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| Coppock's Indicator - Bull market ahead ? |
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| 18.05.2009 [ THE DAY MARKET TOUCHED HISTORIC 20% UPPER CIRCUIT]
The markets have reacted positively to the poll results of the worlds largest democracy. The historic dual circuit filters on the upside have cheered many hearts on the fifth anniversary of "black Monday" in May 2004. Should we assume that the markets are now undisputedly in bullish hands and fresh buying is advisable ? We refer to Edwin Coppock's indicator which has stood the test of time and accurately predicted market bottoms for over 4 decades.
Edwin Coppock was an economist in the UK who was approached by the Church to help with investing the church funds at the appropriate time in the middle of the previous century. The Church was unsure of how long the then recessionary phase would last and wanted to be absolutely sure before committing funds to equities. Coppock set to work, formulating an indicator which is now referred to as the "Coppocks indicator" by the rare breed to veteran technical analysts. It consists of plotting 11 & 14 month RoC (rate of change) oscillators and then smoothening the same by a common average. This indicator has accurately predicted 99 % of market bottoms, sometimes a while in advance. However, it fails miserably when it comes to predicting market tops. Coppock had also incorporated some behavioural economics in it's parameters, the primary one among others being the average period of mourning by an average person after losing a near and dear one. He found that an average individual overcomes a loss of a near and dear one, no matter how painful and slowly but surely stops reacting to painful memories of the departed member. Similarly, markets are known to stop reacting to negative news over a period of time, especially after a sustained decline. That would be an ideal time to deploy funds into equity markets.
Currently, Coppock's indicator has signaled a possible market bottom in the domestic context as the headline indices have zoomed to stratospheric levels where a single day gains are concerned. The burning question is, should you enter now, or wait ? The answer is yes to both situations, depending on what type of a market player you are. If you are an aggressive, risk taking leveraged player, you should not think of jumping into the markets on the long side afresh. On the flip side, if you are a long term investor who thinks nothing of 24 - 30 months as a time frame, by all means go ahead and buy. Remember the following points before you buy -
The markets have been rallying before the poll results announcements, which means the "positive surprise" aspect is not really as surprising for all players concerned
The kind of buying that is required to propel markets higher on the eve of poll results means that "smart money" was at work here
"smart money" is also mathematical and un-emotional. It realises that such spikes are invariably followed by consolidation / corrections. Once the news is out, profit taking will set. Remember the old saying - buy on expectations, sell on news?
Once smart money starts selling, it will sell in the same quantum as they bought earlier. A corrective decline that can occur will not be easily absorbed by retail players without suffering significant losses to capital in the futures segment.
The corrective decline that will occur will be a much more safer point of entry as the process of price discovery will be more logical than knee jerk.
While the short term pressures of covering shorts, margin calls and systemic stop loss orders may fire another round of buying, I feel there is a significant risk to bulls who initiate leveraged purchases at current levels. Traders / speculators should not only know when and what to buy but also at what price to buy and when not to buy at all. In summation - if you are a long term investor, by all means, go ahead and buy. But be prepared to average downwards. If you are trader, make haste, but slowly.
Vijay L Bhambwani
(Ceo - BSPLindia.com)
The author is a Mumbai based investment consultant and invites feedback at vijay@BSPLindia.com or (022) 23438482
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