Costco – The Stock Is Sending A Warning Message

Summary

Costco’s price pattern is closely related to the business cycle.

Costco outperforms the market when business slows down.

Costco has declined enough to make it attractive again.

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As shown in my article of 12/15/2020 - Costco: A Great Defensive Play, The Issue Is Timing – Costco has 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. Its price is now at the levels of last December. 

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

The importance of knowing where we are in the business cycle has major implications on what type of stocks should be in a portfolio.

 

                                Source: The Peter Dag Portfolio Strategy and Management

 

There are two crucial turning points of the business cycle. The first one is when business transitions from Phase 2 to Phase 3. The second point is when the business cycle moves from Phase 4 to Phase 1. Both points signal important changes in price performance of the major market sectors as discussed in detail here.

In Phase 2 of the business cycle business is facing strong demand and needs to replenish inventories to meet sales. The increased production is achieved by buying more raw materials, hiring more people, and increasing borrowing to expand and improve productive capacity.

The outcome of these decisions is higher commodity prices, rising wages, and higher interest rates. The combination of these factors is transmitted to the consumer as higher inflation.

In this phase of the business cycle commodity-sensitive stocks, industrials, energy, and financial stocks easily outperform the market. 

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Roger Keats 3 weeks ago Member's comment

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George Dagnino 2 weeks ago Author's comment

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