Benchmarks for bull and bear markets and how I use them

Strategy

This is a chart of my old favourite, QQQ3. It gives a great idea of what is happening. We are presently having a rally but there is no way of telling whether it might last or is just a rally. All my indicators are still pointed firmly down.

However there is one straw in the wind that might be significant. In the group of benchmark stocks is a larger group that I have described as hot technology shares. This group came to prominence in the bull market and especially in the period between 2016 and early 2021 when many shares enjoyed spectacular rises. These shares have been smashed in the bear market but had a good day on Wednesday, 20 July 2022; that is something that can be the first sign of a bottoming out process.

I am going to pick one share from the list of a company that has phenomenal fundamentals, data storage business, MongoDB (the DB stands for data base). Since the company was founded in 2009 it has been growing at a tremendous rate. The company is still on fire.

“We generated revenue of $285m, a 57pc year-over-year increase and above the high end of our guidance.

Atlas revenue grew 82pc year over year, representing 60pc of revenue. And we had another strong quarter of customer growth, ending the quarter with over 35,200 customers. We are really pleased with our Q1 performance and see it as continued validation of the massive market we are pursuing, our strong product market fit and our ability to execute. Atlas continues to be a key growth engine as new and existing customers run more and more of their mission-critical workloads on Atlas.

Q1 2023, 1 June 2022

None of my three indicators is signalling buy. The Coppock indicator is falling, there is no golden cross on the moving averages although the shorter moving average has turned higher, which is a promising development and there is no significant breach of a downtrend line. The only thing we have is a buy signal on my buy on a green strategy (every time we get a green candlestick after a red one, we buy) but this is very much a win in the end strategy although it could be combined with my other indicators so that you build up a position on green candlesticks and then sell everything if my three indicators turn down.

There is a case in the stock market that almost any sensible strategy if pursued for long enough will generate positive returns. For example, if you keep buying MDB on the greens from now on, against the background of those positive fundamentals, your average purchase price will either fall or you will find yourself invested in a rising market. If MongoDB shares ever reach new peaks, which looks more likely than not, then any strategy will prove rewarding.

One psychological problem (remember Robert Greene and the greedy little man that lurks inside many of us) is the desire to buy as close to the bottom as possible. This can only be done by luck because in the early stages it is so hard to distinguish between a rally in a bear market and the beginning of a new bull market.

What is relevant is that most of my Coppock indicators have fallen a long way and some of them are starting to flatten out. In the past I can see that when Coppock flattens out, especially after a prolonged fall, this more often than not is an early warning of a change of direction. However I have little history as yet of using Coppock with individual shares so I have to tread cautiously.

If we forget about trying to buy at the bottom and think more in terms of being on board while a share is rising life becomes easier because we can then wait for all my indicators to turn positive and we have the comfort of buying while the Coppock indicator is rising which, historically, has been a reliable indicator of a rising share price. While the Coppock indicator is rising there is no need to sell. Once Coppock starts to fall this doesn’t mean you have to sell immediately but it means the shares are at risk and should be sold on confirmation from my other indicators.

If you look closely at the chart above you will see two Coppock sell signals (red vertical line) with no buy signal (blue vertical line) in between. This is where common sense comes in. The Coppock indicator for MongoDB turned down in March 2021. They then gave a powerful buy signal based on my other two indicators (trend line break and a golden cross on the moving averages). They also reached a new all-time high so with all this going on it could have been very tempting to buy back in. The second consecutive Coppock sell signal is based on a resumed decline in Coppock after a brief flattening and helped confirm that the trend line break and dead cross on the moving averages should be acted on and the shares should be sold.

I am agnostic about the market at the moment which is maybe what one should be all the time, taking your cue from the indicators. It feels as though we may have reached a low point with the Nasdaq having declined, peak to trough, by 35pc.

The chart for Alps O’Shares Global Internet giants ETF, which includes so many of the shares from the Quentinvest table, shows an even more dramatic decline.