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What the future holds

January 10, 2023

Don’t get too excited. I haven’t suddenly discovered a crystal ballet but we can make some strategic observations about the future. As discussed recently my ideal investment is a perfect 10 for a share or a perfect six for an ETF. The perfect 10 occurs when all three of my key indicators are positive for the relevant indices, ETFs and an individual share. The last element, the final 1/10, comes from some extra magic about the share’s fundamentals.

As long as the indices are scoring less than 3/3 and currently the US indices are scoring 0/3 it is impossible for any US shares to score 10/10. This is a classic feast or famine situation. At the moment we have no 10/10s. When the indices score 3/3 we are going to have loads of them.

I am imagining at the moment that when this starts to happen I will be looking at indices, relevant ETFs and selected shares all in the same alert. Subscribers will have a choice of buying shares in single companies, ETFs or both. It will be a time for building a portfolio, sowing the seeds as my predecessor as editor of the Investors Chronicle Stockmarket Newsletter used to say with a view to reaping a rich harvest later.

SOXX looks promising

SOXX is the unleveraged version of SOXL. It tracks the 30 largest US listed semiconductor shares. The chart above is based on three monthly candlesticks and shows three massive breakouts within a long-term rising trend. Most likely we are now building a fourth consolidation but there could be more to-ing and fro-ing to come.The Coppock indicator is negative and fast approaching the low levels previously seen in 2003 and 2008 at the bottom of earlier steep bear markets.

The presumption must be that we are in or around buying territory. There may be another downward plunge but equally there may not be; the chart looks promising.

I recently bailed out of my QQQ3 but promptly reinvested in the very similar TECL and SOXL, which IG now allows you to buy in a share account. They are, if anything, even more exciting investments than QQQ3 and unless the world is changing in a most unexpected way they should enter a new bull market at some point, later this year.

10/10 ain’t bad

Below is a chart of SOXX on an even more concentrated 6m candlestick scale. It makes the big breakouts vividly apparent and also the periods when it would have been better not to be holding the shares. There are three periods of plunging red candlesticks, with the latest having just happened. My best guess is that we are still in a continuing secular bull market but have just endured a fierce correction.

SOXX can only score a maximum 6/6, rising indices and rising ETF. For most of the green periods on the screen the score would have been 6/6. A simple strategy would be to buy and hold SOXX when it scores 6/6 and be alert to take profits at other times. A breakout which takes the shares to a new all-time peak is an especially interesting development.

When this ETF scores 6/6 we know that individual semiconductor shares are going to be behaving well and here we will need to prioritise. Particularly interesting will be individual shares breaking out from large consolidations, reaching new all-time peaks and/ or having something especially interesting, ideally an important ‘something new’ happening on the fundamental front.

Once this ETF scores 6/6 the search for exciting individual shares will be underway in earnest. Imagine your portfolio where every ETF is a 6/6 and every share is a 10/10. This should be an exciting time. It also makes decision taking easier. When we read the CEO’s letter to shareholders and he outlines his plans for global conquest we can check this against the chart. Sounds great we may think but is the chart a 10/10 because if not we can take his excitement with a pinch of salt.

Strategy

Below is a chart of QQQ, an unleveraged ETF, which tracks the Nasdaq 100. Over the last two and a half years a pattern has formed that looks curiously like an upended version of the pattern that formed between 2007 and 2010. The latter, known as a reversed head and shoulders, launched the bull market. What we now have could be a head and shoulders top. A breakdown would not be good news and gives us another reason for feeling cautious.

The good news is that we don’t have to do anything until we feel more confident of the trend. At the moment many stocks, ETFs and individual shares are scoring zero so why buy anything. One day that will change and that will be the time to pounce.

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