Saturday, July 04, 2009

Mourning the Stock Market

When is The Right Time to Enter the Stock Market to Enjoy the Rally?

How long does the average person mourn the loss of a loved one? It seems that the time period runs from eleven to fourteen months on average. How long does one mourn the losses in the stock market? Can I measure that?

Yes it seems we can. We have an indicator for that too. It was devised in 1962 using un-motional mathematics and technical analysis to measure emotion in the market. E.S.C. Coppock worked out a mathematical indicator to examine how mourning happens in the market. He looked at personal bereavement and took that time period to base his measurement. This is described by Hughes, Gangahar and Mackenzie in the FINANCIAL TIMES (June 6). Currently the indicator is pointing up and that is good news for equity markets. There are several other indicators that one might look into just out of interest and for fun, if not profit: The Dow Jones Theory and the Hindenburg Omen.

Coppock developed an index of eleven and fourteen month periods and summed the rate of change, then used a 10 period moving average to smooth it all out. It’s all Greek to me. Black magic? Maybe, but it seems to work.

In seventeen buy signals, rallies were confirmed 16 times. When the indicator moves up above its zero base line, it is time to get in. It missed in 2001. Not all buy this though. Fundamental technicians like to stick to their charts and opinions and don’t look for such gimmicks. Moreover, the volatility of the last year in the markets worries many technicians who say it may not work. But we will see in the coming months.

On the other hand, many say that it may be right. Based on the three month rally we have seen, we may keep going. There is a lot of cash on the sidelines. It will pour in with any rally that seems strong. Some money will start coming into the market this year no matter what. Barclays has 14 % in cash and plans to buy through the year. In addition there were and still are a lot of anxious investors sitting in the bleachers. When they get tired of 2-3% bond yields and see things going up, they will jump in too. They already missed the rally from the 667 S&P bottom in March and are anxious to make up for it.

The rally now has more legs. The daily trading volumes are higher. This supports a continued bullish note to things. However, the S&P is having trouble getting through the resistance line of the 200 day moving average. This is a must for continued move up. In the UK, the market has been stuck at the 4500 level. The bulls must push through to keep it all going their way. So remember the Coppock Indicator and see if it is right.


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