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Leveraged ETFs and the buy zone; Chinese health care

January 23, 2023

This chart shows when SPXL, a three times leveraged, daily rebalanced ETF which roughly tracks the S&P 500, was in the buy zone. These are the periods indicated by the horizontal purple lines. The idea is that while it is in these zones you can keep buying. It is in the buy zone now.

In a new departure I have also drawn in a vertical line to mark the precise point where Coppock turned higher to give a buy signal. There is no vertical line with the latest horizontal line because that has not happened yet.

I no longer mark Coppock sell signals with a vertical red line because the end of the purple line is where those vertical lines would be. The implied strategy is that you can buy as long as the purple line is there but you are on selling alert once you no longer have that support.

Thinking about this personally this means I can consider an aggressive spread betting approach as long as I have support from the horizontal purple line but I need to take care when I have gone past the edge as it were.

I have also drawn in some upward sloping red trend lines where we could sell when they are broken. It is much easier to draw these with 20:20 hindsight but they can still be a tool in our armoury. The broad aim with these leveraged ETFs is to buy, buy more and hold while the price is low or climbing and sell when it is high and falling. If we do that, even with quite a lot of slippage, we should do well and have the right mindset for success.

As my younger brother would say, when all is doom and gloom look to buy and when everybody is gung-ho and bullish look to sell. The problem is that it is hard to measure emotion. The journey from feeling optimistic to feeling euphoric can be an exciting one, just as things can always get worse before a bear market ends. Charts are useful not only to tell us when to buy and sell but also give us reassurance to stay in for the bull run and out as prices fall.

I have followed charts ever since I started investing/ speculating as a teenager. I read books and learned about all the patterns, head and shoulders tops, triangles, flags, gaps, breakouts, double tops and much else besides. What is happening to me now with Coppock is that I am gradually changing my approach. I can see that Coppock is great for creating a mindset where you buy low, sell high, stay in while prices are rising and stay out while prices are falling.

This is valuable and sometimes is in conflict with pattern analysis. The pattern may be bearish or scary but Coppock may be telling me that prices are in the buy zone. Increasingly I am favouring the message from Coppock over pattern analysis although I think I am always going to find a breakdown from a head and shoulders top an alarming development.

In the chart above of the Nasdaq Technology index I have marked in the buy zones with purple horizontal lines. I have also drawn in blue trend lines to mark important chart breakouts (buy signals) early in the buy zone period.

As before the selling zone begins where the purple lines end and when you sell you should sell at least 50pc of your holding. My inclination would be to sell everything but it depends on what is happening at the time.If my other indicators are positive, as can often happen, you can wait for them to turn down before you sell.

QQQ3 in the buy zone

Not long ago I wrote about QQQ3 in pattern analysis terms as being on the brink. It hasn’t broken down but with a 0/3 score it still might. On the other hand, in Coppock terms it is in what I call the buy zone. That’s investment really. Who knows what is going to happen? It’s a mystery as the theatre owner played by Geoffrey Rush kept saying in the film, Shakespeare in Love. We poor humans just do the best we can.

Common sense does seem to favour the buy zone approach. Is America going to sink into the sea? Probably not, at least for a while, in which case 340m Americans in a genuinely free enterprise, every man for himself, Adam Smith’s invisible hand economy are going to get America firing on all cylinders again just like they always do. If only Britain could do the same but just the hint that it was trying to with Liz Truss and Armageddon broke out. Now she is off to the US where people like her get a welcome. I have often wondered if I shouldn’t do the same but I do like English life.

In Europe it is the bureaucrats, the great and the good, who try to manage everything and it’s a car crash, again and again. Look at the English police force, an increasingly pen pushing, bureaucratic, jobs for the boys enterprise, which it turns out is a cauldron of rapists and sexual abusers and why am I not surprised. These guys and girls can’t even count calories as they occasionally tramp out of their dens in their size 12 boots to shake the pavements. Jimmy Saville and Cyril Smith, the Lib Dem pedo encountered not a cheep from Britain’s finest or the prosecution services as they abused their way through hundreds of vulnerable children whereas poor Sir Cliff Richard and Leon Brittan, had Plod all over them based on the flimsiest of evidence. Hearing the police apologise for past errors is becoming like the chorus in a Gilbert & Sullivan operetta.

When the US economy gets its mojo back as it surely will the stock market will resume its endless climb and QQQ3 will be back into orbit again. Pattern analysis seems too detailed, Buying zone is simple big picture stuff, buy low, sell high. Where are we now? A lot lower than we were in November 2021, maybe not the bottom but it is hard not to feel that purchases made from now on are going to do well, maybe very well.

Strategy

I have been going through my table of ETFs and the number with rising Coppocks is growing including all the China-focussed ones and many in the health care sector. On this basis a Chinese health care stock should be an interesting investment and there is one, Beigene, already in the QV portfolio, which boasts a rising Coppock line and a dramatic programme for expanding the footprint of the business, especially with cancer research.

Below is the chart of an ETF, which has a large holding in Beigene. This is quite a punchy ETF as can be seen from the top 10 holdings which are all in emerging and hugely ambitious biotechnology companies. ETFs are a good way to play a sector like this where it is so hard for the layman to evaluate the prospects for any individual company. Part of the excitement is that success by any of them and the Covid vaccines have already been a huge success for mRNA will raise investor enthusiasm for the whole sector.

As far as Beigene is concerned I had found a slide from a recent presentation which demonstrates vividly how exciting and ambitious this company is. In terms of news flow and that is what tends to drive the shares in companies like Beigene, the group has just announced a significant US approval for a drug called Brukinsa, which has been approved for chronic lymphocytic leukaemia.

Another chart shows the staggering growth in Beigene since 2017 in sales and in numbers employed. In 2017 it had a handful of employees and annualised revenues of $64m a year. The current figures are 3,400+ employees and annualised revenues 0f $1.4bn a year. The negative which saw the shares fall in nine months from a peak $428 to a low of $118 is that the group is heavily loss making and burning through cash with free cash flow for 2022 expected to be minus over $1.7bn. These guys are betting the ranch but that is what can make exciting investments.

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