The Lure Of The Charts For Buy Signals

I am trying to reduce my fascination with share price chart analysis but it is hard when they offer such useful insights. This is a chart of the S&P 500 3x Daily Leveraged ETF and it is apparent that buy signals based on moving averages are helpful.

Although long term investors can do just as well by simply buying whenever and holding, which is what my ‘priceless’ approach is all about. If it is on the list buy whenever and hold although if you do this with just one stock you may pick a dud, because there are always some.

I have noticed that moving average buy signals using long-term charts where each candle represents 6m trading are similar to Coppock buy signals and they have an excellent track record of success.

Edwin Coppock did not advocate his indicator for sell signals and you could say the same for the buy signals above which are calculated using a four-candles moving average, so two years. This might seem too long to be useful for anything but the buy signals work. Generally speaking with the sell signals, the worst decline is over by the time you know you have one.

Where are we now? – in an uptrend which has been running since the latter part of 2022. The chart is long term so in the short term, anything could happen. Trying to second-guess when declines will begin or when they will end is a mug’s game except that on past precedent after a couple of red candles it should not be long before a new uptrend begins.

Chinese Revival

Chinese shares have skyrocketed recently. My favourite Chinese share, Futu Holdings, has doubled in a week. There is talk of a short squeeze but another reason for the dramatic rise, as the Irishman said about leaving from here, is that the shares started from a far too low level.

Using the analysts’ projections on Market Screener at the present elevated price Futu is on a prospective PE ratio for calendar 2026, not so far away, of 19.8. A month ago, before the shares rose so sharply, it was on a prospective PE ratio in single figures for a business experiencing dramatic growth and addressing a large and exciting market.

It is a no-brainer to say that the shares were too cheap and don’t look especially expensive now. We should also remember that as a share and crypto dealing platform and wealth manager, Futu’s profits are hard to predict. In a booming stock market the projections would likely be exceeded and vice versa in a stock market slump.

The business is glowing with health.

• Total number of paying clients¹ increased 28.8pc year-over-year to 2,042,313 as of June 30, 2024.
• Total number of registered clients² increased 19.1pc year-over-year to 4,045,703 as of June 30, 2024.
• Total number of users³ increased 13.3pc year-over-year to 23.3m as of June 30, 2024.
• Total client assets increased 24.3pc year-over-year to HK$579.3bn (US$75bn) as of June 30, 2024.
• Daily average client assets were HK$560.0bn in the second quarter of 2024, an increase of 24.4pc from the same period in 2023.
• Total trading volume in the second quarter of 2024 increased by 69.0pc year-over-year to HK$1.62 trillion, in which trading volume for U.S. stocks was HK$1.24 trillion, and trading volume for Hong Kong stocks was HK$357.6bn.
• Daily average revenue trades (DARTs)⁴ in the second quarter of 2024 increased 67.4pc year-over-year to 652,286.
• Margin financing and securities lending balance increased 28.8pc year-over-year to HK$43.8bn as of June 30, 2024.

Futu Holdings web site, Q2 2024 results, 24 August 2024

The company has also cheered investors with a classic beat and raise.

“We ended the second quarter with over two million paying clients, representing a 28.8pc growth year-over-year and 8.2pc growth quarter-over-quarter. We added 155 thousand paying clients in the second quarter, down 12.5pc sequentially off of a high base but up 167.8pc year-over-year. In the first half of 2024, we have achieved over 80pc of our full-year new paying client guidance. Given the strong year-to-date momentum, we would like to raise our guidance again to 550 thousand new paying clients in 2024.”

Leaf LI, CEO and founder, Futu Holdings, Q2 2024, 24 August 2024

No question that Futu Holdings is a serious player.

“Total client assets in wealth management leaped 83.6pc year-over-year and 24.8pc quarter-over-quarter to HK$79.8bn, accounting for 14pc of total client assets. Money market funds and U.S. treasury bills again drove the bulk of that increase. As of quarter end, wealth management penetration among paying clients crossed 25pc.”

“We had 451 IPO distribution and IR clients, up 20.6pc year-over-year. We underwrote seven of the ten largest Hong Kong IPO listings in the first half of 2024.”

Leaf LI, CEO and founder, Futu Holdings, Q2 2024, 24 August 2024

The question mark over these results is why a strong increase in revenue did not lead to a dramatic increase in profits and earnings per share. On the contrary profits and earnings rose significantly less than revenue.

The obvious explanation as so often with early-stage high-growth companies is that Futu is still at the territorial acquisition stage and is more concerned with building its footprint than maximising profits.

This analysis is borne out by the number of growth initiatives happening at Futu.

New paying clients in Hong Kong and Singapore, both recorded double-digit sequential growth, a mid-market rebound collectively contributing to over one third of paying client growth in the second quarter. In Japan, new paying clients grew by double-digit quarter-over-quarter as we continue to strengthen product offerings, iterate our marketing initiatives and increase our brand awareness. Meanwhile, Malaysia maintained strong momentum and contributed the highest number of new paying clients among all markets to quarters in the role despite sequential deceleration.

One major product update is our recent launch of cryptocurrency trading in Hong Kong and Singapore. Compared to some other markets we operate in, we believe that the penetration of crypto in Hong Kong and Singapore helps much room for growth given their supportive regulatory environment, rising awareness of virtual assets and the emergence of more user-friendly virtual asset trading platforms.

The adoption curve will not be linear and obviously highly subjective to market sentiments. But when we develop our product roadmap, we think less about short term monetisation than offering a broader portfolio with asset classes with low correlation to help our clients navigate market cycles and thus drive higher client wallet share.

In terms of our product roadmap for other international markets, in Japan, we are on track to launch NISA savings account, mutual funds, and U.S. margin trading in the coming months. In Malaysia, we recently rolled out ring aid and USD denominated money market funds. To help our clients capitalise on the vibrant local IPO market in Malaysia, we also launched a Malaysian stock IPO subscription service. In Canada, we just introduced cash a plus product that enable clients to earn a census on their idle cash.

Leaf LI, CEO and founder, Futu Holdings, Q2 2024, 24 August 2024

This is what one Seeking Alpha commentator had to say about Futu’s margin problem.

Operating expenses are also up, they rose 21.1pc in total, with selling and marketing expenses driving this increase as they rose 93.1pc.

We reiterate what we noted in our last neutral call. Looking at these huge marketing expenses, it would seem Futu is “buying their clients” through such heavy marketing. The challenge in the long-term is retaining these clients.

Seeking Alpha, 20 August 2024

There is nothing wrong with buying clients; that’s what marketing spending is for so the margin compression is not necessarily bearish. It may be sensible to regard Futu as a play on the stock market. If a true bull market develops with sharply rising trading volumes all those expensively acquired clients will be worth their weight in gold.

There may also be an element of using stock broking services almost as a loss leader to build a client base who can be converted to more profitable wealth management services. This is similar to any subscription business spending all and more of the first year’s subscription to make handsome profit margins on renewals. The key is to have a healthy renewal rate but the implication is that rapid growth will tend to depress profit margins.

Futu has a great chart and looks set for a test of the former peaks around $200. Ultimately I would expect the shares to go much higher. Futu looks to me like a much bigger business in the making.

Another company with a similar business model is UP Holdings whose chart looks similarly explosive.

Mr. Wu Tianhua, Chairman and CEO of UP Fintech stated: “In the second quarter, driven by a more active market environment and our comprehensive product offerings, trading volumes increased 23.9pc quarter over quarter and 62.5pc year over year to US$105.9bn. Our total revenue for the second quarter amounted to US$87.4m, an all-time high and reflected a quarter-over-quarter increase of 10.8pc and a year-over-year increase of 32.4pc. Our GAAP net income and non-GAAP net income attributable to ordinary shareholders of UP Fintech for the second quarter were US$2.6m and US$5.2m respectively. The quarter-over-quarter decrease in net income was due to a US$13.2m loss provision for the suspended Hong Kong stock pledge business faced with extreme market situation and significant price drop, leading to a provision for the loan balance.

In the second quarter, we added 48,900 new funded accounts, bringing our total number of funded accounts at the end of the second quarter to 982,300, a 16.8pc increase compared to the same quarter last year. In addition, as of early August, the total number of funded accounts has exceeded the 1m milestone. Client assets inflow remained strong, with a net asset inflow of US$1.7bn in the second quarter, fueled by a US$3.6bn mark-to-market gain, leading the total account balance to rise by 16.2pc quarter over quarter and 121.1pc year over year to US$38.2bn. The rapid expansion of our client base and the record-setting of total client assets over the past three quarters will position us well for sustained long-term growth.

We continued to invest in research and development to better serve our users and improve operating efficiency. In August, we introduced short selling and options trading features for Hong Kong stocks, expanding our product offerings and enabling more flexible trading strategies. Furthermore, since our Hong Kong subsidiary officially uplifted its Type 1 license to include virtual asset dealing service for professional investors in January of this year, we received approval in June to expand this license to retail clients in Hong Kong. We offer zero commission and no platform fees for both professional investors and Hong Kong retail clients to trade spot cryptocurrency on Tiger platform.

Our corporate businesses continued to perform well in the second quarter of 2024. During this period, we underwrote a total of 12 U.S. and Hong Kong IPOs, including “Laopu Gold” and “Dida” and we served as the exclusive lead bank for the U.S. IPOs of “Tungray Technologies” and “YY Group”. In our ESOP business, we added 22 new clients in the second quarter, bringing the total number of ESOP clients served to 579 as of June 30, 2024.”

Wu Tianhua, CEO, UP Fintech, Q2 2024, 30 August 2024

UP Fintech is a similar business to Futu Holdings so no need to invest in both. A characteristic of these busiensses is their sensitivity to a rising and more active stock market. They win more brokerage and wealth management clients and their assets managed are further boosted by rising values. Back in the days of quoted unit trust managers like Perpetual in the UK I always used to say, in a bull market don’t buy the units, buy shares in the management company. A similar argument applies for FUTU and TIGR.

The shares are likely to be volatile because they appeal to Hong Kong-based as well as US investors and will attract day traders and momentum investors.

Share Recommendations (4 October 2024)

Futu Holdings. FUTU

UP Fintech. TIGR

Strategy – Buy The Shares

The stock market is generally trending higher and Chinese shares have woken up with a vengeance but it doesn’t feel like a true bull market, more a sideways market with positive characteristics. Bull markets are exciting and you know when you are in one. For one thing there are tons of exciting IPOs and that is not happening. The market is bubbling but certainly not blowing the lid off the pot.

I think in time it will because the underlying fundamentals are incredible. Technology is racing ahead at an accelerating pace, there is a ton of money around as I can see wherever I look in Kensington or Saffron Walden. Privileged locations, I know, but there seem to be many privileged locations, far more than when I was younger.

I looked up the Chinese economy on Google and it was all doom and gloom. Most likely, as with the US when gloom is similarly pervasive, it is the darkest hour before the dawn and investors should have faith in the inventiveness and dynamism of the people. Nor do I forget the theory that accelerating investment in technology is going to trigger a positive step change in global growth.

Optimism is usually the way to go.