Tatton teaser: Can you time the market?
Posted 15 December 2022
It’s certainly an interesting question. Traditionally, the answer would be no as spending time in the markets can help one avoid the costly mistakes of getting timing wrong.
But is it true that you cannot time the market? Well if you ask a technical analyst, someone that looks at charts seeking to identify repeating patterns on a price graph, you might get a different answer. Identifying the top of a market is notoriously difficult but what if you could get a sense that a market was in the process of forming a base or bottom that it could move higher from based on analysing trends?
Enter the Coppock Curve. First published in Barron’s Magazine in 1962, economist Edwin S. Coppock and founder of Trendex Research identified that the time humans take to process loss was between 11 and 14 months. Coppock reasoned that financial losses might also be mourned by investors in a similar fashion and he sought to identify long-term buying points following a market correction.
A true test of any potentially repeating patten or signal is how well it performs based on historic data. The Coppock Curve appears to have confirmed every major bull market since the late 1920s – but there were two false signals seen in 1941 and November 2001.
A Coppock buying signal is thought to occur when the indicator is below zero and turns upwards towards zero from a trough – it doesn’t seek to identifying selling signals, just a market bottom when a rally appears to be establishing itself. The signal would suggest investors hold their position when you cross zero and sell when the signal rolls over and starts turning down, although it’s been less successful at calling a market top. The signal is a trend following strategy based around averages. The more negative the starting point of the signal when it begins to move upwards, the more potential upside there’s meant to be. We note a few buying points on the chart below.
Using the Coppock Curve on the S&P 500, shown in blue on a log basis, today, we see the following signal emerge in orange. The Curve broke below zero in September and has stayed in negative territory since then.
The reading at the end of November indicates a level of -0.2, potentially suggesting current weakness is not over just yet based on the above. Even if markets rally from here, the Coppock Curve would only likely turn positive late Jan/Feb 2023 time – given it’s lagging average nature and historically an investor would normally miss the very early part of any rally but buy in when more established. A failure of any rally could see the signal move further negative, which would push out the buying signal to Q2 – 2023.
Based purely on the Coppock Curve, it is possible that a return to more bullish markets may take a bit longer than investors currently think. But then again, perhaps we shouldn’t try timing the markets after all.
Thank you Sam Leary for this note.