It goes without saying that knowing when to buy and when to sell in the financial market is one of the keys to trading and investing success. However, it is easier said than done for both professional and do it yourself traders and investors. Paradoxically while technology is making participation in the markets ever easier with access to sophisticated charts, technical and fundamental indicators all available at the touch of button, market timing seems as elusive as ever. My own view is that whilst trading and investing may not necessarily be easy, it is relatively simple and straightforward.
As I have said in the past trying to predict absolute market tops and bottoms is for fools, but knowing when markets are in the process of turning is a skill we can all acquire if we know where to look and what to look for. Last year I spoke about the VIX in great detail. A fantastic indicator which takes the temperature of the market so “when the VIX is low it’s time to go”. Back in January last year it was reading below 10 indicating that market participants were calm and complacent, when suddenly in March it raced to over 20, reaching almost 40 in September when the markets became panic stricken and seemed to be spinning out of control.
If the VIX can help determine the best time to sell what about the best time to buy? Here I would suggest looking at the Coppock indicator because like the VIX, it too measures market sentiment and psychology.
The Coppock indicator was developed by Edwin Coppock, who was asked by the administrators of church funds to devise a long term low risk signal to enable them to know when to increase their equity holdings, and when to stand aside. Coppock thought setbacks in the stock market were like bereavements and required a period of mourning before normal spirits revived. So he asked the bishops how long it took people to come to terms with stresses such as illness, divorce etc and the answer he got was between 11 and 14 months.
From this Coppock developed a series of calculations designed to signal when stock market mourning could be said to be over. The indicator’s signal does not emerge at the bottom, but emerges as a rally is established. In recent times, the Coppock indicator signalled rallies in 1988 and 1994 and investors who acted on the indicator made a lot of money.
Just like the VIX the Coppock is not a sign of trend reversal, but shows us when risk factors in the market are low and the herald of a sustained advance. Although the Coppock was originally developed for the Dow Jones it has been shown to work across other indices. However, it cannot be used with intra-day or short term trading or in the forex market. Its use, like the VIX, is to help us understand the emotion behind the market price and so profit accordingly.