In October 1962, the late Mr. Edwin S.C. Coppock of Trendex Research Group in Texas (a company which provides services for brokers and investment bankers), wrote an article entitled "The Madness of Crowds".
"Crowds do too much too soon", he wrote. "They overdo. When they get an urge to speculate, their concerted demand forces prices up at a rate far greater than the growth of the company into which they are buying. Likewise, when they liquidate holdings or make short sales during a panicky decline, they ignore basic economic facts. They overdo because they are motivated by emotion rather than reason".
With this in mind Mr. Coppock and his staff set out to create a practical technique to aid long-term investors who wish to minimise risk. He consulted with members of the Episcopalian Church who told him that it takes between eleven and fourteen months for human beings to adjust to bereavement or recover from illness and operations. He then used this piece of information by including the time scale within his formula.
Mr. Coppock and his team evolved a five step procedure:
Step 1 - Calculate the percentage change of the index over the past fourteen months.
Step 2 - Do the same for the past eleven months.
Step 3 - Add the two percentage changes thus obtained.
Step 4 - Prepare a ten-month weighted moving total of the figures in step 3 and 'post' this figure to an arithmetic scale.
Step 5 - The final step is only taken when the resultant curve on the chart starts to rise after having been below the zero line.
The result of these workings is a single figure, either positive or negative. When shown alongside previous months' results, the Coppock indicator signals BUY or SELL signals for when the market is undervalued. In 1963 the Investors Chronicle decided to apply Coppock's principles to the Financial Times Industrial Index. They have been publishing their results every month since then online for free.
- You can view them in the Markets & Sectors > Markets section of the website.
- You can view June 09's IC/Coppock here
However, the IC/Coppock is slightly different in that one short-cut was made. Instead of averaging the percentage change over a fourteen and an eleven month period, they took the percentage change between the current monthly average of the Financial Times Index and the monthly average of that index twelve months ago. The calculation became easier to compute than the original and the world markets and sectors were added to teh Dow Jones and the Financial Times indicators.
How to interpret the indicators and spot BUY and SELL signals
At the bottom of every IC/Coppock puclication you'll see that the IC actually explains the indicator. To clarify it though, the first two columns in the table are self explanatory, showing the country index and its monthyl arithemtic mean. The following three need a little interpretation. The IC/Coppock Indicators are calculated each month and are included in the table along with the previous two months's figures. The indicators fall from positive to zero and then into the negative phase. When they turn upward whilst in the negative phase, you get a BUY signal. The indicators rise from the negative through zero and into the positives phase. When the indicators begin to fall whilst in the positive, you get a SELL signal.
The indicator is best applied to markets where 'wave motions' occur i.e. markets which rise and fall evenly over a regular period. Commodities and currencies are not ideal to apply Coppock as there are too many outside influences such as wars, frosts, Government intervention etc.