If charts had all the answers, we would all be millionaires, but they can help to set the framework. In the chart above of the Nasdaq 100 Technology index, an unweighted index of Nasdaq-quoted technology shares, so less dominated by the mega caps, the yellow smileys signal buy signals. These buy signals occur when the three falling moving averages all change direction from down to up and cross. The shorter green moving average moves up through the longer yellow moving average, which crosses above the longest red moving average. The last buy signal was around April/ May 2023.
When this happens, we could say that the market’s momentum (and direction) has changed decisively from down to up. The signals have a good record of making accurate predictions.
The red frownies occur when the market direction changes decisively from up to down. These changes are against the secular trend of the market, so may herald more a pause for sideways trading than a dramatic fall. I have only marked in the last two signals and the latest one may not be confirmed until the end of the month. A sharp rally in the rest of March could prevent the sell signal from being given. The present position looks threatening.
We can also look at the market through the behaviour of the Coppock indicator. This was invented in the 1930s by a man called Edwin Coppock, it is ingeniously weighted to make it more sensitive to the latest trend, but has the valuable characteristic that it tends to move in long slow swings.
Coppock used it purely to generate buy signals. His rule was that a buy signal was given when the indicator turned higher (became less negative) after having become negative. The signals it gave were amazingly accurate and I have always loved this indicator since I brought it back into fashion at the Investor’s Chronicle in the 1970s.
If we allow ourselves a little license, so allowing that turning up from almost negative also counts as a buy signal, we can see how useful it has been. You could almost say it is infallible. We don’t have a buy signal presently but the indicator is falling steadily and may turn negative some time in the summer, say by July, setting the scene for a new buy signal. I will be watching closely.
I have a trick where I can make forward projections for the indicator which enable me to anticipate turning points. I also have a rule that once the indicator turns negative, even though share prices may fall further, we are in buying territory.
It doesn’t work nearly so well for sell signals, but a heavily plus Coppock is a warning and once it has changed direction you could say that the stock market is vulnerable. Unlike Edwin Coppock, I use the indicator for individual shares. This is partly because the signals can be computer generated, so saving all the labour of doing the calculations manually.
My interpretation of the present position in US stock markets, my main interest, is that they are vulnerable to a further decline. A significant negative development would hit the markets hard. Will that happen? I don’t know, but we have a wild man in the White House, who’s understanding of diplomacy and economics does not inspire confidence.
We have also been through a period of great excitement in the stock market as technology and generative AI have held out the promise of a great leap forward. My warning in recent alerts is that such great leaps forward, even when they occur, are not always accompanied by predictable gains in the stock market.
Investors became wildly excited in the 1990s about the prospect of huge growth in the Internet and the emergence of a connected, digital world. They were right and some shares did benefit but many did not.
Strategy – Time To Hold Back And Raise Liquidity
Cash comes into its own in bear markets, hence the saying at such times, that cash is king. The easiest way to lose money in a bear market is to invest prematurely into rallies. We need to be patient and use indicators such as Coppock to tell us when to commit. In military parlance, we need to wait until we can see the whites of their eyes.
Is it OK to hang onto shares? I never do but in hindsight, over the long haul, i.e., through successive bull markets, I often wish that I had. Amazon shares were hammered between December 1999 and September 2001 but anyone who bought at any time before December 1999 and held on is sitting pretty now. It worked for Jeff Bezos.
I owned Google as it then was, in 2004, a lot of Google, and boy do I wish I had never sold them.
