From the desk of Steve Strazza @sstrazza
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.
According to a recent article from the Wall Street Journal:
Prices for both new and used cars are high. The surge is driven in part by the global chip shortage, which is straining new-car inventories. This has led more consumers to shop the preowned market, increasing demand for used cars and eroding dealer inventories.
A little over a month ago we published a post discussing the strength in the Nasdaq Global Auto ETF $CARZ. The index is designed to track the performance of the largest companies in the automobile manufacturing industry. These stocks had been performing quite well as it is a seller’s market out there, but have corrected over the last few months.
We even discussed the relative strength we’re seeing from the new online auto retailer Carvana $CVNA in yesterday’s 2 to 100 Club Report.
But today, we’re going to reveal last week’s Mystery Chart and focus our attention less on the traditional automakers and more on the burgeoning growth industry of autonomous and electric vehicles as this is where the strength has been for the automotive industry of late. Let’s drive right in. Get it…?
As always, thanks to everyone who participated in the Mystery Chart post. Most of you wanted to buy in anticipation of a breakout, or wait for a decisive move first and then get long. Either way, the responses were bullish, and our position is too. Here’s an updated look at the chart – it was the Kraneshares Electric Vehicles ETF $KARS:
We’re looking at a strong primary uptrend followed by a prolonged period of consolidation which began earlier this year, right around when internals peaked for the broader market.
Last week when we put out the mystery post, KARS was attempting to break out of this continuation pattern but was rejected at a logical level of overhead supply. Fast forward to today, and we’re right back at those February highs again.
One of the characteristics favoring the bulls here is that momentum has remained in a bullish regime during this corrective phase as the daily RSI-14 never hit oversold conditions. On the other hand, we’ve seen momentum consistently register overbought readings which is a classic characteristic of strong uptrends.
We want to be buyers of strength in KARS if/when we get a decisive move above 48 with a 1-3 month target of 58.
And when it comes to finding alpha within the automobile industry in general, EVs look ready to reassert their old leadership relative to the traditional automakers. Here’s a look:
After about a year and a half of consolidation, KARS looks ready to resolve higher relative to the Nasdaq Global Auto ETF, CARZ.
The primary trend is up. The 200-day moving average just flattened and is now curling higher. And momentum recently shifted into a bullish regime.
If we’re above 0.82 in this ratio, we want to favor the electric and autonomous vehicle stocks over the GMs and Fords of the world.
One way we can get a feel for the future direction of KARS on an absolute basis is by diving into its top components and seeing how they are faring on an individual basis. As always, we’re also keeping our eyes peeled to see if there are any favorable risk/reward setups to capitalize on as the ETF looks poised to make another leg higher.
After digging into the holdings, there are two important aspects worth highlighting.
First, there are a lot of semiconductor and tech names in here which are key suppliers to the industry but do not exactly represent the Electric Vehicles manufacturers themselves. This really sets it apart from the CARZ ETF, which sticks to the automakers themselves – regardless of whether they manufacture mainly EVs or traditional gas-powered vehicles.
The second thing we noticed is that no single stock or handful of holdings dominates this fund. You can see the largest holdings listed in the chart above. After those top few, there aren’t any with much more than a 3% weighting.
But as always, Tesla $TSLA is a top holding in both CARZ and KARS – in addition to many other large-cap indexes these days, due to its mammoth market cap. We’d be remis to discuss the industry without reviewing the chart of TSLA so here it is:
The primary trend is still higher but price has been chopping around in a range and consolidating all year. Considering the stock rallied more than 300% from its breakout in July of last year to its peak in January of this year, we’d argue this is a healthy and welcomed digestion of those gains.
If you want to trade this messy range, have at it. As long as we’re above 600 the structural trend remains intact. And with price currently near the lower boundaries of its consolidation pattern, the risk is to the upside toward the former all-time highs near 920.
Now let’s get into some trade ideas in the space. In line with the mixed market conditions we’re confronted with, we have both a long and a short.