Rotation

There was some rotation out of bonds and into stocks since the election and there has been some rotation within the stock market itself. As you would expect the high yield investments (REITs, utilities, consumer staples) have all underperformed as long bond rates have spiked higher. The bond market lost more than $1T (yes, that is one trillion dollars) last week.

It appears as if money managers and investors are setting up for what they believe will be the new winners once Trump takes office. Materials and other inflation/growth vehicles were on an abbreviated week tear. Technology, the past 7 year darling could get out if its own way as it was lower in spite of the post-election rally. The broader stock market shifted into a lower gear for the time being, having lost the support of its most influential sector and most of the influential momentum stocks.

Things are a changin’

Here’s what I want you to take away from the week that was. In fact, if you remember nothing else, remember this: Markets stall or sell off on uncertainty and they rally hard on certainty. Markets like answers. They don’t like President Trump any more or less than they like President Clinton.  They will adapt. Will you?

Who'da Thunk?

As a follow on to what Mel posted yesterday regarding market performance after elections, I thought I would add a different cut at the data. From both sets of data it becomes crystal clear to see that the markets will definitely, for sure, without a doubt …. go up … or down. 

Very interesting data but I find nothing in it to provide an edge to make money. As we wait on the results that will determine the fate of the Western World (said with tongue firmly planted in cheek), I found the following article to be an incredibly interesting discovery, if true. Regardless of your position on global warming what they have be a solution to two problems 1) our ability to reduce CO2 (and therefore our effect on the environment), and 2) a virtually unlimited supply of energy.

 Copied from Popular Mechanics Magazine:

Scientists Accidentally Discover Efficient Process to Turn CO2 Into Ethanol

The process is cheap, efficient, and scalable, meaning it could soon be used to remove large amounts of CO2 from the atmosphere.

"Scientists at the Oak Ridge National Laboratory in Tennessee have discovered a chemical reaction to turn CO2 into ethanol, potentially creating a new technology to help avert climate change. Their findings were published in the journal ChemistrySelect.

The researchers were attempting to find a series of chemical reactions that could turn CO2 into a useful fuel, when they realized the first step in their process managed to do it all by itself. The reaction turns CO2 into ethanol, which could in turn be used to power generators and vehicles.

The tech involves a new combination of copper and carbon arranged into nanospikes on a silicon surface. The nanotechnology allows the reactions to be very precise, with very few contaminants.

"By using common materials, but arranging them with nanotechnology, we figured out how to limit the side reactions and end up with the one thing that we want," said Adam Rondinone.

This process has several advantages when compared to other methods of converting CO2 into fuel. The reaction uses common materials like copper and carbon, and it converts the CO2 into ethanol, which is already widely used as a fuel.

Perhaps most importantly, it works at room temperature, which means that it can be started and stopped easily and with little energy cost. This means that this conversion process could be used as temporary energy storage during a lull in renewable energy generation, smoothing out fluctuations in a renewable energy grid.

"A process like this would allow you to consume extra electricity when it's available to make and store as ethanol," said Rondinone. "This could help to balance a grid supplied by intermittent renewable sources."

The researchers plan to further study this process and try and make it more efficient. If they're successful, we just might see large-scale carbon capture using this technique in the near future."

Electoral Overload

336 stocks are down more than 20% for the past month. Only 36 are up more than 20%

The SP500 made it nine sessions in a row of declines on Friday.  The first time in 36 years. But it is only down 3% over those 9 days, unlike the previous occasions which saw a drop of -7% on average. This shows relative strength..  In the past 86 years, there have been 22 occasions of 9 down days.   Six months later SP500 was up 74% of the time with an average return of +9%.  For 12 months, a rise of +14%. The average loss was -7%. These down streaks have historically been good buying opportunities, Will it be this time?

Sentiment says we are getting close to a bounce as the boat is over-crowded on one side.

Recent market gyrations are a byproduct of the uncertainty around the election. In two days it will be over and only then are we likely to see what hand Ms. Market is playing. Until then, it’s all noise.

October Charts on the Move Video

The markets are at a crossroad and looking very heavy and susceptible. The right catalyst (the election results?) could be a set up for a big move in either direction. Short term downtrends and break of critical support are fighting with positive seasonality. Which one wins only time will tell. Either way, active investors need to be nimble here. In my video below i share what i am looking for.

https://youtu.be/vOV0E6Z7MrQ

Mind the Gaps

I often mention gaps in price movement but have never done an example post  … until now.  In my 9-28-16 blog post Beast Mode I wrote about the consolidation occurring in ACIA stock. As is always the case with consolidations there are only two eventual outcomes, one bullish and the other bearish. I wrote

The stakes and return on this investment is big so it’s important to get it right. For me a close and hold above prior $128.73 highs is the confirmation I would be looking to go long. If, on the other hand, price closes and stays below the red horizontal support line at $102, I would expect a quick and violent decline back to fill the open gap below

Below is a re-annotation of the original chart I posted cleaning up some of the noise and making the gap I was referring to more apparent.

View fullsize

A gap is an area on a price chart in which there were no trades. Normally this occurs between the close of the market on one day and the next day's open. Lot's of things can cause this, most of the time it is news driven such as an earnings report coming out after the stock market has closed for the day. If the earnings were significantly higher than expected, many investors might place buy orders for the next day. This could result in the price opening higher than the previous day's close. If the trading that day continues to trade above that point, a gap will exist in the price chart. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement.

There is an old saying that the market abhors a vacuum and all gaps will eventually be filled is why in my post I said

If, on the other hand, price closes and stays below the red horizontal support line at $102, I would expect a quick and violent decline back to fill the open gap below

The chart below is that of ACIA but brought up to date as of Friday’s close.

The 30% decline in less than 3 weeks fits my definition of a violent decline. While I would expect at least a small period of consolidation after filling the gap, momentum is still falling and price is just beginning to reach oversold conditions as such it looks like ACIA has more downside. If you took the short trade as mentioned in my original post, you have a handsome profit and this is a level I would be taking at least half off the table. I very much like ACIA long term and will likely find a place for it in our portfolios but that won’t occur until all selling has exhausted and we begin a new uptrend.  When and at what level that will occur, only time will tell.

The take away here is gaps are a significant technical development in price action and chart analysis, provide important clues about potential future support and resistance levels and as such should hold a place near and dear to all investor’s hearts.