Saturday, May 3, 2014

XLE Coppock Guide: Bullish as of May Day 2014

The Energy Select Sector SPDR exchange-traded fund (XLE) ranked No. 2 by return among the ETFs that divide the S&P 500 into nine pieces during the first third of this year, as its adjusted closing share price grew to $93.74 from $88.08, an increase of $5.66, or 6.43 percent.

Over this period, XLE’s return was a little less than one-half that of the Utilities SPDR ETF (XLU) and a lot more than twice that of the SPDR S&P 500 ETF (SPY), as detailed in “XLU Coppock Guide: Bullish as of May Day 2014.” (XLU returned 14.74 percent, and SPY returned 2.41 percent.)

XLE is the second of 13 ETFs to be featured in a J.J.’s Risky Business blog series this month. Basically, I will be looking at each ETF with both eyes fixed on its Coppock guide, as was the case in “SPY Coppock Guide: Away From Bullishness, Toward Nonbullishness as of March 31, 2014.”

The Coppock guide, aka either the Coppock curve or the Coppock indicator, is a long-term indicator of price movements in major stock-market indexes introduced by Edwin S. Coppock in Barron’s more than half a century ago. The indicator’s history and methodology are interesting in themselves, but my focus now is on its relevance to XLE.

Figure 1: XLE And Its Coppock Guide, The Complete History

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Note: The XLE closing-value scale is on the left, and the Coppock guide scale is on the right.

Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data and those data themselves.

Coppock developed his long-term guide not to flash both bullish and bearish signals but to generate only bullish signals. However, I employ it to flash either bullish or nonbullish signals. It is extremely important to keep in mind that a nonbullish signal is not equivalent to a bearish signal in the context of the Coppock guide.

I anticipate XLE may advance after a bullish signal and expect it might do anything following a nonbullish signal (i.e., trade higher, lower or sideways).

Figure 2: XLE’s Behavior Subsequent To Initial Bullish Signals

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Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

The XLE Coppock guide’s initial bullish signals collectively have done an excellent job in forecasting the future upward movements of the ETF on monthly closing bases. In 10 cases since November 2000, these signals have been correct on nine occasions, or 90.00 percent of the time, and incorrect on one occasion, or 10.00 percent of the time.

The Coppock guide’s latest initial bullish signal was generated in March, when XLE’s closing share price was $89.06. Because of a one-month lag in the confirmation of any signal, however, I will be unable to determine the success or failure of this most recent signal until the close of trading May 30.

Meanwhile, I believe the equity market may be within a few percentage points of a long-term peak (as indicated in “SPY, MDY And IJR At The Fed's QE3+ Market Top”), and I think SPY is experiencing not tailwinds but headwinds in the short term (as suggested in “SPY Seasonality: Share Price Cools Down While U.S. Air Temperature Heats Up”).

Accordingly, I would be completely unsurprised by a certain amount of whipsawing between the XLE Coppock guide’s bullish and nonbullish signals in the second and third quarters of this year. This behavior would be uncharacteristic, but there is historical precedent for it in proximity to a market top: Incredibly, the XLE Coppock guide flashed signals in each of the four months between December 2007 and March 2008, and it generated a fifth signal shortly afterward, in June 2008.

Figure 3: XLE’s Behavior Subsequent To Initial Nonbullish Signals

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Source: This J.J.’s Risky Business chart is based on proprietary analyses of Yahoo Finance adjusted monthly share-price data.

The XLE Coppock guide’s initial nonbullish signals collectively also have established an interesting track record when evaluated on monthly closing bases. Again, it is extremely important to keep in mind that a nonbullish signal is not equivalent to a bearish signal in the context of the Coppock guide. In the wake of nonbullish signals since November 2000, however, the ETF has fallen on nine occasions, or 81.82 percent of the time, and risen on two occasions, or 18.18 percent of the time.

A day without analysis of the nine Select Sector SPDRs by multiple short-term indicators (e.g., price, relative strength, money flow) would be like a day without sunshine at my shop, and examinations of their long-term indicators, such as their Coppock guides, are also invaluable as I seek more light than heat about the state of the stock market.

Coppock Guide: The Blog Series


Author’s Note: This is the second blog post in a series centered on the Coppock guides of 13 important ETFs in May. The first was cross-posted at both J.J.’s Risky Business and J.J. McGrath’s Instablog on Seeking Alpha, but the rest of the series will be posted at the former location. You can follow me (and the series) @JJMcGrath3000 on Twitter, at JJMcGrath on StockTwits and via myself on Google+.

Disclaimer: The opinions expressed herein by the author do not constitute an investment recommendation, and they are unsuitable for employment in the making of investment decisions. The opinions expressed herein address only certain aspects of potential investment in any securities and cannot substitute for comprehensive investment analysis. The opinions expressed herein are based on an incomplete set of information, illustrative in nature, and limited in scope. In addition, the opinions expressed herein reflect the author’s best judgment as of the date of publication, and they are subject to change without notice.