I am grateful to Robert Ansted of the Investors Chronicle, an expert on Coppock, for much of the following.
‘Crowds do too much too soon,’ said Edwin S.C. Coppock in a 1962 essay, ‘The Madness of Crowds’. This described some research he had been doing on behalf of his Texas investment advisory firm, Trendex
Research Group. He went on:
They overdo. When they get an urge to speculate, their concerted demand forces prices up at a rate far greater then 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.
This all sounds right on the mark to anybody who has experienced one or two stock market cycles. Coppock wanted to turn these observations into ‘a practical technique to aid long-term investors who wish to minimise risk’.
Believing that a key driver in crowd psychology was how recently it had experienced a serious hit on its wallet, he turned to his local church and asked its officials how long the average person needs to grieve following a bereavement or other traumatic event: 11 to 14 months was the answer.
Coppock then formulated a memorable indicator. On a rolling basis, he calculated percentages for how much the Dow Jones Average had moved over the previous 14-month and 11-month periods. These two figures were added together and turned into a ten-month weighted moving average. The result was a momentum oscillator (see Figure 4.3, p. 81) to which he attached a simple rule: Buy when it moves up whilst below zero. ‘The curve has been highly satisfactory as a profit maker,’ said Coppock. A modest claim for a Texan.
Coppock was neither the first nor the last to formulate a momentum oscillator, but his inspiration of setting its periodicity according to how long bereavement depresses the emotions produced impressive results.
The curve had identified the beginning or near-beginning of all four major surges in the Dow Index from 1948 to 1962. He arrived at a formula which picks up major lows but is not so sensitive that it called for action on what turned out to have been a minor reactions to the prevailing trend.
And when do you sell? You don’t, at least not in the original Coppock scheme of things. He was an advisor to US institutional investors, who always had strong cashflows coming in from the public. His purpose was to help them time the investment of those cashflows by avoiding tops and amassing cash until the crowd was bent on another speculative surge. He didn’t envisage that they would ever need to sell ‘the market’. He did however note that the curve had acted as a warning of major market tops.
In 1963 Harold Wincott, editor of the Investors Chroniclein the UK, came across Coppock’s work and applied it to the UK market, using figures going back to 1940. In those days, without readily accessible computers, a short cut was made, of using a single rolling 12-month average rather than the 11- month and 14-month figures which Coppock had devised. Wincott found the
results of his analysis highly satisfactory and the Investors Chronicle has published its ‘IC/Coppock indicators’ ever since. (They appear once a month in a table at the back of the magazine. Indices are provided for a dozen major stock markets.) Inevitably, Coppock’s original trading rule was extended by treating a turndown when the index was above zero as a sell signal. Further, a subsidiary buy signal was identified – when the Coppock Index turns up while still above zero. The Investors Chronicleterms these signals unofficial.
In the 1970s, the IC/Coppock indicator caught the UK market’s highs and lows with great accuracy. The signals were rare – the whole decade saw just three buys (all official) and four sells – but most were gilt-edged. In particular, it called a perfect sell and buy at the top and bottom of the calamitous collapse from 1972 to 1975, which saw the index fall by over 70 per cent.
However, since then the record has been mixed. It is set out in Figure 7.6.
The 1980s were queer territory for IC/Coppock. The indicator stayed above zero from 1977 to 1989, and therefore gave not a single official signal in that time. This demonstrates the severe limitations of Coppock’s original formulation. No investor could have afforded a signal which kept him out of the great 1980s’ global bull market.
If the indicator was to be used at all then, the unofficial signals had to be considered. But these have had a poor record since 1983. First and least on several occasions these arrived in whipping sequences, with succeeding months delivering first one injunction, then the opposite one – not at all what Coppock had in mind. More seriously, the sell signals in 1983, 1985, 1986 and 1987 – after the October crash – were just plain wrong. The record in the 1990s has been rather better, or rather less bad. Signals in the 1990s have been associated with market setbacks, but the timing has not been tight enough. Since October 1989, three IC/Coppock buy signals (those of December 1989, January 1992 and November 1992) have arrived too late to put investors back into the market in time to put them ahead of where they would have been if they had simply ignored the sells and held their portfolios. The ill effects of these signals have more than outweighed the benefits of the two good sell signals.
The problem is that the market often recovers following a setback in very sharp spurts, which either largely or more than make up for the preceding reaction. These are very evident in Figure 7.6 where strong gains may be seen in the month or two running up to each of the last three IC/Coppock buy signals. In 1992, the market moved ahead by 15 per cent in just three months before the indicator gave a green light to buy. In the 1990s investors seem to need less grieving than 20 years ago. So why not shorten the formula? No doubt some have. But when will conditions swing around again?
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
-100 0 100 200 300
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
FT All Share Index
IC/Coppock Indicator
after a ‘sell’ signal after a ‘buy’ signal whipping signal
(see page 128) official signal
In fact, the original Coppock buy signals only approach should not be discarded. It is clear from Figure 7.6 that although the signals have tended to be late, they have on every occasion (and this even applies to the unofficial buy signals except for that which occurred in 1986) been followed by a vigorous market for a minimum of four months before the next reaction began to take shape. The buy signal could therefore be taken as marking conditions in which it would pay to take an aggressive approach to investing, for instance, by gearing up a portfolio (i.e. buying shares with borrowed money) and buying call options, if that is the investor’s style.
Figure 7.6 Coppock calls the All Share
Figure 7.7 sets out in detail all the IC/Coppock signals from 1982 to 1996 and compares the effects of following these (with sells held to mean a switch into cash) with the strategy of simply buying the Index in 1982 and holding it through all ups and downs. Even though no interest has been allocated to the Coppock strategy when it is holding cash, it is clear that buy and hold leaves IC/Coppock standing.
Results from a starting capital of £100 in July 1982 FT-A
All-Share FTAS Slavish Buy and
‘Official Index change by Signal good IC/Coppock2 hold
signal’ Date Signal (FTAS) next signal or bad1 £ £
7/82 buy 330 +2% good 102 102
8/82 sell 336 +6% bad 102 108
9/82 buy 357 +26% good 128 136
9/83 sell 449 +19% bad 128 162
10/84 buy 533 +19% good 152 192
9/85 sell 633 +8% bad 152 208
11/85 buy 684 –1% bad 150 205
12/85 sell 674 +17% bad 150 239
3/86 buy 787 +0% – 150 239
10/86 sell 788 +12% bad 150 267
1/87 buy 879 +12% good 169 300
4/87 sell 989 +8% bad 169 326
5/87 buy 1073 –23% bad 131 251
11/87 sell 828 +15% bad 131 288
* 11/88 buy 949 +17% good 153 337
10/89 sell 1111 +6% bad 153 357
12/89 buy 1175 –2% bad 149 348
2/90 sell 1147 –4% good 149 332
* 2/91 buy 1095 +6% good 157 351
12/91 sell 1156 +4% bad 157 365
1/92 buy 1203 +1% good 159 370
2/92 sell 1219 +5% bad 159 390
* 11/92 buy 1284 +26% good 201 492
3/94 sell 1620 –3% bad 201 475
* 4/95 buy 1566 +21% good (so far) 243 574
5/96 1890
1 Based on performance between this signal and the next one 2 See text
Figure 7.7 Coppock compared with ‘buy and hold’ since 1982
-200%
800%
85 87 89 91 93 95 97 99 01
-1000 0 1000 2000 3000
good good
good
good
bad All Share Index
IC/Coppock Indicator
Figure 7.8 Official IC/Coppock buy signals since 1985
Coppock also devised a short-term indicator which is said to have worked well in the USA, but not in the UK. He was working on a UK adaptation of this when he died in the mid-1980s.