Ask Colin

Do you think the most recent Coppock signal on the KLSE is deep enough?

The detailed question was:

The chart attached is the Coppock indicator for KLSE, and one doubt I have is that, how much is considered "deep into negative territory "? The KLSE has been turning less negative from -100 to -90. Is it considered deep enough into negative territory? Do you think the buy signal is timely or premature?

It is important to realise several things about the Coppock indicator: It is not magic. It is simply a long-term momentum oscillator based on rate of change. I use it for one purpose only and that is my market exposure strategy, which you have already read about once you have finished chapter 8 of Building Wealth in the Stock Market. In doing so, it is rather like an alarm clock, it wakes me up if I have been asleep and not seen a market turn. I find that a monthly MACD turning up gives similar signals (the MACD cross tends to be a bit later). But that is all I use the Coppock for. Sometimes I wish I  had never mentioned it because people attach some magical property to it and act on it alone. Selecting stocks is a quite different exercise as you will read as you go through the rest of the book and read the many stock journals on the website.

Sometimes deep Coppock signals are better than shallow ones and sometimes the reverse. That deep signals  tend to be better is only a general observation and there will always be exceptions. This is not some simplistic rule to be followed blindly, it is a general observation that applies much of the time but not invariably.

If you look at the chart, where my history goes back only to 1993, there have been only a few signals:

  • It looks as though there was a shallow signal in 1995. It did not lead to a bull market.

  • There was a deep signal in 1998 that led to a substantial rise.

  • There was a moderately deep signal in 2001, that was followed by a weak rise.

  • Then a shallow signal in 2003 that led to a good and sustained rise.

  • There was a deep-ish signal in 2009 that led to a great rise.

  • Now you have a shallow signal. What it means is unknown.

There is one big question in all of this, considering that I do not know your market and have such limited history back only to 1993. This is that the Coppock indicator was created specifically for the US market (DJIA in particular), but we have history showing it also works well for the S&P500, both of which I have history back to 1900. It also is possibly good for the Nasdaq, but my history is only to 1970. It has also worked well in Australia, where I also have history back to 1900. I think there is a case to assume it will work on big widely traded markets like the FTSE100 and Nikkei225, but again my history is only since 1970. The big question is that I do not know your market and how widely traded it is e.g. how many stocks, do a few stocks dominate it and how wide and deep is the market? What I am suggesting is that the Coppock Indicator is unproven in your market. I  would personally not be relying on it to the extent you seem to be trying to do.

I think you need to be looking at whether your market seems to be cheap. It may not be after such a sustained rise from 2008. If it is not, then be very careful of Coppock or other signals. You need to be finding stocks one by one rather than blindly on a Coppock Signal. Start studying my stock journals for examples of how I do it. Bear in mind that my market is not cheap at present, but neither is it wildly over-valued. This makes it a difficult stock-picker’s market rather than and index-hugging market. Yours may be in a similar state, but I cannot do more than guess at that.

Finally, from this week (15 April 2016) I will include your market in my Weekly Market Charts and Analysis file on the website.

Keyword: