Costco - A Great Company Outperforming The Market Some Of The Time

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As I discussed a year ago, Costco (NASDAQ:COST) has a distinct pattern closely tied to the business cycle. 

Costco declined more than 19% from December 2020 to March 2021. It has underperformed the market from March 2020 to March 2021. Costco has been outperforming the market in a major way since April 2021. 

The price action of Costco raises two questions. Is Costco likely to continue to outperform the market? If so, what is its price action telling us about the future of the economy? 

This is what I wrote in April 2021:

The sharp increase in inflation, interest rates, and commodities we have been experiencing suggests we are close to the Phase 2-Phase 3 turning point of the business cycle. 

The ratio COST/SPY has reached oversold conditions, coinciding in the past with a peak of the business cycle. These oversold conditions suggest Costco will continue to outperform the market (emphasis added)

The strength of Costco compared to the market may suggest investors are beginning to position their portfolios for the Phase 2-Phase 3 turning point of the business cycle. 

Costco did indeed outperform the market. The issue now is whether it will continue to do so. 

The price pattern of Costco compared to the S&P 500 is particularly telling because it might give further information on the position of the business cycle.

Source: StockCharts.comThe Peter Dag Portfolio Strategy and Management

The above chart shows two panels. The graphs in the above panel represent the ratio between COST and SPY. The second graph is its 200-day moving average. The graphs rise when COST out-performs SPY. The graphs decline when COST under-performs SPY. Investors are going to outperform the market if they invest in COST when the graphs rise.

The bottom panel shows the spread between the ratio COST/SPY and its 200-day moving average. The resulting pattern is unique and quite telling.

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