Way back in the day when I used to write about charts for the Investors’ Chronicle I met a man called Eustace Storey who was ancient then. He had a theory about how all bull markets and bear markets end and he was keen to share it with me.
It was a simple argument although complicated in execution. His idea was that all bull markets ended with double tops and vice versa for bear markets. He said this became especially apparent if we added volume into the equation.
Look at the chart above of ARKK, an actively managed ETF known for taking aggressive positions in shares like Tesla. At first sight the top area may not look like a double top but if you add volume (price x volume) because the volume on the second lower top is even lower this theory doesn’t work. What we actually find was that the second top with volume added in was much lower than the first top. Even so that is useful information because the lower price and volume on the second ‘top’ is a sign of great weakness. It just doesn’t look much like a second top.
What is happening now is more in line with Storey’s theory and what you would expect from common sense. The first low was accompanied by a frenzy of selling and volume spiked sharply. The second low appeared to be lower but as a measure of sentiment, if you add in volume which has been considerably less with the recent low point you find that in terms of sentiment both lows (price x volume) were of similar depth.
According to Storey this sets the scene for a turning point which will then be confirmed when price times volume tops the mid-point high. In price terms the mid-point high was around $54 in August 2022 so if the price can rise above that level on good volume he would say that a new bull trend is under way.
This price would be a lot higher than the current price. If you want to anticipate it you could start buying when we see a golden cross buy signal, a broken down trend line and ideally, Coppock turning higher from its current level around minus 132, which is when I would start turning bullish.
Once you start to bring timing into the equation, which I am increasingly doing, the need for large portfolios becomes less apparent. You can still have a large portfolio, especially if you start building it at a good time, like early in a new bull market.
But if you are expecting at some point to sell the shares that you are buying then you don’t need many different shares. What you do need is a spectacular performance by the ones that you do buy.
This is why I am so interested in leveraged ETFs and shares which I believe have massive upside potential. My ambition is to make a handful of brilliant investments, buy them after strong buy signals, hold them while they are rising strongly, sell them when they give sell signals and do all this with leverage in a tax free account.
It’s a dream scenario but if we don’t aim high we will never get amazing results. You don’t have to do what I do but I would encourage you to have a go with what I would call a gambling amount of money. I don’t want to be stressed any more than you do. What I do is start small with a sum of money which will not move the needle if I lose it. I then build from profit, using leverage and reinvested equity until I start making amounts of money which do move the needle.
The beauty of this is that I am gambling, for sure but these are intelligent gambles made with accumulated profits. Heads I win a lot; tails I don’t lose very much. This is why it is important not to jump the gun. I want to start, as noted in my previous alert, or at least start putting in more serious money, when I get that ‘what am I waiting for moment.’.
The reason why I like to nibble a bit before that happens is partly because I am impatient but also because if you do that and get it right you can build up a nice little starting sum before we get a more general move forward. I will explain in more detail how to do all this as we get to the point where it becomes relevant.
When this time comes I will be recommending shares so you will be able able to use Quentinvest to build a portfolio in the same way as has always been possible.
Just a reminder that we must accustom ourselves to extreme volatility in these markets. I am looking at what Pinduoduo has been doing in recent months – down to $23, up to $48, down to $30, up to $68, down to $38, up to $80 and then who knows. I believe this extreme volatility is because the shares are at a turning point. They have been over $200 in the past but anyone who thinks they know what these shares are going to do tomorrow or next week has all my admiration . I do not pretend to have a clue but I do think that what is going on is part of a process of building a base for a new bull run.
It seems hard to imagine now but in my crystal ball I see these shares making their way back to the old peak, probably bouncing around at that level and then breaking higher to potentially usher in a very exciting period. At $200 Pinduoduo would be valued at $250bn which is not too far from what Facebook/Meta Platforms is valued at now, so we are talking about a company with the potential for massive value creation; that is only going to happen if they are doing some really exciting things like reinventing the whole process of agriculture in China and reinventing the way people consume goods and they are doing both these things. This is a very ambitious business.
The other thing I like about Pindudoduo is the virtuous circles they are building. More customers attract more farmers, more farmers justify collaborations with universities and other research bodies to develop new varieties of fruits and vegetables which attract more farmers ad infinitum.
Listen to what they say and excuse the somewhat laboured English. They are Chinese after all.
Technology is at the heart of our value creation. From the very beginning, we committed to introducing technology to improve the efficiency of supply chain and create value to all the parties through digitalization. In the past year or so, we increased our investment in technology and focus on driving innovation through research and development. We have built a young, energetic, innovative team with strong technology background and we are encouraged to see that our investment in technology is creating positive impact to society.
In agriculture, we keep promoting our holistic approach to digitalize the agricultural sector so that more and more people can benefit from advances in science and technology. Our approach at agriculture is a holistic way of creating inclusive growth by leveraging the resources of Pinduoduo, we hope that more farmers will adopt agricultural technology to improve their productivity and put their farming practices in a more sustainable city.Q3 2022, 28 November 2022
Nor is this just happening in agriculture.
The new craftsman program is now in many regions across the country, helping local manufacturing to build their brand. We hope to use the Pinduoduo platform to have more of these undiscovered manufacturers reach more potential buyers. We increase the money exposure also benefit the local community to more income and more job opportunities. As we enter our eight year of operation. We remain passionate and excited about the future. We are a young company with a team will drive an energy and we will constantly grow areas to create positive value through technology.Q3 2022, 28 November 2022
This is what one analyst had to say about Pinduoduo after the latest results.
Pinduoduo is a tremendous company and true pioneer in the world of social commerce. The company has recently posted tremendous financial results and the stock is undervalued. I think the only major risk is the “China Risk” and thus that must be taken into account when investing, and allocated in your portfolio in a diversified manner.Seeking Alpha, 28 November 2022
I would wholeheartedly agree with that conclusion. I am not sure exactly what the China risk is since big as it is the Chinese economy would be mad to disengage from the global economy and I am sure that is not going to happen. You could equally argue for a China premium since China offers a huge market with growing spending power which is hard for non-Chinese companies to access. It is not known as the forbidden kingdom for nothing.