From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
A revolution in energy is upon us.
Some like to call it the green revolution or the transition to renewable and alternative energy. How you want to label it isn’t what matters.
All we care about is that the landscape for energy and how we use it is changing dramatically.
As the world quickly changes and the demand for energy expands, how we generate and utilize it, as well as the natural resources we rely upon to do so - will inevitably change, and adapt to this new environment.
Of course, we’ll continue to burn coal, crude oil, and natural gas for the foreseeable future. But there are other pockets of strength arising in areas that could very well be secular growth trends for decades into the future.
We’re always looking to identify these new arenas of growth. Here’s the way we see it...
With strong prospects for global growth and economic expansion in the cards, additional energy sources will need to be created so that supply can meet the growing demand being placed on an already antiquated and stressed infrastructure.
I've personally been in the market for a new or used car for a few months now, and let's just say it hasn't been easy. The entire supply chain has been disrupted, and the market has been unable to keep up with demand.
I finally made the decision to stop my search until the supply crunch for semiconductors and other critical inputs alleviates. I could be waiting a while though, as this has already been going on for about a year. Thankfully, I live on an island that is only 8 square miles, so my bike or feet can take me wherever I need to go in the meantime.
Hello, this is the nurse from camp. Your son had an accident. He's fine but I need to talk to you…
I quickly called back to get the details. I was on the road just a few minutes later, making a nighttime trip to a rural emergency room 100 miles away. As it turns out, my son suffered a broken arm during a relatively run-of-the-mill game of chase that involved jumping across a small ditch and not quite sticking the landing. He was doing what we sent him to camp to do.
A couple of hours alone in the car gave me plenty of time to think about all types of risks and how they are unevenly distributed across both space and time. Accidents can really happen anywhere. Still, we have nurses at summer camps, not in our living rooms. Broken arms and other more minor injuries are more likely at the former than the later.
What was once peanuts, the total market cap of this asset class achieved the $2T milestone at its peak earlier this year.
It's hard to believe, but there are literally several thousands of individual coins and tokens, and the list keeps growing every day.
Not only can we express our opinions in the coins themselves, but there's an expanding list of pure-play stocks, ETFs, and funds being offered to investors, too.
So today, we'll dive into some of these offerings, what sets them apart, and ultimately, how we're approaching these vehicles in the coming weeks and months.
As many of you know, something we’ve been working on internally is using various 'bottoms-up' tools and scans to complement our top-down approach. It's really been working for us!
One way we’re doing this is by identifying the strongest growth stocks as they climb the market-cap ladder from small, to mid, to large - and ultimately mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B) they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn’t just end there. We only want to look at the strongest growth industries in the market as that is typically where these potential 50-baggers come from.
Some markets have been choppy for longer than others. Most of the Nasdaq has been a chop fest since February, and so have Emerging Markets. Now since about May a lot more of the cyclical and developed markets have taken a hit.
You can see that in the Equally-weighted S&P500 Index:
Breadth downgraded to neutral as trends in the US and globally weaken
Absence of breadth thrust regime weighs on a market struggling for direction
Reducing equity exposure in Cyclical and Tactical Opportunity portfolios
The divergences between what has been seen in the popular averages and what is happening beneath the surface have become significant enough that we have moved breadth to neutral in our weight of the evidence framework. This leaves the scales tilted away from opportunity and toward risk.
The most recent breadth thrust regime expired in early June and since then the percentage of global markets trading above their 50-day averages has fallen from the upper 80’s to now just 20%. One-third of the markets are not even above their 200-day averages. US industry group trends have also faltered. The percentage trading above their 10-week averages is breaking down while the percentage making new 13-week lows is breaking out.
In the recent All Star Charts monthly conference call, one of the themes that were repeated often was that stocks are in a "hot mess." In other words, many sectors are a bit stuck in the mud, offering very few signals or hints on the next direction. And when stocks aren't offering us many clues, the likely conclusion is that we'll go sideways for a while. It might be choppy, but the net result will be a whole big bowl of nothing.
With that in mind, it pays to look for opportunities to take advantage of stocks or ETFs that have somewhat elevated implied volatilities (meaning options are richly priced) and put on delta neutral credit spreads. We already did this earlier this week, and we're going to continue with another similar trade in a wildly different ETF.
The strongest of assets will not only do well on an absolute basis, but they also tend to outperform their alternatives. In the case of Bitcoin, not only are we pressing against new absolute lows, but we're seeing lower lows relative to other non-crypto-related assets.
Relative strength is one of our primary tools as technicians.
The easiest way to go about doing this analysis is through relative ratio price charts.
Simply put, it's a measure of a security's performance relative to another. For this example, that's displayed as being long Bitcoin in the numerator, and short an equivalent amount of US Dollars in the denominator.
When the ratio is rising, the numerator is outperforming the denominator. And when the ratio is falling, the numerator is underperforming the denominator.
Not only does this type of analysis allow us to evaluate the risk appetite of investors, but it also ensures we're always positioned in the right areas.
What we do here is take a chart that’s captured our attention, and remove the x and y-axes as well as any other labels that could help identify it.
This chart can be of any security, in any asset class, on any timeframe. Sometimes it’s an absolute price chart, other times it’s on a relative basis.
It might be a ratio, a custom index, or maybe the price is inverted. It could be all three!
The point is, when we aren’t able to recognize what’s in front of us, we put aside any biases we may have and scrutinize the price behavior objectively.
While you can try to guess the chart, the point is to make a decision…
So, let us know what it is… Buy, Sell, or Do Nothing?
