January 6th, 2015

Forget Oil, Go Lithium

GigafactoryOil prices has tumbled more than 50% since the beginning of last summer so many investment advisers are recommending today that investments be made in the energy sector, arguing that the stocks have fallen so that many represent the best bargains in many years.

If you had been able to predict the oil price rout in July and sold short, you would have discovered that not all energy-related stocks and ETFs acted uniformly. Some actually went up (EEP up 12.49%, VLO up 1.68%) while others dropped anywhere from -5% to
-70%. For example, CVX decline -16.81%, COP declined -19.33, OIL -49.48, RIG -56.39 and CRK -73.99.

If you believe that oil prices can’t go much lower and will soon rebound then it would seem logical that buying an oil-related stock is a “sure thing”. But how does one select among the more than 300 energy stocks of all sizes, dividends, volatility, growth.

Oil Prices

Should you select those that performed the “best” over the past 4-5 months under the assumption that they will perform best in the future. Or, conversely, should you buy those that performed the worst because they could possibly bounce back the most. If you’re looking to put money to work, though a better strategy than catching one of 300 “falling knives” might be to look someplace totally different, someplace that will be “driving the future” rather than the energy that has “driven the past” (no pun intended).

Rather than betting on a recovery in oil prices, why not take out a stake instead in the industry making possible electric transportation – lithium, one of the most valuable natural resources of the new electronic world thanks to its unique and extremely valuable characteristics:

Lithium

As described in a recent Mauldin Economics report:

  • Lithium has such a low density that it floats on water and can be cut with a butter knife. When mixed with aluminum and magnesium, it forms lightweight alloys that produce some the highest strength-to-weight ratios of all metals.
  • Lithium tolerates heat better than any other solid element, melting at 357°F.
  • Lithium batteries offer the best weight-to-energy ratio, making lithium batteries ideal for any application where weight is an issue, such as portable electronics.
  • That same high energy density and low weight characteristic makes lithium batteries the best choice for electric/hybrid vehicles due to car gas mileage. A car’s biggest enemy is weight.
  • Lithium has a very high electrochemical potential, meaning that it has excellent energy storage capacity.

The lithium market is dominated by only three publicly-owned producers:

  1. Chemical & Mining Company of Chile (SQM);
  2. FMC Corp. (FMC);
  3. Rockwood Holdings (ROC)

Lithium Industry

In addition to its excellent dividend yield and relatively low (as compared to the pure-play ROC) price-earnings ratio, the SQM chart is most volatile and shows promise to bounce off the bottom of the horizontal channel it’s formed since late 2013 and attempt to cross above the upper boundary at 33, a 40% move.

SQM - 20150105

Tesla has just completed a gigafactory that exceeds all comparisons in the belief that the lithium-ion battery will be the power source for many more battery powered cars, drones, toys and power grid storage.  I’m hoping that SQM will benefit from that future.

October 18th, 2012

Seeking Greener Grass

Something we learned long ago is that the big money pro’s are like sheep, they like to move in herds (hence the name of my recently published book, Run with the Herd).  They’ll move together bidding up the price of stocks in select industries until they reach unsustainable heights and then abandon them to move their money into areas that they previously ignored, starting the process over again.

To some extent, these money flows are truly based on strong fundamental factors but, at other times, it is a function of fashion and effective sales.  One large investor comes up with a believable theme and others buy into the story.   They begin pushing the stocks of companies up and down that supply chain higher.  The sales pitch story is told over and over so often that it soon most begins to resemble generally accepted truth that “goes without saying.”

Our voices in either agreeing with the herd or loudly shouting the absence of the kings clothing is drowned out and all we can do is run with the herd and make sure we get out of the way when they decide to abandon those stocks.  Demand for the shares outstrips supply in a continuously reinforced loop.  Until, that is, someone wakes up to the heights of those prices causing a mass and rapid exit from the stocks. That was true of the ethanol stocks, solar energy, Chinese internet and emerging markets stocks of the past.  I’m sure the future will not be much different than it has been in the past.

The market’s advance over the past twelve months has been driven mostly by the herd’s purchase of the beaten down stocks of construction and homebuilding, and bank and financial stocks. The S&P 500 advanced 21.4% since last October 17 but, during that time, only 209 stocks, or 41.8% have advanced as much (4 stocks were added during the past twelve months).  Of those 211 stocks, a disproportionate number were in the sectors most impacted during the previous  Crash, namely Financial and Banks and Construction and Homebuilding:

Ah, if we only had had the courage to buy those “falling knives” a year ago we would be know heading to a Caribbean island rather than getting our snow boots out of the closet or trying to find the tire chains in the garage.

Over the next twelve months, it’s likely that the herd will begin abandoning the winners of the past year and begin putting together equally compelling, timely stories about other industry in which the stocks are still at depressed prices, not having yet recovered.  In my sifting through the rubble of the past five year’s worth of markets, I’ve identified the following areas and stocks that were devastated during the housing/financial crisis crash of 2007-09 but haven’t yet been dramatically bid up (I’ve recently wrote about some of these here before but it’s worth repeating):

  • Oil and Gas (DVN, DNR, CHK, MUR, VLO, NE)
  • Coal (BTU, CNX)
  • Steel and Materials (A, X, NUE, ANR, TIE)
  • Defense (BA, GD)
  • Electric Utilities (ETR, AES, FE, POM, PPL)

These are all S&P 500 stocks.  The market’s moving higher will depend on whether stocks like these can find support.

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October 16th, 2012

KOL and UNG: the First Chapter

I’m not breaking any new headlines here but the Fed has flooded the economy with a huge amount of liquidity.  To this point about the only thing I focused on with regard to all that money sloshing around is to wonder when it might come in to the stock market.  Consequently, I missed the surprising new boom that’s emerged in housing and most related industries like lumber,construction equipment and tools and home related retail.

But sooner or later all that newly created money should begin to show up in commodity prices (other than precious metals), inflation statistics and, finally, in interest rates.  We may have gotten a peek at that future this morning when the government reported that industrial production rose 0.4% in September while capacity utilization inched ahead from 78.0% to 78.3% and copper rose 0.5% on the commodity exchange.  It may be time to take a look at a couple commodity ETFs.

  • UNG (Natural Gas): I swore off of natural gas having been burned by it (no pun intended) several times over the past few years as I bought mistakenly believing that the commodity just couldn’t drop any further in price only to have been proven wrong.  Perhaps it might be one of the instances again:What a huge destruction of value!  If you had put $1000 into UNG when it first became available and held on for the duration, you would have been left with a measly $54.80.  There’s not much hope in recouping all that money any time soon but, if you want to put $1000 in UNG today, you could have a fairly good chance of perhaps doubling it.  For the first time in many years, UNG is in the process of forming a reversal bottom pattern.  The 50-dma has crossed above both the 100- and 200-dma’s and the 100-dma has also crossed above the 200-dma.  Volume has picked up significantly due to many bottom fishers who are now betting on that bottom taking place.  There still are many skeptics out there so if a reversal is truly in the making then it will probably go through many stages and stretch out for years.  Along the way, there will be several constructive trading opportunities …. a long-term buy-and-hold approach could be frustrating.
  • KOL (coal): Coal is the bad boy of the energy complex but, with the possibility of a Romney victory, may gain some new found respect in the effort to become energy independent.Like the case of UNG, KOL is in the early phases of a clear-cut reversal pattern.  The upside opportunities may not be as significant as UNG (because the previous decline wasn’t as severe) but, as a more mature industry, they may be more certain.

Of course,one can play the natural gas and coal producers instead of the ETFs and there always are the precious metals (GLD, SLV, GDX) and their producers.  Clearly, this is a long-term unfolding story that we’ll continue to follow.

December 7th, 2011

New Highs + Dividends; Unbeatable In This Market?

I know it’s frustrating having to sit around waiting for the market to show its hand as to future direction.  But for me, it’s the cautious and prudent thing to do.  I’ve just been disappointed and have lost too much in the past by thinking I can pick the few stocks that are able to hold their own against the forces of a declining market.  But I am beginning to put together a watchlist of stocks with interesting technicals but have decided not acting on them yet.

One place I began my search is to comb through stocks that are in all-time new high territory (because of system limitations, I’m limited to stocks moving to new 5-year highs as a surrogate metric).  A measure of how poorly stocks have performed over the past 18 months is the fact that only 118, or 2.4% of all stocks, meet the criteria. The distribution of these 118 stocks by Industry Group includes:

Stocks in All-time New High Territory by Industry Group 12/07/11

Not knowing how long it will be before the market gained some upward momentum, I decided to zero in first on the stocks paying the largest dividends.  For those itching to hit that “Buy” button, here are a few stocks I came up with you might be interested in:

Top Dividend Payers + All-Time New Highs 12/07/11

Dividends and continuing their ascent into all-time new high territory.  Almost an unbeatable combination?

May 12th, 2011

Sell Rule: Out-of-Favor Industry Groups

A mistake most traders, including myself, often make is focusing too much on what is or, more correctly, what will in the near future be moving higher. In the Weekly Recap Report I send to subscribers, I include both an breakdown by industry group of stocks in the current Portfolio as well as a list of Investors’ Business Daily’s top-ranked Industry groups and Groups moving up in rank the most during the past 3 months.

Our goal is finding tomorrow’s hot stocks. At the same time, however, we should make sure that the stocks we already have in our portfolios continue performing. It’s just as important to see what Industry Groups are falling the most in their rankings as it is those that are rising the fastest.

For example, I’ve been beating the drum for healthcare related Industry Groups for some months and, as of this past weekend, over 20% of the portfolio is now made up by stocks in those groups; most have performed extremely well. I included the following chart in a recent Recap Report of the Medical-Biomed/Biotech ranking showing that these stocks, as a group, have been among the best performers for over a year (click on images to enlarge):

What I hadn’t looked at or acted on was the other end of the spectrum – the industry groups that might have been falling fastest. If I had, I would have seen, for example, was that all the Oil & Gas related Industry Groups had begun losing their top rank positions. I had blinders on but if I had looked at the other end, I would have seen the stocks that were dropping the most in ranking. I would have seen groups like the Oil & Gas-International Exploration and Development:

and the Oil & Gas – Canadian Exploration and Development:

Both of these groups had started turning down from their top rankings in mid-March and were now among the lower half in ranking of the 197 Industry Groups; both were now clearly under the 20-week moving average of their ranking. If I had taken notice and acted as quickly to dispose of these stocks in the Portfolio as I was adding healthcare stocks then I would have preserved a lot of profit.

Last November, I wrote “My Sell Rules Discipline” in which one rule is selling “individual stocks where risks associated with that stock appear to have increased”; the fourth example is “an industry group if it falls out of favor”. I just didn’t follow my own rules. I have long known that Industry Group factors contribute about 30% to a stock’s movement (the market is 50% and factors related exclusively to the individual stock contribute the remaining 20%). What I just now re-learned, a lesson I won’t soon forget, is that we have to look not only for new stocks to add but also to find and quickly act to prune out stocks in Industry Groups out of which money clearly is flowing.

April 12th, 2011

Chernobyl, Fukushima Dai-Ichi and the Market

I’m always on the lookout for things to write about and subscriber questions are always an interesting place to begin. For example, someone wrote this morning asking the following:

“Japan has now raised their reactor crisis to Level 7, the highest level and equal to the Chernobyl disaster. Is there any chart information from the Chernobyl disaster that might help us?”

At first I thought linking a nuclear reactor disaster to the US stock market was unusual but, after giving it some more thought, I realized that actually there was value in looking back to see how the market reacted then and comparing it to what might happen in reaction to the current one. Understanding similarities and differences between the two events at the disaster and the market levels could, after all, be quite meaningful.

The Chernobyl disaster occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR (now Ukraine). An explosion and fire released large quantities of radioactive contamination into the atmosphere spreading over much of Western Russia and Europe. It was considered the worst nuclear power plant accident in history, and it was the only one classified as a level 7 event on the International Nuclear Event Scale until the Fukushima I nuclear accidents of March 2011.

The battle to contain the contamination and avert a greater catastrophe ultimately involved over 500,000 workers and cost an estimated 18 billion rubles, crippling the Soviet economy……Estimates of the number of deaths potentially resulting from the accident vary enormously: the World Health Organization (WHO) suggest it could reach 4,000; a Greenpeace report puts this figure at 200,000 or more; a Russian publication, Chernobyl, concludes that 985,000 excess deaths occurred between 1986 and 2004 as a result of radioactive contamination. (from Wikipedia)

The market’s reaction at the time was as follows (click on image to enlarge):

It might first appear as though the disaster damaged the market by stalling attempts to move higher as the S&P 500 Index began trading in an 11% range between 229 and 254. If Chernobyl did have a direct relationship to the consolidation pattern during most 1986 then it pales by comparison, however, with the market’s own melt-down and the largest one-day percentage point loss on Black Monday in October 1987 a little over a year later:

Put in an even longer-term picture, Chernobyl appears as little more than a bump in the road of the longest bull market in history that began when the S&P 500 successfully first crossed above 125 (Dow Jones Industrial Average above 1000) in 1982 and ended with the bursting of the Tech Bubble in 2000:

It’s difficult making “if-all-things-are-considered-equal” sorts of comparisons because Russia in 1986 was different than Japan and the world economy and trade are today. I would say, however, that the market today is at about the same early phase in coming out of the current secular bear market that begab with the Tech Bubble Crash in 2000 as it was in 1983 coming out of 1966-1982 secular bear market. If, in fact, we are in the early phases of this recovery then, over the long-run, the Japanese nuclear disaster will also appear as a blip on future long-term charts.

Thanks for the question, Chuck.

April 20th, 2010

A Favorite Group From Yesteryear – For-Profit Education

How many of you remember the history of for-profit education companies between 2000 to 2003? They’re probably some of the best examples of Wall Street’s herd mentality when it comes to stampeding towards an industry group, running up prices and, even more quickly, running away from it as if it had a plague.

After the Tech Bubble Crash in 2000-03, hot money was looking for someplace to go since Tech was dying or dead; that place was For-Profit Education stocks. The fundamental theory sounded good. Employees displaced by the collapse of firms in the Tech Industry needed to learn new skills to find work in other fields and for-profit were there to satisfy the need …. and at the same time make a lot of money. The three largest firms in the industry appreciated 10-fold (that’s 1000%) in 4 years. Career Education Corp., for example, went from under $5 at the beginning of 2000 to $70 by June, 2004.

Unfortunately, the light that turned green in 2000 switched to red in 2004. Towards the end of 2003, the schools were subjected to a series of investigations and lawsuits by authorities for violating Federal programs and resulted in adverse judgments, substantial penalties and fines. The stocks tumbled and the image of the industry was severely compromised.

But that was then and now is now. The Commercial Svces-Schools Industry Group was ranked 69th last Friday, up from 194th (out of 197) at the end of last year. There are 28 firms in the Group today of which 5 are Chinese. Several stocks in the Group have either begun to make all-time new highs and others appear to be attempting to break through significant resistance. I thought long-term charts were best at displaying the sort of action since their peaks in 2004 (click on images to enlarge):

  • DV
  • STRA
  • COCO
  • CPLA
  • ESI
  • FC
  • LINC
  • LTRE

Again, something different seems to be happening with the Group (I intentionally omitted Chinese education stocks and these seem to have similar patterns) and they are generating some momentum relative to other Groups. This is a purely technical view of an industry group and you need to do your own homework to decide which stock, if any, will work best for you in your investment time horizon.

October 12th, 2009

REITs and Energy: New Darlings

I have to travel again this week so my posts might be sparse. In the meanwhile, though, I recommend you take a look at a group that appears to be in the last stages of completing very distinct bottom reversal patterns: REITs.

Remember the “perpetual in-the-money call option” strategy of last November and February? It might be appropriate for resurrecting it and applying it to REITs. For example, here are some low-priced, high-volatility REITs; construct for yourself a basket (to spread the risk, a small, equal amount invested in each of 4 or 5) and there’s a good chance you might make a nice return even if one or two go further down in price:

  • MPG
  • AHR
  • BEE
  • SFI
  • GKK
  • CT
  • CBL
  • PEI
  • DDR
  • ABR
  • FR
  • LXP

These currently all sell for less than $10 and many still pay nice dividends.

As money on the sidelines continues to try find stocks that haven’t already been propelled to what many consider unsustainable prices, they may also begin pushing up the oil and gas, solar and various alternative energy stocks like coal and uranium. Here, too, clear bottom reversals have been formed and stocks are about to break, or have broken, out (see “Mysterious Happenings in the Oil Patch” and “SOLR: A Winner When Clean and Alternative Energy Heats Up“). Whether its part of the weak-dollar trade along with precious metals, energy stocks of all sorts (including the oil service stocks) are starting to heat up again.

Even as the market edges closer to a consolidation, a much needed midstream pause, there are still stocks that could have room to grow.

September 29th, 2009

SOLR: A Winner When Clean and Alternative Energy Heats Up

Thomas Friedman had an excellent piece in Sunday’s New York Times Editorial Section entitled “The New Sputnik” in which he wrote:

“future historians may well conclude that the most important thing to happen in the last 18 months was that Red China decided to become Green China….when China decides it has to go green out of necessity, watch out. You will not just be buying your toys from China. You will buy your next electric car, solar panels, batteries and energy-efficiency software from China…..Well, folks. Sputnik just went up again: China’s going clean-tech…..China is focused on low-cost manufacturing of solar, wind and batteries and building the world’s biggest market for these products.”

The editorial was intriguing and prompted me to look at the sector and I find that the alternative or clean energy groups have lagged the general market but appear to be on the verge of a breaking out. You can get a sense of how the group’s been doing through GEX, the Market Vectors Global Alternative Energy ETF (click on image to enlarge):

As beautiful a cup-and-handle formation as you can ever hope to see. Moving averages have turned up and are about to cross the lagging 300-day moving average as volume trends, as measured by OBV (On-Balance-Volume) is also trending higher. Stocks comprising this ETF are a globally diversified group of companies engaged in the production of alternative fuels and/or related technologies.

Another group of companies in the field, those involved in solar energy, are included in KWT, the Market Vectors Solar Energy ETF (click on image to enlarge):

You could call its reversal pattern as a cup-and-handle (dashed red lines) also or as a head-and-shoulders; regardless, it’s clearly a bottom that’s building towards a breakout. The volume patterns in this chart aren’t as compelling so any increased volume associated with a price move above the neckline would be compelling.

These are only two of many ETFs covering various aspects of the space (PWND for wind, TAN for solar, PBW for clean energy, PZD for clean technology) but one place to begin is at the beginning of the pipeline, the manufacturer of equipment for making silicon wafers, SOLR, GT Solar Int. (click on image to enlarge):

SOLR was a 2008 IPO but one can already see clearly a symmetrical triangle consolidation forming in its limited public trading. When the solar and alternative energy space begins to heat up again, which it looks like it might soon, SOLR could be among the winners. To avoid sitting with some “dead money”, I’d add the stock to my watchlist, waiting for a breakout move above 7.00, perhaps even 8.00, confirmed by higher volumes before making a commitment.

August 2nd, 2009

Where Were You At Obama’s Election?

That’s not intended as a political question but rather interest in your portfolio’s health since then. The reason for framing the question this way is because Friday was a watershed day: the market closed at 987.40, nearly the identical level it was on November 4, 2008, Election Day, or 1005.75. It closed up 39.45, or 4.08%, from the 966.30 pre-Election close and has not been as high since.

After careening down since last labor day, through the Lehman bankruptcy and the Merrill Lynch acquisition, market psychology was temporarily bolstered over the succeeding weeks by announcements of the G-7 meeting and decision for a coordinated effort “to combat the crisis including the use of ‘all available tools’ to support key institutions and prevent their failure.” (If you are a masochist and want to relive those awful days, click here for an excellent timeline of all the gory details assembled by the St. Louis Fed.)

When you look at those two Index closing levels, you might think the last 9 months has been a boring, flat market. Au contraire, my friends. There’s been the equivalent of a bear market with a 32.73% decline to March 9 and a booming bull market with a 45.96% recovery since March in between. How did your portfolio perform over the same period. Having an average 40% in cash over the past nine months, my portfolio has gained only a disappointing 3.5% from last Election Day, net of dividends, commissions, interest, gains/losses and additions/withdrawals.

So for me, and perhaps some of you, the game is just beginning again. I can drool at all the profits that could have been made if only I had been less fearful and jumped back into stocks in a big way soon after the bottom (see March 19, “The Debate is Settled: The Market Has Hit Bottom“). I sought a safe haven, found it in cash but may have stayed there a bit longer that I should have.

As an aside, remember the Coppock Curve, Mean Reversion and MTI Indicators. I last checked in on them on May 1; two months later they look even more accurate at predicting the bottom. Coppock got it right again as the Curve has clearly trended up since May:

And the Mean Reversion Indicator? It’s still eerily similar to the path off the 1973 bottom (as a matter of fact, see the predictions of May 1 for a July close of 999.60 vs. an actual of 987.48). I wonder how long that parallelism will continue:

Finally, the MTI gave an “all-clear” signal on June 1 when the Index crossed the 200-day Moving Average. But that’s all history. Where do we go from here? I focused on all the money that’s parked on the sidelines needing to be invested as a possible catalyst for further market appreciation. “Z”, a loyal reader, recommended the following references as support to this notion: “Six Good Reasons to Like Stocks” from Barrons on August 3:

“There will certainly be a ton of buying power available once any bear conversion takes place. Cash holdings amounted to about 95% of the value of U.S. stocks at the end of the first quarter. Paulsen argues that given the current environment of inflation and interest rates, this ratio of cash to market cap should stand at around 50%. That would leave, by his reckoning, nearly $5 trillion of cash currently sitting on the sidelines available to push stocks markedly higher.”

and “Parked cash hoard: Fuel for further stock gains?” from Fidelity Investments on June 22 (the numbers are different but the conclusion is the same):

“Although investor cash levels have fallen from their record high in March, their value is still equivalent to about 40% of the entire U.S. stock market. This level of cash—as a percentage of what it could purchase of the overall stock market—remains much higher than the 27% peak rate seen during the 2000-2002 bear market, and well above the historical average rate of 16%….the cash stockpile on the sidelines remains so much larger than it historically has been that it would only take a smaller percentage of stock market re-entrants (relative to past cycles) to provide a significant boost to stock prices.”

So where should we look for stocks to lead the next leg up. Which stocks were involved in the Bull Market of Spring 2009 and which ones might take us through the end of the year?

More than half the stocks in the Telechart database, 56.3%, were higher this past Friday than they were on Election day. But what was most amazing is that the sectors up the most are those you wouldn’t necessarily expect, like retailers. As Bob Doll of BlackRock calls it a “relief rally” where investors said to themselves “Maybe this isn’t another Great Depression, and I’m underinvested in equities — I have to participate”; the speculated on the stocks that had been hit the hardest. Paul Lim, in today’s NYTimes, interviews analysts who rationalize that large caps with good fundamentals will support the next leg up.

I’ll go with the laggards since Obama’s Election: Banking, Real Estate, Transportation, Energy, Chemicals and Consumer Durables. That’s close to 1000 stocks of which many have formed beautiful reversal bottom patterns they’re about to break above. I’ll post a spreadsheet for you tomorrow.