OK, I will admit I am acting a bit schizophrenic of late. Yesterday I write an article titled “One Sign That the Bull May Still Have Legs” and today I am writing an article that seemingly suggests that you sell tomorrow. So what gives?
First off a friendly reminder that everything I write on this blog is for “educational purposes only” and I do not make formal “recommendations.” In other words, “I report (whatever I see – or to be technically correct, whatever I think I see), you decide.” (This is slightly but importantly different from most of today’s main stream media whose motto more closely resembles “We decide, then we report.”)
So the Bullish Outside Month I detailed in my last piece remains a bullish factor. But today, let’s look at the other side of the coin by combining two indicators.
The Coppock Guide
Because I am hoping to avoid having too many readers suffer “My God This Sure Seems Complicated – Not to Mention Boring” syndrome, I am going to skip the description of the steps involved in calculating the Coppock Guide (may I suggest Google.com or better yet here). Long story short, the Coppock Guide is a momentum indicator which in this case is updated once a month using the closing price each month for the Dow Jones Industrials Average. Also in this case we are looking at the 2-month rate-of-change in the Coppock Guide Indicator value itself. Interpretation works as follows:
*Current Coppock Guide value > Coppock Guide value two months ago = GOOD
*Current Coppock Guide value < Coppock Guide value two months ago = BAD
For the record, starting in August of 1900 (and assuming no interest while out of the market):
*$1,000 invested in the Dow only when conditions were GOOD is now worth $379,378.
*$1,000 invested in the Dow only when conditions were BAD is now worth $764
That’s +37,838% versus -23.6% (which is what we “quantitative analyst types” refer to as “statistically significant”).
For the record, the Coppock Guide 2-month rate-of-change is now negative, i.e., bearish.
The 40-Week Cycle
The 40-week cycle can be traced back to April 21, 1967 (no seriously). Since that date, the first 140 calendar day period (20 weeks times 7 days a week) is deemed the “bullish phase” and the next 20 weeks is deemed the “bearish phase.”
One refinement I’ve added is a 12.5% stop-loss. If the Dow drops 12.5% or more on a closing basis from its closing price at the start of a bullish phase, then the cycle is deemed bearish until the end of the current 40-week cycle. Recent cycle phases appear in Figure 1.Figure 1 – The 40-week cycle (20 weeks bullish; 20 weeks bearish) Courtesy: ProfitSource by HUBB
For the record, starting on 4/21/1967 (and assuming no interest earned while out of the market):
*$1,000 invested in the Dow only when 40-week Cycle is bullish is now worth $28,896.
*$1,000 invested in the Dow only when 40-week Cycle is bearish is now worth $664.
That’s +2,790% versus -34% (again, “statistically significant”).
For the record, the 40-Week Cycle reverts to a bearish phase as of the close on 6/13/14.
One thing to note: As you can see in Figure 1 it is not like the Dow necessarily begins to decline the minute a new 40-week bearish phase (marked by “-” signs in Figure 1) begins. So let’s combine the Coppock Guide and the 40-week cycle.
Combining Coppock Guide and 40-Week Cycle
So let’s now take the obvious next step and combine these two indicators. For our purpose, if either indicator is bullish we will call this a “combined bullish phase.” On the other hand of BOTH indicators are bearish – which will be the case starting at the close on 6/13/14 – we will call this a “combined bearish phase.”
Figure 2 displays the growth of $1,000 invested in the Dow when either or both of the indicators are bullish, i.e., in a “combined bullish phase.”Figure 2 – $1,000 invested only during a “combined bullish phase” (blue line) grew to $30,221 versus $19,187 for buy-and-hold (red line); 1967-present
On the flip side, Figure 3 displays the growth of $1,000 invested in the Dow when both indicators are bearish, i.e., in a “combined bearish phase” (again, this will be the case as of the close on 6/13/14).Figure 3 – $1,000 invested only during a “bearish phase is now worth just $635; 1967-present
So will the Bullish Outside Month propel stock prices higher still? Or does the combined bearish phase for the Coppock Guide and the 40-Week Cycle portend that a market decline is finally in the offing?
As usual I have to go with my stock answer of “It beats me.” But my basic plan remains unchanged. Unless and until the major market averages start to break down I continue to give the bullish case the benefit of the doubt.
After June 13th I will however, be keeping an ever more vigilant “eye on the exits.”