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Planning for the bull market

January 27, 2023
RUT | Quentinvest

The Russell 2,000, charted above, is part of the Russell 3,000 and includes the smallest 2,000 shares, a bit like the FTSE 250 in London, which starts where the FTSE 100 ends. The pattern looks promising but also significant is that it has just given a buy signal on Coppock. On that basis the Russell 2,000 has commenced a new bull market.

On a day to day basis you can feel that the market just goes endlessly up and down but that is not the case. It is like a river flowing upstream or downstream. That effect can be very pronounced over time, especially if you look at the big picture trend in this index. Periods of falling prices are against the current and need constant bad news to drive prices lower. Left to its own devices the stock market goes up and that is what I expect it to do this year.

We need to be as sure as we possibly can that if that happens we profit from it. I am gradually putting in place the building blocks to make serious profits, the only kind in which I am interested – a 10pc return doesn’t cut it for me.

One area where we need to get our strategy right is ETFs. There are four which particularly interest me. They all come with built in leverage to supply the stock market drama I like.

QQQ3 @ $64.75

SOXL @ $14.72

SPXL @ $71.32

TECL @ $27.58

They are in the buying zone and can be bought, the next buy signals are imminent. The beauty of these ETFs is that partly because of the leverage but mainly because of the daily rebalancing they really move. The conventional wisdom is that these shares are for traders but their history suggests differently. TECL, which tracks a bundle of technology shares, was 20 cents in 2009. It is up over 100-fold since then and has been a lot higher.

Look at TECL below and how well past Coppock signals have worked. You could say, who needs signals, just keep buying and that would most likely work but I like the idea of being out when the price collapses. You can spend some of your profits and start the whole game again when Coppock enters the buy zone and/ or gives a buy signal.

One reasonable strategy would be to always be a buyer but take some profits on the first sell signal that comes after leaving the buy zone; that way you get some money out and the steady buying should make sure your average cost is low.

On QQQ3, for example, chart not shown, you are currently buying almost four times as many shares for $1,000 as you would have bought at the peak. Whatever you do now looks like a good time to be buying.

TECL 1 | Quentinvest

Next are regular ETFs. I am becoming increasingly interested in ETFs as an alternative to holding individual shares. What I have noticed is that when a sector is doing well I start buying individual shares, add new ones and before I know it my portfolio starts to look like that of the sector ETF. In which case maybe I should just buy the ETF and forget the individual shares. Hence for Chinese shares I am torn between buying KWEB and shares like Alibaba, Tencent, Netease, Pindudoduo, BiliBili, Vipshop and Futu Holdings.

I think KWEB is a good choice.

KWEB 1 | Quentinvest

So why might I buy the individual shares which is what I have also done. The reason is that I am an aggressive investor so I am continually rebalancing my portfolio around the best performers. This does not necessarily mean I sell something but as my portfolio rises in value it creates equity (this only happens in leveraged CFD and spread betting accounts) which can be reinvested. I almost invariably reinvest in the strongest performer. Unleveraged ETFs are rebalanced much less frequently.

This is similar to the daily rebalancing which takes place at leveraged ETFs and can have the same effect on my portfolio. It is much harder to do that with ETFs but I guess most investors won’t want to be as aggressive as me. I get margin calls from IG most days to which I pay no attention. Urgent margin calls are different. I may respond to them by selling some of my weakest performers which further enhances the momentum effect.

Just so you know I always react in this way, shifting funds from weakness to strength.

Another ETF which is important to me is OGIG, which is like the Quentinvest ETF, it has so many shares from the QV portfolio. OGIG was hammered in the bear market but it is on the turn now.

OGIG 1 | Quentinvest

This is a classic test of Coppock in real time. The indicator has just turned up from negative and is set to keep rising for the rest of 2023. I was useless at maths at school so I have no idea whether it is technically possible for Coppock to rise for a whole year while the shares it is measuring fall. I am hoping that can’t happen and that if Coppock rises throughout 2023 so will OGIG’s share price.

The nature of momentum

I am trying to think about this. Coppock measures momentum. OGIG fell very steeply in 2022 so maybe just falling less steeply could cause Coppock to rise; that would be disappointing. It is clear that to an extent this is what happens. We can see it at the peak. Coppock rose strongly between April 2020 and March 2021. It then changed direction and started falling but the shares tracked sideways. This was a huge loss of momentum and enough for Coppock to stop rising and start falling.

After the steep falls of 2022 this could happen in reverse. It will be enough for Coppock to rise strongly through 2023 if share prices just stabilise. However this need not be too alarming. First of all I think if prices stop falling investors will come back and there is a huge amount of liquidity in the world. Secondly, the more time shares spend base building the bigger the rise we can expect later on. Maybe 2023 is going to be more of a year of consolidation and 2024 is going to be the start of the next boom.

Who knows; not me that is for sure but either way I think we can safely start investing again but it may be a while before it is all systems go again.

Funnily enough this brings me back closer to the original concept of Coppock as intended by its creator, Edwin Coppock. Unlike me he clearly was a gifted mathematician and statistician and I think his concept was exactly what I have just been discussing. He argued that institutions, a proxy for the global investing community, were normally net investors. They stopped investing in exceptional circumstances , like a sharp rise in interest rates and/ or a recession but during this period cash would pile up so as soon as the fall in stock markets showed signs of losing momentum they would start investing again.

On this basis a change in direction by Coppock FOR WHATEVER REASON was a signal that a new bull market was beginning. Maybe I am worrying too much and 2023 is going to be a good year.

So far we have looked at ETFs, leveraged ETFs and Chinese technology shares all of which have a part to play in a portfolio and many of which look good to go at the moment. Now we need to look at the most exciting area of all which is shares in individual companies.

At the top of my list is going to be the search for shares in companies which are 10+, companies where everything looks positive plus there is some extra piece of magic. This is both hard to spot because if it was easy we would all be rich but in a way it is also easy because a change which is big enough to move the needle in a massive way is invariably obvious, although everything becomes more obvious with hindsight.

Apple launched the first iPhone in January 2007. The shares were already in a raging bull market, probably party in anticipation of the launch. Nevertheless it was a seismic event. At the time the shares were $3, adjusted for splits against $143 currently. What was the iPhone? It was a hand held device which could connect to the Internet. It doesn’t take a rocket scientist to think that could be important even if nobody understood just how important it has become. What it was without any doubt was a major ‘something new’ and, as we know something new developments are the biggest drivers of share price outperformance.

So, the main thing I am going to be looking for when choosing individual shares is ‘something new’ to take them to 10+. Peloton has one with a new management team in charge. Snowflake probably doesn’t but I expect one will emerge at some point. There are between 5,000 and 6,000 people working at Snowflake thinking about ways to help companies manage and use data. They are going to have some great ideas.

Roblox sellers throwing in the towel

RBLX 1 | Quentinvest

Here I want to look at the chart for another share about which I have a good feeling. I am convinced that Roblox has an exciting future and I think this chart is early days bullish. I have included the volume figures because for once I think they have a lot to say about what is happening. When Roblox shares crashed in May 2022 volume spiked sharply (the tallest red bar on the chart). In November and December when it looked as though the shares might be going into freefall again volume was much less and the shares rebounded without making a new low.

This tells me that the selling has become much less aggressive, these shares are building a base and the next big move will be up. It’s just too early, by a month, to start calculating any Coppock numbers but my guess is they will be negative, putting the shares in the buy zone, and the next buy signal won’t be far away.

Developers are incredibly important to Roblox.

The Roblox developer community is large and growing rapidly. In September we hosted our 8th annual Roblox Developers Conference, and over 800 developers hailing from 28 countries joined us at Fort Mason for three days. Thousands of other developers from around the world watched the proceedings online. We believe that this is one of the most talented and important creative communities in the world. Roblox developers continue to push the boundaries of the platform, making high quality experiences that appeal to an increasingly broad and global audience. Their advances, in turn, drive us to improve the tools and infrastructure they rely on to build their businesses.

In the month of September 2022, there were 1,520 developers that had experiences on Roblox that generated over 100,000 hours of engagement, up 54pc over September 2021. In addition, within that group, there were 352 developers in September 2022 that had experiences on Roblox that generated over 1,000,000 hours, up 47pc over September 2021. Further, in September 2022, developer #1,000 earned at an annual run rate of nearly $60,000, which is nearly 3x the amount in September 2020. And finally, in September 2022, the top 1,000 experiences accounted for 85pc of both Roblox earnings and hours of engagement. Both figures were over 90pc this time last year, so the platform is on a trajectory of increasing content diversity which we view as positive.

Q3 2022, 9 November 2022

Brands are also learning to use Roblox including our own Manchester City football club.

Branded experiences on Roblox also grew in Q3 2022 with Walmart, Ulta Beauty, GS Retail, Dick’s Sporting Goods, the Union of European Football Associations UEFA, Manchester City Football Club, and iHeart Radio all creating new, persistent places on Roblox.

Q3 2022, 9 November 2022

What I cannot find is an important something new and the score is 0/10 so any investment in the shares would be speculative and early days but I still think it could work.

Strategy

Subscribers will see that I am trying to use all my indicators and fundamental analysis to look at shares and see where I think they are in the cycle. Waiting for 10/10 is like waiting to shoot until you see the whites of their eyes; buying on 0/10 is more like a sniper taking a 1,000 yard shot. My overall feeling as I look at the stock market and my benchmarks is that many shares are in or around buying territory.

The fact is that there are many companies, in the US especially, where you can throw inflation, higher interest rates and probably even recession at them and they are going to sail through it maybe slowing a bit but still growing and as full of ambition as ever.

More on Coppock

I am still brooding about the Coppock indicator. Edwin Coppock was a statistician but I think his most important observation is that the US stockmarket’s natural direction of travel is up. This is partly because thanks to the entrepreneurial vigour of its inhabitants the economy keeps growing but also because every year, to fund things like pensions and insurance claims, a tidal wave of money is being saved and a big chunk of that is destined for shares.

Once we know that shares have a tendency to climb momentum becomes important. In particular, as Coppock noticed, a loss of downside momentum becomes especially important because falling share prices are like pulling back the elastic on a catapult. Once we stop pulling and relax the stone, boulder, whatever will be hurled on its way.

He realised that what he needed was a powerful but sensitive way of measuring momentum in the stock market, went to the nuns and found that it takes 14 months to recover from grief and out of that and his clever statistical brain the Coppock indicator was born. A key element is the way it is weighted for more recent data which is why it is so sensitive and changes direction so early in the cycle.

Because of the way it was conceived he felt it was most applicable, arguably even only applicable, to signalling when to buy after bear markets, i.e., buy shares generally when Coppock turns negative (precondition) and then starts to become less negative (trigger) signalling a loss of downside. momentum.

It works very well for this and I have used it for years to identify the birth of new bull markets but now I am starting to use it for much more. We will see how that works but I am hopeful because the same basic logic applies – 14 months of grieving for the lost bull market in whatever, indices, ETFs, cryptos, individual shares, followed by the loss of downside momentum and the birth of a new bull phase.

We may also suspect that loss of upside momentum is an early warning sign of a fading bull phase and an alert to start looking for an exit based on my other indicators. So there we go, clever Mr Coppock.

The other element I have added is the concept of a buy zone. This is based on observation that once Coppock turns negative the next buy signal is not too far away. In which case why not jump the gun a bit and start buying in anticipation of a signal which you KNOW is coming.

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