It is said that Archimedes discovered the principle of displacement while sitting in a tub of water. It's not unusual for insights to occur at unforeseen times. So too it was with economist Edwin Coppock. On being told that it took 11 to 14 months to mourn a death, he used this idea to develop an indicator that would predict a sustained rally after an economic downturn.
The Coppock indicator is the sum of a 14-month rate of change in an index and 11-month rate of change, smoothed out by a 10-period weighted moving average. When the curve less than zero and rises, that is a "buy" signal. The deeper it goes below zero, the more powerful the rally. The Coppock indicator has predicted 16 U.S. rallies from 17 "buy" signals, and recently the Coppock indicator gave another "buy" signal.
Of what use is the Coppock indicator? It is considered a technical indicator. Technical indicators usually use mathematics to predict the movement of the markets. The Coppock claims to be a long-term indicator, giving a "buy" signal that would carry the market upward for a sustained period. Another long-term technical indicator is the 200-day moving average, and others include Bollinger Bands. Keep in mind that there is no shortage of technical indicators, and some traders use a combination of various ones. All of these indicators are superimposed on charts of one kind or another. The one failing of technical indicators is that they only show us the past and while they may be useful in determining trends, they really cannot predict the future. Charts, for example did not predict 9/11, which drastically altered the direction of the market.
Another way of investing is the fundamental approach. Here, the investor chooses a stock or industry, does research on such things as income, earnings, P/E ratios, and management and decides to make a play based on these factors.
Of course some investors use a combination of technical and fundamental approaches when making their decisions.
Then we have those who simply don't have the time or inclination to do any research and rely on the purchase of a mutual fund or the advice of brokers or financial advisers. These people may be successful in bull markets but by abdicating their responsibility to take charge themselves, they are often the biggest losers in a bear market, such as we have seen in the past year.
When making your investment decisions, what approach do you use?
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Reader Comments (Page 1 of 1)
6-07-2009 @ 1:38PM
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6-08-2009 @ 2:51PM
Iridium said...
But when the Coppock indicator turns positive due to artificial stimulus can you really use it as a predictor?
There isn't any true activity that turned the market positive. A quick rule change allowed the banks to turn billions in losses into billions in profit. The other indicators turned positive through a massive influx of tax dollars, unprecedented in history.
Because of the massive intrusion by the government into the private sector you really can’t use any historical indicators to predict the market. If the massive corporations were allowed to fail you could use historical growth patterns as a predictor because new corporations would rise to replace those that went bankrupt.