A Picture of Perfection

VALE, a Brazilian mining conglomerate, got absolutely pounded over the past 5 years as it lost almost 90% of its value. Chalk up the decline to a number of factors including the fact that Brazilian stocks have been out of favor and being a commodity play, it tends to perform best in inflationary an environment. The combination of the confluence of dollar strength, Brazilian political disorder and deflation was a toxic brew.

But a funny thing happened earlier this year. Why? I cannot tell you but you can see in Vale’s chart below, price bottomed. And subsequent movement has created a very interesting and potentially extremely profitable investment setup. I have labeled what is an almost perfectly symmetrical inverse head and shoulders bottoming pattern. What makes it so attractive is 4 fold 1) the left shoulder and right shoulder formed at almost the exact same price level 2) the neckline is horizontal 3) volume patterns confirm the pattern and support further upside 4) momentum has confirmed a switch from the bearish to bullish zone. And while those technical signals are about as perfect as it gets, what really has my piqued my interest is the fact it broke out of the pattern last week indicating an upside target of more than 70%. And potentially even much more … but let’s don’t get ahead of ourselves.

There is no doubt VALE is a volatile stock and any upside movement will be met with a ton of overhead supply making the move higher a bumpy one, especially as it gets to the $11 level. In spite of that, with the right management plan, VALE is a stock worthy of consideration as it more than exceeds a 3:1 reward to risk ratio requirement which don’t present themselves all that often.

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.   

Good Things Come in Small Packages

What a difference a week makes. In last month’s video I was talking about US small cap stock being rejected and rolling over at prior highs which was not a good sign for US stock bulls. I lamented “In bull markets you want to see small cap stocks leading” not lagging. Then Trump happened. Every talking head, prognosticator and market pundit was wrong. This is a great example (and one to memorize) of the markets will almost always do the thing that people expect least.

Notice in my weekly charts of the US small cap index, IWM, below, spiked up on huge volume and blasted right past the past troublesome (blue horizontal) resistance area. Notice also how price formed and inverse head and shoulders bullish reversal pattern which has a projected upside target in the 155-160 zone above, some 30+% higher.

Not only is this bullish for small caps but also for all US stocks in general. As always there will be some laggards but this sign combined how the market is trashing bonds, is telling us we may be on the verge of seeing that shift from public to private asset investing finally begin its take off. 

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."