Sunday, May 11, 2014

XLK Coppock Guide: Bullish as of May Day 2014

The Technology Select Sector SPDR exchange-traded fund (XLK) ranked No. 6 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 ascended to $36.45 from $35.59, a climb of 86 cents, or 2.42 percent.

Over this period, XLK’s return was about one-sixth that of the Utilities SPDR ETF (XLU) and about the same as that of the SPDR S&P 500 ETF (SPY), as described in “XLU Coppock Guide: Bullish as of May Day 2014.” (XLU returned 14.74 percent, and SPY returned 2.41 percent.)

XLK is the sixth 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 calculated on the basis of monthly data.

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

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Note: The XLK 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.

Edwin S. 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 produce 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 guide.

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

Figure 2: XLK’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 XLK Coppock guide’s initial bullish signals collectively have done a good job in forecasting the future upward movements of the ETF on monthly closing bases. In 11 cases since November 2000, these signals have been correct on eight occasions, or 72.73 percent of the time, and incorrect on three occasions, or 27.27 percent of the time. All the errant signals flashed in proximity to SPY’s 2011 bear market, when that ETF dipped intraday to $107.43 on Oct. 4 from $137.18 on May 2, a drop of $29.75, or 21.69 percent.

The XLK Coppock guide’s latest initial bullish signal was generated last August, when the ETF’s closing share price was $30.96. Accounting for the one-month lag in the confirmation of any signal, I note XLK’s closing share price grew to $36.45 in April from $31.75 in September, which clearly constitutes bullish action by any standard.

However, I also point out the XLK Coppock guide’s rate of increase has significantly slowed during the past three months: It was 0.92 percent in April, 1.50 percent in March and 2.08 percent in February. Therefore, I would be completely unsurprised should we see an initial nonbullish signal produced by the middle of this year (i.e., July 1).

Figure 3: XLK’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 XLK Coppock guide’s initial nonbullish signals collectively have compiled an interesting track record when evaluated on monthly closing bases. Keeping in mind that a nonbullish signal is not equivalent to a bearish signal in the context of the Coppock guide, the flashing of 11 initial nonbullish signals since November 2000 has been followed by the ETF’s share price falling on seven occasions, or 63.64 percent of the time, and rising on four occasions, or 36.36 percent of the time.

The analyses associated with “NYSE Margin Debt Falls In March For First Time In 9 Months: Risk Rank At No. 55” and “S&P 500 And U.S. Economic Index Show Early Signs Of A Return To Normalcy” both indicate fundamental reasons why the equity market and XLK may be either at or close to long-term peaks.

And the analyses associated with “Coppock Guide: The Blog Series” all suggest a technical reason for the same outlook vis-à-vis the stock market and XLK.

Coppock Guide: The Blog Series






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Author’s Note: This is the sixth blog post in a May series centered on the Coppock guides of 13 important ETFs, among them all nine Select Sector SPDRs. 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 here. 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.