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Trend Following and Market Timing: Necessary Decisions

Many folks assume that knowing the perfect moment to buy or sell in the stock market is a skill beyond reach. While it's difficult for many, there are tools designed to assist with this task. One such tool is the Coppock Curve, which is particularly valuable for long-term investors.


Edwin S. Coppock, a money manager who also worked for the Episcopal Church in the US, developed this curve. He had a discussion with a priest about grief. They concluded that it takes about 11 to 14 months to recover from the loss of a loved one. Coppock thought this concept could be applied to recovering from a major investment loss. Using this time frame, he created the Coppock Curve to help spot the best long-term investment opportunities.


The Coppock Curve is great for helping investors decide when to take bigger risks in the stock market. It's been effective for over a hundred years at signalling the start of new periods of growth for stocks. It would have even prevented investors from entering the 1929-1932 stock market crash too early.


Predicting the highest point of the market is tough, but the Coppock Curve has consistently identified the lowest points over the past century. Recently, the Coppock Curve dipped below zero in September. It'll likely stay there for a few more months before rising again. Even if the current market continues to grow, the Coppock Curve isn't expected to turn upward until February. If the market takes a downward turn again, it'll take even longer for the Coppock Curve to rise. Thus, the market may need more time than investors think to adjust to losing a large amount of monetary stimulus.


So, the next time someone says that it's impossible to predict the market, remember the Coppock Curve. Every move in the market is a prediction. Using tools like the Coppock Curve to refine your predictive ability is a smart strategy.


The Coppock Curve for the S&P 500 Index started rising in March. Other trend indicators also look promising for the index: it's still above its 200-day moving average, as is the 50-day moving average. This suggests an upward trend. However, remember that the Coppock Curve falsely predicted an upward turn in December 2001, right before the S&P 500 Index dropped another 30% by fall 2002. Like any tool, the Coppock Curve can improve.


The end of 2001 and start of 2002 provide a useful comparison. The Dotcom Bubble bursting saw some fantastic rallies, similar to recent ones in Big Tech stocks. Many thought these rallies signaled the end of the crash, but they were mistaken. If the fall of SVB predicts more financial trouble for non-profitable start-ups, stocks popular in 2021 may have much more to lose. This could impact the broader economy and risk attitudes.


Trend followers will ignore these predictions and focus on the upward trend suggested by their indicators. More holistic approaches may consider the larger picture and be more cautious about this year's rally. Passive investors may ignore everything and stay fully invested. Regardless, all investors make implicit market-timing decisions, or predictions. Any investment decision is a forecast, so it's unavoidable.





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