Strategies to prepare for the next bull market

This (see chart above) is a big part of what is causing problems for the US stock market. Bond yields plummeted between November 2019 and March 2020 setting the scene for the strong equity bull market which followed. Now they are rising sharply and have been flirting with three per cent

This has been driven by a surge in inflation, which recently was running at 8.3pc in the US, a 40-year high. Take 40 from 2022 and you get 1982, when Reagan and Thatcher saw interest rates rising to eye-watering levels to drive inflation out of the system.

Most politicians don’t have the bottle to deal with inflation but it is a beast that needs to be slain if you want sustainable economic growth. Globalisation and technology can both help in this battle. Globalisation means you can source goods where they are cheapest or where they have the biggest comparative advantage. Technology means things tend to get cheaper. Elon Musk believes that helped by automation and a robot in every home we are heading for an age of abundance. Most probably he is right. It seems he often is with his forecasts but meanwhile the bear market stays in place and investors need to be cautious.

Shares will bottom out when gloom is deepest but it is hard to measure gloom. Falling shares as the headline in newspapers would be an indicator but that has not happened yet. Since April 2009 the Nasdaq 100 has risen from 1,000 to 16,560 so a retreat to 12,312 is hardly the end of the world.

As noted in recent QV alerts my indicators are all pointing down. On past form the one likely to turn up first is Coppock, because it is constructed as weighted momentum indicator and so gives increasing importance to the most recent trends. Most Coppocks I look at are not yet negative, which according to founder, Edwin Coppock, was a precondition for an important buy signal.

Obviously we need to keep an open mind. The only predictable thing about stockmarkets is that they are unpredictable. I say that but Coppock has been amazingly successful in the past at predicting the birth of a new bull market.

I also have great hopes for my new favourite indicator which is the balance of shares on my QV List looking unequivocally bullish versus the number looking unequivocally bearish (UBUs v UBEs if we can try to remember that). At the moment UBEs are overwhelmingly in the majority, almost unanimous. This may be a paradoxical sign that we are near a market bottom but that would be just a guess.

What will be exciting will be when we start to get buy signals. If you look back at past Coppock buy signals following a serious bear market they have ushered in periods of substantial gains. I have looked back to the 1960s for Coppock buy signals on the S&P 500 after the indicator became negative. There have been 12 and they all ushered in periods of strongly rising share prices. Presently the Coppock indicator for the S&P 500 is in the high 20s, having peaked at around 75 in September 2021.

The Nasdaq Technology sector index is down from 100 to around 15 so that could easily become negative soon. OGIG, an ETF which is invested in a range of technology shares, already has a negative Coppock indicator.

The strategies at which I am looking are relatively simple ones. As subscribers know I have created a list of shares which I think have exciting characteristics. They are drawn from the QV for Shares table. I will be looking out for these shares to give buy signals and as and when they do I will alert subscribers. This will be especially exciting when the number of buy signals starts to outpace the ones still looking unequivocally bearish. This could easily happen when the fundamentals remain seemingly negative. Shares often bottom out in recessions, especially in periods of stagflation when inflation and interest rates remain high while economy activity is depressed.

Another strategy which I favour is buying ETFs, especially leveraged ETFs, in a way which ensures that you win in the end. This could be simple £-cost averaging, where you invest an equal amount each month. You may start by racking up heavy losses but you will win in the end.

Another variant on this to buy on buy signals and I will be alerting on these as and when they happen.

Spread betting – exciting but scary

There is another strategy for bull markets which I like but is close to gambling and that is to build a spread betting portfolio. The trick here is to only do this in a bull market so not right now. Once we have a Coppock buy signal and a growing number of unequivocally bullish (UBUs) in my table and exciting new entrants to the table which I will start finding when a new bull market begins that is the time to start your spread betting strategy.

The attraction of the strategy is that you can make money amazingly fast. It is a bit like pyramid selling. More accurately, you could call it pyramid buying. When it works the results are spectacular. I have talked about this in the past and I will again in the future. One beauty of spread betting is that you don’t need to risk much money. Even a small stake can become serious money if you choose the right shares (high momentum, high growth 3G) and the whole stock market rises strongly, which is exactly what may happen in a post Coppock buy signal bull market.

In simple terms you can think of spread betting in shares as like a speeded up version of buying houses with mortgages in a property bull market. We all know the stories of people who bought houses for what now seem like peanuts in the early 1970s and now they are worth telephone numbers; that can happen with shares very quickly.

20:20 hindsight makes us all zillionaires but less us have a look at Shopify. Imagine you bought the shares at $28 on the first chart buy signal in March 2016. I know this would have been a very clever thing to do but let us dream for a moment. These shares peaked at $1,760 in November 2021 so even if you were slow to react to the subsequent chart breakdown you would have made a great deal of money just by a straight purchase.

But now let us consider our crazy, gang ho, spread betting madman and see what might have happened to him. He puts $5,000 in cash into his spread betting account and uses it to buy 892 Shopify shares at $28. He is using five times gearing (the maximum permitted to beginner investors on IG which means he can buy $25,000 worth of shares). He is adopting a kind of buy and hold strategy (that’s the mindset ) but with that level of gearing he has to keep a close eye on what is happening.

The shares consolidate briefly and then break higher again to reach $34 in July 2016. His shares are now worth approximately $30,000. Remember he invested $25,000 in March based on $5,000 of equity. The remaining funding was $20,000 borrowed from IG. His equity is now $10,000. He has doubled his money but the fun is just beginning.

He can use his extra $5,000 of equity to buy another $25,000 worth of shares or 735 shares at $34. He now has 1,627 shares worth $55,318 and borrowings of around $40,000. In January 2017 the shares break higher again to $51.50. Our ballsy madman now has a holding worth $83,790 with borrowings of $40,000 (approx). His equity is now say $43,000 on an initial cash investment of $5,000.

But this guy is really crazy. He now has some $30,000 of as yet unused equity. He can invest $150,000 in Shopify and he does this at $51.50 to buy another 2,912 shares. HIs holding of 4,539 Shopify shares is worth $233,790 and he has borrowings of $160,000. His equity is now around $73,000 on an initial investment of $5,000 and he is still not finished because the indicators for Shopify and the market generally are still positive.

The next chart breakout in January 2018 takes the shares to $111. His holding is now worth $503,829. His borrowings are $160,000; his equity is around $340,000 and his unused equity is $180,000 which he can used (times five with the leverage) to buy another 8,108 shares. His total holding is 12,647 shares worth $1.4m with borrowings of $340,000.

The next buy signal comes in February 2019 at $188. Our insane ballsy madman’s shares are now worth $2.35m. His borrowings are $340,000. His net equity is around $2m and remember he only invested $5,000.

Nor has he finished yet although I have. I cannot be bothered to do the sums any more but I am sure you get the picture. Spread betting in a bull market is an incredible way of making money and you are not at risk beyond your initial $5,000 because beginner investors are legally guaranteed by IG that they cannot lose more than their initial investment.

I expect if you did all this just with Shopify IG might start to freak out but if you do it with a few different shares and there are plenty of good ones around no problem. The catch is knowing when to sell and that is a difficult one but I invest like this all the time and even making loads of mistakes and getting hammered when share prices turn down suddenly I can still make lots of money and have lots of fun.

And there is something interesting which I have noticed. in a bull market Coppock often turns down too early but if you are investing on margin with spread bets who cares if you leave a bit on the table. And all these gains are tax free. You don’t even have to declare them.

Something to think about when the next bull market begins. If you are a mathematician and you can be bothered to check there may be some errors in my calculations because I did them in my head, not on a spread sheet. Also I have not made much allowance for interest rates and commission charges but the general drift is what I am suggesting. Spread betting to the max on exciting shares in a bull market is a spectacular way of making money and, unlike me, you may be a sensible person and decide that a return of $2m on an investment of $5,000 is enough and it is time to cash in.

Leveraged ETFs are exciting too

Just a last reference to the leveraged ETFs. These can be a lot of fun too. A Coppock buy signal on any of QQQ3 (Nasdaq 100 x 3), TECL (tech stocks x 3), SPXL (S&P 500 x 3) and SOXL (semiconductor stocks x3) is going to look like a licence to print money, a lot on money.

You could probably same the same about a whole string of technology shares. Shopify is down from $1760 to $360 and the Coppock indicator is negative. Is it game over for Shopify as a business? They clearly don’t think so judging by the amount of advertising they are doing and the businesses they cater for are the businesses of the future.

I have just engaged two cleaning ladies to help me with my house in Saffron Walden. They were employees, didn’t like their boss, left him and have rapidly found me as a client and I have a lot for them to do. Hopefully my crumbling Dickensian mansion is going to become a palace. If it does I will post a picture on the web site and they will probably need Shopify to help them manage their growing business.

I have also finally found a gardener and there is a lot for her to do too. Meanwhile, fingers crossed, the next bull market will be starting soon to help me pay for it all.

The problem at the moment for my indicators is that the stock market has crashed so hard and fast that it needs to rise a lot to turn them around. But that is the picture right now. Every month that passes with shares trading around the lower levels would change that; it depends what kind of recovery we get. If it is V-shaped then my indicators will lag a bit but the thing to remember is that when new bull markets start they astound people by how far they go. Look at what happened after 2009.

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