Nasdaq 100 Signal Says Stocks Could Post Impressive Multi-Year Gains

Long-Term Buying Opportunity

Thirty-five calendar days ago, the NASDAQ 100 triggered an extremely rare long-term momentum signal that should be of great interest to long-term investors. According to Stockcharts.com, “The goal of the Coppock Curve is to identify long-term buying opportunities,” which speaks to margin of safety when putting hard-earned capital in harm’s way.

Rare Buy Signal

In 2021, with market participants growing increasingly concerned about inflation and Fed policy, longer-term momentum began to slow in the NASDAQ 100, the index tracked by the Invesco NASDAQ 100 ETF (QQQ). Multi-year prospects began to improve in Q1 2023 when the Coppock Curve turned back up. A long-term buy signal was triggered on July 31, 2023 when the Coppock Curve moved back into positive territory.

QQQ has a high correlation to the U.S. stock market and the technology sector, thus, this signal provides insight into the long-term investment prospects for the SPDR S&P 500 ETF (SPY) and the Technology Select Sector SPDR ETF (XLK).

How Rare and What Happened In Subsequent Years?

The NASDAQ 100 officially launched on January 31, 1985. Over the past thirty-eight years, a monthly Coppock buy signal has only been flashed four previous times. Since improving long-term momentum reflects expectations related to every fundamental topic you can think of, including valuations, earnings, general economic conditions, health of the credit markets, interest rates, inflation, and Fed policy, it is helpful to review each historical case to see what we can learn about the investment prospects for QQQ, XLK, and SPY in September 2023.

Sentiment Improves After 1987 Crash

After the 1987 stock market crash, there were lingering questions about the stability of the U.S. economy and financial markets. NASDAQ 100 momentum began to turn more constructive in 1988 and a rare Coppock Curve buy signal was triggered on December 31.

While volatility remained part of the investment equation, the NASDAQ 100 presented investors with a rare long-term opportunity by posting a gain of 2,544% between December 31, 1988 and March 24, 2000.

Momentum Turns After 1990 Concerns

Investors were concerned about a recession following the 1987 crash, however, the National Bureau of Economic Research (NBER) did not declare a recession until several years later on April 25, 1991, stating that an economic contraction began in July 1990 via the press release text below:

CAMBRIDGE, April 25 - The Business Cycle Dating Committee of the National Bureau of Economic Research reached the judgment today that the peak of US economic activity occurred in July 1990. The current US recession thus began in July 1990, in the committee's view.

Thus, an investor that was waiting for a recession probably did not pay much attention to the bullish Coppock Curve signal that triggered on March 28, 1991, 28 days before the recession was officially declared. The market had already discounted the recession via the declines that occurred in 1990.

The stock market was looking to the future after the 1991 Coppock Curve buy signal. Following the rare turn in bullish momentum, the NASDAQ 100 posted an impressive gain of 1,671% before the market peaked on March 24, 2000.

Buy and Hold Is Not Easy

There are times when buy and hold investing seems easy and clearly the only way to go. Unfortunately, nothing is easy in the financial markets as evidenced by the 83% decline in the NASDAQ 100 between March 24, 2000 and the bear market low on October 9, 2002. Did the Coppock Curve flash any long-term buy signals in this painful investing window? No, which makes the 2023 signal even more compelling.

New Dawn After Dot-Com Bust

As you might imagine, after an 83% decline, investors were not as enthusiastic about the merits of technology when sentiment began to slowly improve in late 2002. Long-term NASDAQ 100 momentum finally flashed a Coppock Curve buy signal on August 29, 2003.

The gains following the signal were still extremely rewarding with the NASDAQ 100 posting a return of 61.89% between points A and B on the graph below.

Coppock Curve During The Financial Crisis

The most useful indicators are helpful in bullish and bearish situations. Thus, it is helpful to know what the Coppock Curve was saying during the Global Financial Crisis (GFC). The signal that just occurred in 2023 was never triggered in the 2007-2009 bear market window.

Opportunity Following GFC

Somewhat similar to the abrupt turn in momentum following the NASDAQ 100’s December 28, 2022 bear market low, Coppock momentum began to improve rapidly in Q1 2009 and crossed the monthly zero line on December 31, 2009.

The returns following the rare bullish reversal in 2009 were impressive with the NASDAQ 100 gaining 369% between December 31, 2009 and December 31, 2019.

Comparing Periods In Dollar Terms

If you are looking for a magical system, indicator, moving average, or stock market signal, you will be on an endless and frustrating journey. Nothing is magical, including the Coppock Curve. Having said that, systems, indicators, moving averages, and signals can help with the assessment of the odds of good things happening relative to the odds of bad things happening as illustrated in the two contrasting tables below:

The median NASDAQ 100 gain following the four historical monthly Coppock Curve buy signals was 1,020%. Hypothetically, a $1,000,000 portfolio would have grown to $10,202,644. No monthly Coppock Curve buy signals were flashed during the 2000-2002 and 2007-2009 bear market windows. The median outcome in the bearish windows was a loss of 67%.

Long-term Opportunity: QQQ, XLK, SPY

The recent bullish signal for QQQ (NASDAQ 100) is also favorable for the technology sector since QQQ has a 57% exposure to tech. SPY is also heavily influenced by tech with a sector (XLK) exposure of 28.75%.

Is it possible other sectors will outperform tech in the coming weeks and months? Sure it is, but the long-term trends unquestionably are in favor of productivity-enhancing and earnings-producing technology.

LONG-TERM MEANS LONG-TERM

A monthly Coppock Curve buy signal speaks to the coming years. It says very little about the next six days, six weeks, or six months.

FACTS ARE COVERED ABOVE

The signal generated on July 31 is a fact. The market’s performance following the historical signals is a set of facts. The purpose of reviewing the facts is to help us better understand probabilistic outcomes, which are significantly different from a prediction or forecast. We will continue to take it day by day with an open mind about a wide range of outcomes.

The Weight Of The Evidence Builds Over Time

The favorable long-term signal for QQQ aligns with the U.S. stock market being in a demographically-driven secular bull market that could last until 2034 or 2035.

Moral Of The Story

Based on a rare long-term momentum buy signal that was flashed for QQQ (NASDAQ 100), the margin of safety equation looks much more favorable today. As evidenced in August 2023, volatility and give backs are a normal part of all trends, including the current favorable trends in QQQ, XLK, and SPY.

Charts/Data Do Not Support Imminent Debt Crisis Theory

Stress Testing The Bullish Case

As outlined previously, the fundamentals and technicals continue to support the case for a demographically driven secular bull market in stocks that could last until 2034. One of the best ways to test the base case is to continually ask:

 What could go wrong or what could we be missing?

If you understand the global macroeconomic backdrop, a good place to start is an inflation and interest rate induced debt crisis.

Debt Crisis Setup

In the wake of the 2008-2009 global financial crisis, central banks kept rates extremely low for years, which provided market participants, including governments, with a strong incentive to take on debt.

Since we are exploring a hypothetical ‘what could go wrong’ scenario, we will assume inflation remains higher than expected over the next two to three years. Higher inflation would most likely be met with additional Fed interest rate hikes and rates could remain elevated longer than market participants expect.

Balance Sheet Risk

Silicon Valley Bank provided an example of how rising interest rates can adversely impact asset prices, access to capital markets, and balance sheets. If rates remain elevated in an environment with balance sheet deterioration, it may be difficult to find sources of funding to roll over debt that is nearing maturity. The potential problems with refinancing in the commercial real estate sector are well documented. If refinancing problems increase, default rates will most likely follow, which in turn could lead to even tighter credit standards.

Tighter Credit Could Impact Economy

Hypothetically, a spike in bond default rates, paired with tighter credit standards, could adversely impact employment and consumer spending. Weaker consumer spending would impact economic output and corporate earnings. A reduction in corporate earnings could lead to layoffs, a recession, and a significant drop in the stock market. If a major debt crisis were just around the corner, we would expect the stock market’s profile to be highly vulnerable. Therefore, we can gain a better understanding of the market’s risk/reward profile by comparing August 2023 to highly vulnerable points in history that were followed by another significant leg down in the U.S. stock market.

Secular Trend Strength

Given the base case in 2023 is the S&P 500 resumed a secular bullish trend in October 2022, it is prudent to have tools to monitor the health and sustainability of secular trends. Thus, we will use a working prototype of a secular trend scoring system based on 505 binary questions used to differentiate between secular bull markets and periods of secular stagnation. The scores range from 100% (very healthy secular trend) to 0% (looks nothing like a secular trend).

1969 Stock Market Plunge

In late 1968, the S&P 500 peaked, dropped for several months, and staged an impressive rally before stalling in Q4 1969. The bullish rally attempt failed, and the S&P 500 lost an additional 26.54% between November 21, 1969 and May 26, 1970. On November 21, 1969, the S&P 500 posted a secular trend score of 24.75%, which placed it on the higher end of the vulnerability scale.

1974: Bear Market Round Two

With inflation as a primary bearish catalyst, the S&P 500 peaked in January 1973 kicking off a protracted and painful bear market. Buyers tried to make a stand in Q1 1974 near the 1971 lows but were unable to flip the market’s trend. Between March 27, 1974 and October 4, 1974 the S&P 500 lost an additional 35.52%. The market’s secular trend score on March 27 was an unimpressive 14.46%.

2001: Dot-Com Act II

A major bear market began in 2000 with the S&P 500 dropping into Q1 2001. A 2001 Q2 rally attempt ran out of gas and the bears regained control. Between June 13, 2001 and October 9, 2002 the S&P 500 lost an additional 37.44%. On June 13, 2001, the S&P 500 posted a weak secular trend score of 20.40%.

2008: The Final Financial Crisis Act

In the wake of a housing bubble, the S&P 500 peaked in October 2007. Buyers tried to regain control of the stock market in March 2008, but the rally fizzled in May. The market was extremely vulnerable on September 12, 2008 and could only muster a secular trend score of 10.10% (shares very little with a strong secular trend). The vulnerable profile was followed by another painful leg down with the S&P 500 dropping an additional 45.95% between September 12, 2008 and March 9, 2009. 

How Does 2023 Compare?

In the four cases above (1969, 1974, 2001, and 2008), the median outcome was an S&P 500 decline of 36.48% that occurred over the next 6.3 months. The median secular trend score before the decline was a concerning 17.43%, with the max score being 100% and the min being 0%. Therefore, in 2023 the closer the secular trend score is to 100%, the lower the odds of an imminent severe economic recession and debt crisis. Conversely, the closer the score is to 17.43%, the more concerned we would be about major economic and market dislocations occurring over the next six months. What was the S&P 500’s score on August 24,2023? The answer is a very secular trend like 86.04%, which speaks to market expectations regarding the probability of an imminent debt crisis and/or severe economic recession.

Jackson Hole Comparison

Last week’s Jackson Hole speech from Fed Chair Powell provides another opportunity to objectively assess concerns about inflation, interest rates, and Fed policy. A year ago, the S&P 500 was painfully weak following Powell’s August 26, 2022 Jackson Hole speech, primarily based on higher for longer fears. If we compare the S&P 500’s weekly trend following Jackson Hole in 2022 to post-Jackson Hole 2023, we see some significant differences. In 2022, the weekly trend was down with price below a declining 50-week moving average in green.

The market appears much more confident a year later with a positive weekly trend and the S&P 500 above an upward-sloping 50-week moving average. Based on the data we have in hand, the market is not screaming “imminent debt crisis, severe recession, and massive drawdowns.”

The Charts In Front Of Us

Is it possible the 2023 weekly chart above reverses course in an abrupt manner and morphs into a downtrend in the coming weeks? Is it possible the secular trend score begins to plummet? The answers to both questions are yes, and both may happen very soon, but neither has happened yet. The bearish economic, debt, and market cases all need something to change. With the massive market interventions from central banks and policy makers following the global financial crisis and COVID pandemic, it is possible the current economic cycle has been skewed. Thus, we will continue to take it day by day with an open mind about a wide range of outcomes from wildly bullish to wildly bearish.

Are Credit Spreads Waving Crisis Flags?

If the economy were on the verge of a severe recession, corporate earnings were about to get hit hard, and bond defaults were on the cusp of a major spike, we would expect to see credit spreads widening significantly as they did during the global financial crisis. Again, that may happen very soon, but it has not happened yet. At the moment, credit spreads look tame relative to 2008, 2011, 2016, and 2020.

Moral of The Story

The text below comes from a recent research note from Sentiment Trader’s Jason Goepfert:

“After months of extreme and protracted optimism from Dumb Money and caution from Smart Money, the script is about to flip. When the spread between them turns positive after months, and after extreme readings, stocks have had a strong tendency to rise, as it has been a bull market phenomenon.”

The fundamentals and technicals continue to support the resumption of a demographically driven secular bull market that could last until 2034, which is reflected in our current investment stance.