Monday, May 5, 2014

XLV Coppock Guide: Nonbullish as of May Day 2014

The Health Care Select Sector SPDR exchange-traded fund (XLV) was No. 3 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 climbed to $58.12 from $55.25, a hike of $2.87, or 5.19 percent.

Over this period, XLV’s return was a bit more than one-third that of the Utilities SPDR ETF (XLU) and a bit more than twice 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.)

XLV is the third 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 XLV.

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

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Note: The XLV 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 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 Coppock guide.

I anticipate XLV 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: XLV’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 XLV 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 12 cases since November 2000, these signals have been correct on 10 occasions, or 83.33 percent of the time, and incorrect on two occasions, or 16.67 percent of the time.

The Coppock guide’s latest initial bullish signal is associated with XLV’s adjusted closing share price ascending to $59.24 this February from $36.85 in June 2012, a fast and furious skyrocketing of $22.39, or 60.76 percent. I attribute most of this movement to market participants' perceptions of the U.S. Affordable Care Act, aka Obamacare, and Federal Reserve monetary policies.

Obamacare’s constitutionality was established in the landmark National Federation of Independent Business v. Sebelius decision handed down by the U.S. Supreme Court on June 28, 2012, as noted by the court. And the Fed’s current quantitative-easing program was announced by the Federal Open Market Committee on Sept. 13 of the same year, as pointed out in “SPY, MDY And IJR At The Fed's QE3+ Market Top.”

To appropriate an old New Jersey marketing slogan, “Fundamental Analysis And Technical Analysis: Perfect Together.”

Figure 3: XLV’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 XLV 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. Nonetheless, after the flashing of 13 nonbullish signals since November 2000, the ETF’s share price fell on 10 occasions, or 76.92 percent of the time, and rose on three occasions, or 23.08 percent of the time.

The Coppock guide’s most recent initial nonbullish signal was generated in February, when XLV’s closing share price was $59.24. Accounting for the one-month lag in the confirmation of any signal, I note the ETF’s closing share price dipped to $58.12 in April, which is clearly nonbullish action by any standard.

Consistent with the XLV Coppock guide’s current status, I believe in the foreseeable future the ETF may not behave absolutely well, but might perform relatively well. On the one hand, the Affordable Care Act appears to be less of a tailwind and the Fed’s monetary policies seem to be more of a headwind at present than in the recent past. On the other hand, XLV, XLU and the Consumer Staples ETF (XLP) historically have done better than have the other Select Sector SPDRs when the market has exited risk-on mode and entered risk-off mode, a transition I think is under way, as indicated in “Building A Martin Zweig-Like Fed Indicator Integrating Innovations Of The 21st Century.”

I suspect the fact XLU and XLV are already two of the top three Select Sector SPDRs as measured by return this year is anything but a coincidence.

Coppock Guide: The Blog Series



Author’s Note: This is the third 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 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.