Ask Colin

The Coppock on the DJIA and S&P 500 gave a false signal for the beginning of a bull market at the start of 2002. True or false?

The Dow Jones Industrial Average (DJIA) gave a signal early in 2001. At the time, I wrote in Shares that I thought it was a bad signal, because we had not really had a bear market, there was no signal on the S&P 500 and because good signals are rarely so shallow below the zero line. Sure enough, the Coppock turned down again.

Then we got another signal in early 2002, as you say. The Coppock has now turned down again. It is certainly looking now as though it was a premature signal (I hesitate to say "false", because it was a signal, so it is true - the question that is useful for me is whether it is early or late, rather than true or false.)

The S&P 500 also gave a signal in early 2002. Its Coppock has also turned down again, so it too seems to have been premature, considering how much lower the S&P 500 (and the DJIA) has gone since.

Premature signals are not unprecedented. The Coppock is not infallible, but it also has a good record, without being perfect. I don't think there is any perfect indicator, so it does not worry me.

I have given a lot of thought to what is happening. My idea is that the Coppock was designed to work on a "normal" bear market. However, some people are claiming that this bear market is already the third longest in history (however they define this). It may soon be the longest. If we accept this, then like any long term momentum oscillator, the Coppock will struggle because the cycle length it was based on is not appropriate this time. For such a situation, we would expect to get premature signals and possibly more than one such signal.

Whether the signals are premature or what is not the issue. History suggests that Coppock signals should not be simply ignored. My feeling is that we should act on them cautiously as I describe in my trading plan. The signal early this year would have got us into strong stocks. Some we might still be holding if they are still going up (everything is not falling in the lastest leg of the bear market). Our stop-losses should have taken us out of the ones that failed and when the Coppock turned down again, we might have waited for another signal before buying strong stocks again.

So, the Coppock is a useful timing tool, but should be seen as infallible.