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Mourning has broken

The period of mourning is beginning – if you believe economist Edwin Coppock who said that market downturns were like bereavements and take around a year to get over.

The market rises since the March lows have given the impression that the latest bear market has been laid to rest. Stockmarket optimists have become bolder and more open in their thoughts recently. For some, the worst is over and a bull market has begun.

Those very bulls could soon be pointing to the Coppock (bull market) indicator and its period of mourning. The story goes that in America in the early 1960s, the Episcopalian Church asked Coppock, a business economist, if he could come up with something that might spot long-term buying opportunities. Coppock must have thought the stress released by a major bear market was emo- tionally comparable to bereavement because he responded by asking the church to tell him how long, on average, a period of mourning might last. He was told between 11 and 14 months.

The indicator is defined as a 10-month weighted moving average of the sum of the 14-month rate of change and the 11-month rate of change in the relevant index. The confirmation or buy signal comes when the indicator is a) below zero and b) turning upwards from a trough.

In recent times, the Coppock indicator signalled rallies in 1988 and 1994 and investors who acted on the indicator made a lot of money.

But Brewin Dolphin chief strategist Mike Lenhoff says at the moment the indicator is only close to providing a strategic buy signal – it has yet to turn decisively upwards. It is wise to wait for this to happen before shouting “yippee – bear market’s over”, he warns over-zealous investors.

And by the by, the Coppock model gave a false signal in the early stages of 2002 of the dotcom bust, the bull market did not start until 2003.

Equally cautious is Martin Gray, the calm and assured manager from Miton. He is happy enough to have as much as third of his fund’s portfolio in cash. He has already enjoyed the mini boom, shrewdly buying exchange traded funds when the FTSE fell to below 3,600.

A fortnight ago, when the index reached 4,300, he took some profits. The reason? He reckons this is a rally in a bear market and he would not be surprised if the FTSE falls below 3,500 in the months ahead. He does discount the markets falling to below March 2003 lows.

Gray says he is “happy to be cautious'”and is not going to worry if the markets rise by another 10 per cent. He does not believe the latest rally is anything like the one that followed the dotcom boom and bust cycle. If it was, he would be knee-deep in shares right now, instead, 34 per cent of his special situations fund is in cash, 8 per cent is in gilts and 4 per cent is in gold, 4 per cent in zeros and 10 per cent in commercial property.

Calling the end of the bear market is a real problem for financial advisers. Clients have endured a tortuous time and will be nursing hefty losses. Who can blame advisers for making the wrong call or deciding to sit on the fence, particularly when you have two stalwarts in Anthony Bolton and Neil Woodford offering opposing views?

Given the overly cautious overtones in the latest Bank of England quarterly inflation report you can understand why many advisers will be sceptical that the bull will go charging on.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing


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