Uncle Buck

I have been saying for almost 2 years since the initial breakout of the dollar in late 2014 that it is poised to go higher, much higher.  After peaking in March of last year from the first labeled breakout in the chart below, the dollar has been in a massive, multi-year horizontal consolidation waiting for the impetus to escape its clutches.  Apparently Trump’s the election was what the doctor ordered as last week it found massive escape velocity and vaulted out of the rectangle.

While the first upside target is only about 8% higher to ~108, the implications on the rest of the markets are enormous. Emerging market stocks and bonds, US stocks, commodities (including oil and gas), precious metals among other all have historically been negatively correlated with the dollar and as such struggled (and some mightily) as it rises. Because correlations do not always hold, the question investors need to ask themselves is will this time be different?

Regardless of the answer, Uncle Buck is signaling it’s moving higher and investors would do well to keep a close eye on their investments. Strong currency moves, especially in the world’s reserve, can have nasty implications for those caught unaware.   

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.

Leaving the Island

An Island Top, one of the most reliable patterns, occurs when a upward trending price "gaps" above a specific price range and then is confirmed when the price "gaps" down below to the original range. That “island” that is created can be made up from one day or a cluster of days (formed by several bars rather than one) which is a much more powerful signal. The island cluster would look something like this example:

With that in mind, below is the chart of the 20-year Treasury bond ETF, TLT. As you can see, TLT was in a confirmed uptrend and gapped up on June 27 and spent the next 58 trading days above the gap (encompassed within the red box). Last Friday, Sept 9, you can see price gapped below the box and through the up gap of June 27, creating an island.

Island tops have an historical success rate of 77% with an average decline from the successful formations of -21%. While nothing is guaranteed, this pattern's high probability outcome if validated with follow through in the next few days, the market’s concomitant rise in volatility and poor seasonality is a warning that bond holders are likely in for some near term pain

Solar Flair

As I evaluate solar technologies and vendors for an installation in my home, I was interested to see the shift in US electricity generation in the first half of the year. It’s hard to believe that just 5 years ago coal had a 40% share in power generation. The relentless cost declines, government subsidies and capacity increases for both wind and solar are now very much a part of coal’s current declines. Combine that with the learning rate of renewables should add further downside pressure on coal, estimated to fall to the low 20-25% with wind and solar picking up the slack for a combined 15% by 2020.

The technological advances have pushed efficiency's into the low 20% making solar installations nearing a 5-6 year ROI. While solar for the home becomes more cost competitive and an increasingly better ROI, you can’t say the same for solar stocks. TAN, the solar ETF is down 90% from its inception date.

For now and until things change most of your eco-friendly investment dollars appear to be best utilized in your home rather than your portfolio.