The Coppock indicator and current market risk

The Coppock indicator is very useful for finding the probable start of a new bull market and is used on the monthly charts of an index. Over the last 40 years the Coppock indictor has provided a high probability indication of the start of a bull market in Australian equities. An entry signal to a new bull market is given when the Coppock indicator is negative and then starts to rise. It is a lagging indicator, so lacks precision but nevertheless is very useful for investors.

coppock-16

From the above chart the Coppock gave an entry signal to a new “bull” market in Australian equities in about July of 2016. The question is whether this is a valid entry signal or one of the few false starts that Coppock has provided over the past 40 years.

When one looks at current world political and economic events, there is much uncertainty. World GDP growth is slowing, interest rates are at historic lows and there is a broad indication that we are entering a worldwide period of deflation.

On this basis the outlook for equities, at least in the short term is not bright. This is particularly so, given coming significant political events such as the referendum in Italy and the United States elections, each of which may have the potential to create economic (and political) mayhem.

Investors who have had good results with the Coppock in the past will no doubt be encouraged despite world political and economic events. However, it would seem prudent when entering this market to take small positions with close stops and have a clear understanding of the risks.

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