Keeping track as shares and indices build bases

The Nasdaq 100, a weighted index of the 100 largest shares quoted on the NASDAQ excluding financial shares, is my number one benchmark. When this index signals that it is in a bull market it will be all systems go.

This is pure speculation at this stage but I think this index might be building a base. The index fell 37pc between the November 2021 peak and June 2022 but since then it has been fighting back. It has been lower but presently is trading around 11,725 so it has not declined in the last five months. This is what I mean by trying to build a base.

This ties in with the message from Coppock. The index is poised for a valid (turning up from negative) buy signal in March. It wouldn’t take much movement higher by the index to bring that buy signal to February and a buy signal by next Spring looks a virtual certainty.

The classic reversal pattern is an upside down head and shoulders. An exciting possibility is that the June low is the left shoulder, the October low is the head and we have yet to build the right shoulder but that is coming.

The next important bit of a head and shoulders pattern, whether top or base, is the neck line. Once we have a right shoulder we can start thinking about a neck line. The neck line sets the scene for a chart breakout which is when we are really in business.

You might wonder how a head and shoulders pattern can form if so many people know that a reversed head and shoulders breakout is bullish. It usually takes place against a background of disappointing fundamental news. This is the opposite of top patterns forming when all the news still seems good. Shares are discounting mechanisms and move now in anticipation of things expected to happen between six and 18 months ahead.

There are also cross-currents in the stock market with many investors not investors at all but speculators looking to profit from short term, even daily, movements in share prices. I am more long term in my approach. My aim is to hold while all my indicators are positive and then start looking to take profits as and when they turn negative.

Futu Holdings bucks the bear trend

Futu Holdings is a Hong Kong quoted company which helps Chinese investors buy mostly US shares. It did incredibly well during the bull market, paid the price during the bear market but still looks poised for another glorious period when US shares turn bullish again.

Every time Futu reports the shares take off and then fall back again as investors suffer what in the Dick Francis book I have just been reading are referred to as the ‘heebie-jeebies’. July 2021 to March 2022 saw serious heebie-jeebies as the price fell from $181 to $21 but Futu still looks like an exciting company.

As of quarter end, we had 1.44m paying clients, representing a 24pc year-over-year growth. In the third quarter, we added 58,000 paying clients, a 5pc sequential decline due to stock market tumble. Despite the market downturn, we achieved over 98pc quarterly paying client retention rate for each of the five countries and regions for the first time. Our industry-leading retention metric speaks to the stickiness of our product and the resilience of our premier client base.

Q3 2022, 21 November 2022

I am not going to talk much about Futu’s fundamentals. The key point is that it is doing very well against the background of an extremely negative stock market and has a strong balance sheet. It is definitely going to be around for the next bull market and the business should really start to motor when that happens.

The chart is a head and shoulders albeit that the right shoulder is much larger than the left one. We also have the makings of a neckline around the current price of $55. The shares have been trading sideways for a year now which provides plenty of ammunition to support a strong bull run.

The valuation is also a great deal more modest than it was leaving room for a higher share price as investor horizons lengthen.

Futu is a combination of stock broker and wealth manager and has a fairly fixed cost base so as and when revenues rise profits could rise dramatically. Buy this one in a spread betting account on five times leverage at the right moment and there could be some fireworks.

I have burned my fingers with Futu before but it is the kind of hot, sexy share I love so I will no doubt be tempted again.

There is another share we can look at when thinking about Futu and that is Kweb, an ETF built around Chinese Internet shares. Futu is not a top 10 holding for KWEB and may not be in the fund at all but I still think that a bull trend by this ETF would be good news for Futu. It looks as though it could be building a base but so far has not even broken its downtrend, let alone given a golden cross buy signal on the moving averages.

The Coppock indicator for KEWB is flatlining around minus 110 and ditto for Futu around minus 120. Both these shares are shaping up for important buy signals. I can imagine one that in two or three months time Futu could go from a score of two on my system to a maximum score of nine.

Strategy

Just in passing the effect so far of ‘Dishy Rishi’ on UK 10 year bond yields has been incredible. The yield is down from a peak 4.63pc on 12 October to 3pc. What a vote of confidence by the bond markets. Keep this up Rishi and you will be a hero and the markets will love you.

Back to Futu Holdings and what is a decidedly tempting chart. What is interesting is how well Nasdaq Inc. is doing. This is a terrific looking chart (see below). The business model is very different to Futu but they have one thing in common. The success of both businesses is closely tied to the trend in US shares, a strong uptrend and increasing corporate activity, likely given how much valuations have dropped in the bear market, would be good news.

I wrote about Nasdaq Inc on 11 November and the massive something news happening under CEO, Adena Friedman . There are ‘something news’ happening at Futu which, after a successful expansion into Singapore, is targeting expansion in the US market, which could be a game changer for the group. There are over 5m people of Chinese ethnicity living in the US which is similar to the population of Singapore and there is no reason why any Americans should not be a target market for Futu.

If they can start to make inroads into the US market that is a population of 331m v around 12m for Hong Kong and Singapore combined. Futu is a founder led company which is focused on using technology to facilitate stock market related operations.

As they say about themselves.

Futu primarily serves the emerging affluent population, pursuing a massive opportunity to facilitate a once-in-a-generation shift in the wealth management industry and build a digital gateway into broader financial services.

Futu web site

The growth in the business has been extremely impressive and has only been slowed down by a once in a generation bear market with the latest client count for Q3 2022 still climbing at 1.44m.

Futu [has] achieved significant growth in its client base. Futu’s paying clients increased from 80,057 as of December 31, 2017 to 132,821 as of December 31, 2018, to 198,382 as of December 31, 2019, to 516,721 as of December 31, 2020, and further increased to 1,387,146 as of June 30, 2022. The fast growth rate of the Company’s paying clients was mainly attributable to its unique competitive strengths such as the superior investing experience it provides through its fully digitalized brokerage and wealth management platform, which have enabled the Company to rapidly and continually expand its client base and have fueled the strong momentum of its business.

Futu web site

If you look at the Futu chart (three charts up) you can see that after trading sideways for a while the shares exploded higher. They were then hit by a wave of bearishness affecting technology shares perceived as Chinese and then the dramatic sell-off in the US technology sector. In the circumstances you could say the shares are hanging in there well and building a base around five times higher than the original base.

This is a share which is poised for an assault on former peaks and who knows where beyond. At $60 plus they are going to look very interesting with no resistance below the old peak of $150 and by then, for sure, we would have a rising Coppock indicator and a Coppock buy signal from a negative position.

Futu is looking promising but the last time it rebounded to $58 it fell back all the way to $27 so I am a little cautious about getting too excited.

Pinduoduo shaping up nicely

I am not going to go into too much detail, especially with results due shortly, but just to flag up another Chinese share that looks as though it is building a base that could be a launching pad for a much higher share price down the road is Pinduoduo. These Chinese shares have flattered to deceive before but I think of PDD as a terrific business and soon it could have a terrific chart

Pinduoduo shares have a Coppock indicator which is already climbing from a negative position. The next golden cross on the moving averages is going to be important.