SPY Coppock Guide: Away From Bullishness, Toward Nonbullishness as of March 31, 2014

Because the SPDR S&P 500 ETF (SPY) climbed to $187.01 from $185.49 during the trading session Monday, the derivative of the large-capitalization equity-market index managed to record a positive result for the first quarter overall, when it rose $3.13, or 1.70 percent, on an adjusted share-price basis. However, SPY’s daily gain of $1.52, or 0.82 percent, was insufficient to avoid a change in its Coppock guide’s monthly signal, which has shifted to nonbullish from bullish.

The Coppock guide, aka either the Coppock curve or the Coppock indicator, is a long-term indicator of price movements in major stock-market indexes introduced by Edwin S. Coppock in Barron’s more than half a century ago. Both the indicator’s history and its methodology are interesting in themselves, but my focus here is on its relevance to SPY.

Figure 1: SPY And Its Coppock Guide, The Complete History

Note: The SPY closing-value scale is on the left, and the Coppock guide scale is on the right.

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data and those data themselves.

Coppock developed his long-term guide not to generate both bullish and bearish signals but to generate only bullish signals. However, I employ it to generate either bullish or nonbullish signals. It is extremely important to bear in mind that in the context of the Coppock guide a nonbullish signal is not equivalent to a bearish signal. In my use of the indicator, I anticipate SPY may advance after a bullish signal and expect it might do anything following a nonbullish signal (i.e., move higher, move lower or trade sideways).

Figure 2: SPY, Its Coppock Guide And Bubbliciousness, Part One

Note: The SPY closing value scale is on the left, and the Coppock guide scale is on the right.

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data and those data themselves.

The first massive equity-market bubble of the 21st century began to inflate around the same time the SPY Coppock guide generated an initial bullish signal in January 1995 and started to deflate shortly after it generated an initial nonbullish signal in December 1999: On an adjusted share-price basis, SPY hit a monthly closing high of $115.43 in March 2000. (Sadly, I did not come across the Coppock guide until 2003, so I personally was unable to profitably employ the indicator during the period covered in Figure 2.)

Figure 3: SPY, Its Coppock Guide And Bubbliciousness, Part Two

Note: The SPY closing value scale is on the left, and the Coppock guide scale is on the right.

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data and those data themselves.

The second massive equity-market bubble of the 21st century began to inflate around the same time the SPY Coppock guide generated an initial bullish signal in March 2003 and started to deflate shortly after it generated an initial nonbullish signal in October 2007: On an adjusted share-price basis, SPY hit a monthly closing high of $134.65 the latter month.

Figure 4: SPY, Its Coppock Guide And Bubbliciousness, Part Three

Note: The SPY closing value scale is on the left, and the Coppock guide scale is on the right.

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data and those data themselves.

The third massive equity-market bubble of the 21st century began to inflate around the same time the SPY Coppock guide generated an initial bullish signal in April 2009 and has not yet started to deflate: On an adjusted share-price basis, SPY to this date has hit a monthly closing high of $187.01 in March.

Figure 5: SPY’s Behavior Subsequent To Initial Bullish Signals

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

The SPY Coppock guide’s initial bullish signals collectively have done an excellent job in forecasting the future upward movements of the ETF on monthly closing bases. In 22 cases since January 1995, these signals have been successful on 18 occasions, or 81.82 percent of the time, and unsuccessful on four occasions, or 18.18 percent of the time.

Figure 6: SPY’s Behavior Subsequent To Initial Nonbullish Signals

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

In contrast, the SPY Coppock guide’s initial nonbullish signals collectively have done nothing in predicting any movements of the ETF on monthly closing bases. In 21 cases since January 1995, SPY has followed these signals by rising on 11 occasions, or 52.38 percent of the time, and falling on 10 occasions, or 47.62 percent of the time. Sheesh!

The Bottom Lines

The SPY Coppock guide has clearly told me the old long-term trend upward has ended, but it has not clearly told me that a new long-term trend downward has begun. At this moment, it is telling me SPY may move higher, lower or sideways. The indicator is thus sending a mixed message. However, it is a very different message than the one I received each of the previous 20 months, commencing in June 2012. And this message is not the only one I have had delivered recently, as follows:

• The U.S. Federal Open Market Committee has continued to taper the Federal Reserve’s current quantitative-easing program. FOMC first announced it would cut its monthly asset purchases to $75 billion in January from $85 billion in December; the committee then said it would reduce them to $65 billion in February from $75 billion in January; and it most recently said it would trim them to $55 billion in April from $65 billion in March. The changes in monetary policy are likely to have an effect on the equity market in general and SPY in particular, as discussed in “Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century.”

• The stock market is already overvalued, as indicated by 2013 Nobel Prize-winning economist Robert J. Shiller’s cyclically adjusted price-earnings ratio. As a result, there is little or no reason for SPY (or its underlying index) to rise from its current level based on valuation.

• Speculation in the market is close to an all-time high, as suggested by “NYSE Margin Debt Hits All-Time High Of $465.72 Billion In February, With Risk Rank At No. 2.” Therefore, I anticipate a dramatic turn in money flow, to outward from inward, sooner or later.

Still, the history of the SPY Coppock guide leads me to anticipate a certain amount of whipsawing between signals during the next two quarters (at least). I would be completely unsurprised to see the indicator generate first a bullish signal in either May or June and then a nonbullish signal on its heels.

And, of course, I also would be completely unsurprised to see this whipsawing accompanied by the Chicago Board Options Exchange Volatility Index continuing to wend its way higher, as described in “S&P 500 Flattish As VIX Rises In 2014.” Ay caramba!

Correction: Please note the Figure 6 graphic and text originally published has been changed to correct a mischaracterization of SPY’s movement on a monthly closing basis in the wake of one of the 21 initial nonbullish signals flashed by the Coppock guide.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.