How to Know When to Start Buying

By Colin Nicholson

When a bull market begins, many investors have a fair amount of cash held waiting for the right time to start investing. When a bull market begins, most of us think it may be only another bear market rally. However, as the bull market goes higher, beginners hold back from committing their funds for fear the run will end. They look for a correction that will let them enter with safety. However, when prices begin falling, they fear a bear market and still hold off. They never do seem to get set, or only do so when it is far too late. In this way, it is said that bull markets climb a wall of worry.

So, how will we know when it is time to start buying? There is one indicator that has nearly always been a good signal for when we are close to the bottom of the market. This is the Coppock indicator.

This indicator was invented by Edwin Coppock, a US investment adviser. He designed the index to do only one thing; indicate the time to begin buying strong stocks for the long term. It is a little cumbersome to calculate, but it is doable by hand. It is built into some charting software.

It can also be easily calculated on a spreadsheet. I have such a spreadsheet on the Resources page of my website www.bwts.com.au. All that is necessary is to insert the closing price each month. Then copy and paste the last row down one row. I update it for users of my website soon after the end of each month. It is also possible to have someone print out the spreadsheet and it can be calculated by hand using the instructions at the top of each column.

Coppock described the calculation of the indicator and its use at some length in his paper Realistic Stock Market Speculation, which seems to have been last revised about 1967 and has been long out of print. The indicator was designed for the Dow Jones Industrial Average and is calculated monthly. It has been found to work on almost any stock market index.

Although some books suggest the indicator is calculated from average monthly values of an index, it is clear from Coppock’s paper that the closing value is used. The steps in its calculation are as follows:

1. Calculate the percentage change between the index value in the current month and its value 14 months earlier.
2. Calculate the percentage change between the index value in the current month and its value 11 months earlier.
3. Total the two percentages.
4. Calculate a 10 month weighted moving average of the total of the two percentages.
5. This is the indicator, which is plotted on a chart.

The Coppock indicator will swing between positive and negative values. It is usually charted as a line in a sub-chart below the index chart. It will look like this for the ASX All Ordinaries Index:

Source: Insight Trader (the same can be done in Stock Doctor)

The signal for long-term investors to begin buying is when the indicator turns up from below the zero line. In other words, when the Coppock index line rises for the first time (its value is less negative than it has been). The Coppock indicator does not give very many signals, but when it does give a signal, it is invariably reliable. The Australian chart above shows the last five signals from the Coppock, which have been excellent.

Long-term investors should complete their buying before the indicator reaches the zero line. That is, before it turns positive, as it has now done at the end of November 2009.

Coppock claimed his indicator was only for entering the market. He used other means to exit. These were not disclosed in his paper and are beyond the scope of this article.

The Coppock indicator is simply a long term momentum oscillator. It has given premature signals in the past, but few of them have been in Australia and not for many decades. Even long-term passive investors can use the Coppock indicator to know when to invest cash that has accumulated during a bear market. In that they would know they are most likely to be buying near the bottom of the market.

Colin Nicholson is a renowned author and educator. More information can be found at his website Building wealth through shares http://www.bwts.com.au/.  This article is copyrighted to Colin Nicholson. No re-publication or copying in any way, including electronic means, may be made without the prior written consent of Colin Nicholson.

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