: Yahoo
Conclusion
The Coppock curve connects to me on an emotional level. I think there is some logic there - when one loses one's shirt (and maybe pants) in a bear market, it is a devastating blow to the psyche. We go through a time of grieving before we get your mojo back. Investing and speculating is 50% psychological and emotional and only 50% logical. The uptick of the Coppock curve indicates to me that the worst is over, though I do not think it is "dawn" quite yet.
Other indicators also appear to suggest traders are beginning to become more bullish. Mark Hulbert from MarketWatch points out that total margin debt is beginning to rebound. Margin debt enables investors to leverage their gains and losses, so an increasing margin is a good measure of investor confidence in the stock market’s near-term prospects.
Source: MarketWatch
Hulbert's recent research also points out that it is better to be early and anticipate the Federal Reserve's pivot on interest rates rather than wait until it actually pivots. His research indicates stock returns can be in the range of 20% after a year for the early birds as compared to barely abover zero for the laggards.
Source: MarketWatch
While the above data points positively to the odds that the bear market is over, there is one fly in the ointment. Generally, investors and experts are too positive. There are more bullish analysts than bearish ones (including myself, sad to say). For an explosive recovery, my experience is that most optimism needs to be wrung out of the system and fear should rule investor land. Cast your mind to February 2009 to the financial crisis lows or March 2020 to the Covid lows to channel those emotions. Compared to those times, investors now are too joyful. This is not good. So there is a chance that the crocuses are blooming too early and the frost may come once again before spring.
The Fed has yet to pivot, inflation, though down, is not out and the recession is yet to come, but the stock market itself is a forward-looking indicator for the economy. It is said that one should buy the rumors and sell the facts. When it is obvious to everyone the recovery has arrived, there is little money left to be made.
