Analyzing the Coppock Curve Indicator

Thanks to my colleague, Chris Prybal, I learned about a new indicator. It is called the Coppock Curve and it recently signaled a buy on the Dow Jones Industrial Average (DJIA). It’s a momentum indicator that adds the 11-month and 14-month returns and then takes a 10-month moving average of that total. StockCharts.com specifies the reason for the 11- and 14-month periods comes from an Episcopal priest, as that’s the average mourning time for a loved one. Apparently, a stock market recovery could be similar. When the Coppock Curve moves from negative to positive, it’s a buy signal. When it goes positive to negative, it’s a sell.

The chart below shows the Dow along with its Coppock Curve since 1975. This year it dipped down into the negative, creating a sell signal, and then quickly moved back positive which was the recent buy signal. The buy signal officially occurred at the end of August. This week I’ll look at the historical implications of buy and sell signals to see what it’s telling us about where the market might be heading.

Quantifying Buy & Sell Signals

I went back to 1950 and found the buy and sell signals generated using the Dow Industrial Average’s Coppock Curve. The first table below summarizes how the index performed after buy signals. The second table shows the Dow’s performance after sell signals, and the last table shows all the returns since 1950 for comparison.

There have only been 15 signals since 1950 using monthly data points. The indicator has a good track record. Looking at the average return and percent positive, the buy signals beat the anytime returns across all the time frames, and the sell signals underperform the usual returns across all the time frames. Focusing on the six-month return after a signal, the Dow averaged a 6.5% return with 80% of the returns positive after a buy signal. Compare that to after a sell signal, in which the index averaged a return of just 0.5% and less than half of the returns positive.

Breaking Down the Buy Signals

The recent buy signal at the end of August is encouraging given the indicator’s track record. But let’s not forget it yielded a sell signal at the end of June. The table below lists all the buy signals that occurred within six months of a sell signal. The longer-term returns are impressive. After these four occurrences, the DJIA saw an average return of more than 20% over the next year. Two years after one of these buy signals, the index was up an average of over 50% and all four returns were positive. The buy signal seems to negate the sell signal.

Another factor I investigated is how the returns looked when the signal occurred with the market near an all-time high. The individual signals in this next table all occurred with the Dow within 3% of an all-time high. The returns, just like after a general buy signal, beat the typical Dow returns since 1950.

One final angle I took toward this indicator is how the Dow performed after buy signals when investors were optimistic on stocks. As I often do, I used the Investors Intelligence (II) sentiment survey to gauge the sentiment from investors. Specifically, the buy signals in the table below all occurred when the percentage of bulls in the Investors Intelligence sentiment survey were over 50%. Our contrarian philosophy would have us theorize that this would have bearish implications on future returns. A quick glance at the summarized returns does not support our theory. One year after these four signals, the Dow averages a gain of 14.5% with all the returns positive. Taking a closer look, however, reveals that while all four returns are positive, two of those returns returned less than 5% over the next year, and less than 7% over the next two years. They were all positive, but the returns are now what you would be looking for over those longer time frames.