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What the indices are up to

December 13, 2022

The Dow Jones is no longer the greatest guide to what is happening on the US stock market. It includes 30 large companies and is price weighted so companies with high absolute prices count for more, which is not very logical. Nevertheless it does help to illustrate the trend, which has been up since 2009 with an interruption in 2020 (Covid and lockdowns) and another in 2022 (inflation and interest rates).

Looking at this chart which shows a clear golden cross by the moving averages that I use you might well conclude that the 2022 bear market is over. The Coppock indicator has been falling since September 2021, is currently negative and looks poised to turn higher.

The custom in the past when the Dow Jones Industrials gave a buy signal was to look for confirmation from the Dow Jones Transportation index on the argument that a recovering economy would mean more goods moving around. This index looks similar to the Dow Jones Industrials.

The S&P 500 is an excellent index for capturing the health of corporate America. The big picture is one of phenomenal health, especially since the banking crisis driven 2008 bear market but going back before then as well. America is capitalism in action. It is not without problems but that is inevitable with anything involving human beings who can be selfish, greedy creatures. What it does very well is drive growth and prosperity, which is why legendary investors like Warren Buffett treat every bear market as a buying opportunity.

Broadly speaking the S&P looks similar to the Dow in chart terms with a promising base pattern taking shape, a golden cross buy signal and a Coppock indicator which is falling and negative but looks close to a turning point.

The Nasdaq Composite index does not look as strong as the indices discussed above. I guess this is because it is more influenced by technology shares which led the bull market and have borne the brunt of the bear market. The Nasdaq Composite is presently down 31.6pc from the peak versus a drop of 8.3pc for the Dow Jones Industrials and 17.5pc for the S&P 500.

The Coppock Indicator has been falling since June 2021 and is presently falling and negative. I am looking for it to change direction and give a buy signal early next year by which time the price chart may be looking more positive. The Nasdaq 100 is the 100 largest companies by market value listed on the NASDAQ excluding financial shares. It is behaving in a similar way to the Nasdaq Composite and again I am hopeful of a Coppock buy signal early in 2023.

Reflecting its pure focus on technology the Nasdaq Technology index is down more than the other indices with a fall of 37.5pc. The Coppock Indicator is negative and has been falling since August 2021. It is an equal weighted index unlike the other Nasdaq indices which are heavily weighted for megacaps like Apple. There is nothing particularly strong about this chart but again the Coppock indicator looks likely to change direction early next year.

The Russell 3,000 chart (shown below) is the broadest based of all the indices with 3,000 constituents comprising shares that could be on institutional shopping lists. The pattern looks like a possible head and shoulders reversal with a neckline around 2,400 so a sharp move above that level would be encouraging. The Coppock indicator is falling, negative and looks likely to change direction early next year.

Not an index but I tend to treat it as one is OGIG, the O’Leary Global Internet Giants ETF, which is stuffed with shares from the Quentinvest benchmark list. These are shares in companies with exciting fundamentals which soared during the bull market and have been hammered in 2022. The decline from the peak is a ferocious 60.3pc. Common sense suggests that this ETF has had its big fall and is trying to build a base. The Coppock indicator is negative but could change direction as soon as this month (when we have the December figures).

What is interesting about OGIG is how clear the chart signals have been. There was a spectacular buy signal in early 2020 and a sharp breakdown around the end of 2021. There is more work to be done but I can imagine that some time in 2023 we may get a similarly clear and important pattern buy signal, which will be supported by a rising Coppock.

An individual share which illustrates what is happening in stock markets and in technology is Nvidia. I believe that Nvidia is an exciting business with a strong position in products that stand at the heart of the technology revolution. This is a company which is literally creating the future and should grow in scale with the advancing technology revolution. It is the kind of share which I am looking to buy.

On the chart are marked three recent Coppock buy signals each of which came ahead of massive gains in the shares. Nothing in the stock market is ever completely straight forward but buying on those signals looks like a good idea. Since the September 2015 buy signal the shares are up some 35 times. It is marked in pale blue because Coppock turned higher from a positive level but against this there was also a spectacular pattern chart breakout so every reason to feel bullish about the shares.

There is no prospect of a monster buy signal like that this time but we have a golden cross buy signal, the Coppock indicator is negative and a reversal pattern may well be taking shape. It could make sense to buy a few shares now with a view to building your holding as the pattern takes shape and Coppock changes direction.

Something that may happen in coming months is that the valuations of Nvidia and Tesla may cross with the former becoming more valuable than the latter. Tesla is a company whose success is very visible with a growing number of its cars on the road while Nvidia’s products are hidden away inside things like gaming consoles and data centres so most people do not realise how ubiquitous it is.

Tesla has a threatening chart. It is easy to get excited about Tesla as a business and Elon Musk as a businessman but it is not easy to get excited about this chart which looks terrible. These shares are a whisker away from a dramatic collapse. They are vulnerable to any bad news. If Elon Musk gets out of this one he really will be Houdini.

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My impression is that the stock market is trying to change direction but there may be some further shoes to drop on the bad news front. Cryptocurrencies are still poised between heaven and hell as it were with the bitcoin chart looking negative. A sharp fall in Tesla shares allied to the chaos surrounding Twitter could do serious damage to the Musk mystique and to the ETFs which are still heavily invested in Tesla.

Against that there are hopes that inflation is past the worst, that any recession may not need to be too severe and that after a huge reset many exciting shares are now reasonably priced.

Not shown but an important share chart which is almost perfectly neutral is Apple. When I look at it I have no idea whether the shares are poised to break higher or lower. A break lower feels unlikely given the huge strength of the business in products and services and its massive cash generation but charts are charts and need to be watched. At some point we will have a much better idea where these shares are going. Also at some point the Coppock indicator, which is falling, will change direction.

My strategy with this stock market is that I am building a few positions which you will know about if you have been reading recent alerts but I am still proceeding with great caution. I guess we can say that a long bull run between 2009 and middle to late 2021 built great excesses into the system in terms of valuations (especially the shift from valuing companies on a multiple of earnings to valuing on a multiple of revenue which encouraged huge spending to drive all-out growth). There was also a steep rise in margin debt to fund shares held on margin.

We are now seeing a great reset on both these fronts. Once the reset is complete shares should be poised to advance based on many strong fundamentals. We are obviously nearer the end of the reset than the beginning but it is still not a given that a new advance has begun.

Nor do we know what shape a new advance will take. Will shares rise as fast as they fell as happened in 2009 or will there be much backing and filling as has also happened in the past? The miracle of 2009 was that businesses stopped making things but consumers carried on buying.

The corresponding miracle for 2023 might be that investors have become cautious with valuations for shares in the most exciting companies down dramatically but the technology revolution may still be rolling on faster than ever. The other miracle might be that as capitalism responds to shortages and sharply higher prices that inflation comes down so fast that interest rates can start falling again.

Against this optimism are signs that higher prices are feeding into higher wages creating a vicious circle of self-feeding inflation but that is where the technology revolution may have a role to play in enabling people to work more efficiently so justifying higher wages.

If all these ifs and buts are leaving you a little confused the bottom line is that I am expecting a new bull market to launch some time in 2023 and most likely sooner rather than later.

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