Coppock Guide — New Bull or Fakeout?

There were stories all over the news yesterday about how the Coppock Curve or “Coppock Guide,” an obscure but respected sentiment indicator, had turned bullish.  It was covered on CNBC’s “Fast Money” last night, where most of the traders admitted to not knowing about this.

Nor should they.  They are fast money traders, and the Coppock Curve is definitely a “slow money” sentiment indicator.

Here is a chart of the Coppock Curve …

The gauge was named for E.S.C. Coppock, who invented it in 1962.  He wrote that his indicator gave “a picture of the emotional factor” behind stock swings. He advised investors to buy shares in anticipation of “an important, sustained advance” when the guide started to increase from less than zero.

The Coppock Guide is a momentum indicator that filters out shorter-term market swings in order to focus on the long-term trend. Though it will, by definition, always be late in identifying a market bottom, adherents insist that it is a reliable indicator of a new bull market when it finally does issue a buy signal.  That’s what we’re seeing now.  In other words, the guide is saying “buy.”

What is this indicator actually measuring?  As explained by one of the gurus who follows it currently:

Major stimulus initiatives by the Federal government have raised expectations that the economy will begin to recover as early as Q4 of this year. The stock market has already responded, with the S&P 500 rallying 30% from the lows posted in Q1-2009. However, the stimulus initiatives have also raised expectations for future inflation, and this has already undermined performance of 10-Year Treasuries, and will probably continue to do so over the next few years. Our own 12-month targets for 10-Year Treasuries (from current 3.12% yield to 4.15% yield) would result in an estimated 5% total return loss by this time next year.

From a variety of vantage points, the table appears to be set for equities to substantially outperform fixed income over the next several years.

So we should all go 100 percent into stocks, right?  Not so fast!  Over at Dow Jones Marketwatch, Mark Hulbert explains that there was a very important time when the Coppock Guide failed twice.  It issued “two spectacular failures,” Hulbert writes, “when it flashed buy signals at levels well above the eventual bear market low in mid 1932.”

Hulbert adds: “To properly interpret last week’s buy signal from the Coppock Guide, therefore, you must first decide how relevant you believe the early 1930s are to the current market.”

So, that’s a question we face now, my friends.  Do YOU think we are in a new Great Depression — the kind of market environment that would make the Coppock Guide give a “spectacularly” wrong signal?  Or do you think we are in a new bull market.

I’ll have to admit, bullish positions in my publications are doing very well. And a bearish hedge in Red-Hot Global Small-Caps was stopped out (with a small loss).  The bulls definitely have the momentum now. 

Is this bull about to hit a brick wall, or get its second wind?  What do you think?

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