For our part, we don't follow the Coppock indicator per se, but the broad range of technical measures we follow include our own variant that is associated with stronger and more
reliable subsequent returns (this variant has not even gone to negative levels yet, much less turned favorable).
Not exact matches
Moderate interest rates were associated with a whole range of
subsequent returns over the following decade, and we know that those outcomes were 90 % correlated with the level of valuations at the beginning of those periods (on
reliable measures such as market cap / GDP, price / revenue, Tobin's Q, the margin - adjusted Shiller P / E, and others we've presented over time - see Ockham's Razor and the Market Cycle).
It is difficult to rate an indicator as «
reliable» when it has literally zero statistical correlation with
subsequent returns.
While there is a general tendency for high interest rates to be associated with depressed valuations and above - average
subsequent market
returns, and for low interest rates to be associated with elevated valuations and below - average
subsequent market
returns, the relationship isn't extremely
reliable or linear.
As a result, starting valuations, on historically
reliable measures, are 90 % correlated with actual
subsequent 10 - year total market
returns.
The mapping between valuations and
subsequent returns is typically most
reliable over a 10 - 12 year horizon.
Notably, the relationship between the Margin - Adjusted CAPE and actual
subsequent market
returns is more
reliable than for the raw Shiller CAPE.
The most
reliable measures of individual stock valuation we've found are based on formal discounted cash flow considerations, but among publicly - available measures we've evaluated, price / revenue ratios are better correlated with actual
subsequent returns than price / earnings ratios (though normalized profit margins and other factors are obviously necessary to make cross-sectional comparisons).
Recent cycles provide no evidence of deterioration in the relationship between
reliable valuation measures (particularly those that aren't highly sensitive to fluctuations in profit margins) and actual
subsequent market
returns.
While other historically
reliable metrics carry a very similar message, Market Cap / GVA has the highest correlation with actual
subsequent 10 - year S&P 500 total
returns than any other valuation ratio we've examined across history.
Don't criticize historically
reliable valuation measures that have maintained the same tight relationship with actual
subsequent 10 - 12 year market
returns that they've demonstrated across a century of history.
On the basis of the most
reliable valuation measures we identify (those most tightly correlated with actual
subsequent 10 - 12 year S&P 500 total
returns), current market valuations stand about 140 - 165 % above historical norms.
On a wide range of historically
reliable measures (having a nearly 90 % correlation with actual
subsequent S&P 500 total
returns), we estimate current valuations to be fully 118 % above levels associated with historically normal
subsequent returns in stocks.
Last week, the most historically
reliable equity valuation measures we identify (having correlations of over 90 % with actual
subsequent 10 - 12 year S&P 500 total
returns) advanced to more than double their
reliable historical norms.
We emphasize «historically
reliable» because as in every bubble, there are numerous popular measures with quite poor correlation with actual
subsequent market
returns that Wall Street can offer to convince investors that valuations are just fine.
While other historically
reliable metrics carry a very similar message, Market Cap / GVA has the highest correlation with actual
subsequent 10 - year S&P 500 total
returns than any other valuation ratio we've examined across history.