Ask me anything answers: Part 1

Wow! Once again-  great to see so many questions come through for these semi-regular “Ask me Anything” blogs. AMA for short. Lots of variety through lots of questions – so I expect that my “answers” will be posted over 3 blogs, of which this is the first. Craig is working on a few of the questions that were a little less focused on TA. Together, we will do our best to get through them all. As  always, I try to stick with the questions that might appeal to the broadest audience… I also tried to combine questions if the general topic was suitable for combining. So, lets get at it!

Oil & producers

Michael asked about my opinion on XEG (iShares Capped Energy ETF) representing the producers. Meanwhile, Wendy asked if we at ValueTrend sold out of oil, having spoken a bit about that around a month ago. Did we sell out or do we still like oil?

First, lets take a very basic look at the energy producers chart XEG. I didnt bother adding the momentum indicators or the moneyflow to the chart. It doesnt take much of an imagination to know that this chart has gone parabolic of late. As such, you just KNOW that the momentum studies (RSI, stochastics, ROC, etc) are overbought. So be it. As we know, things can remain parabolic and overbought for a while – its hard to say when the party ends in such a security. But it will end.

My view is that the producers have a little left in them. But that huge wall of resistance (in XEG’s case) around $18 will certainly be a big factor for the ETF. At $14.50-ish right now, there is still decent upside left. But all parabolic stories end, and I would be hesitant to be overexposed as price gets closer to that target.

Important: keep in mind that many energy producers, like many of the juniors, the drilling and service companies, some of the pipelines and other outliers have significantly more upside than the XEG chart offers. I’d like to think that ValueTrend is in such names. But if I told you which ones we hold, I’d have to kill you (joking).

Ok, so what about oil in general, and have we been out of the trade – per Wendy’s question? Well, based on the above comments, note that we hold certain energy producers with (IMO) superior charts. It is clear that we are still in the trade based on that comment. What I actually said on March 7th was that energy stocks are getting stretched. Hey, after holding them for a double or more since our original purchase back in 2020, it is prudent to take some off the table. Especially given their overweight position in our platforms. We bought when oil was $40/barrel – and idiots (there is no other suitable word for it)  Biden and Trudeau were capping exploration and pipelines. We recognized the setup for inflation and oil shortages, and saw opportunity in oil to come by the obvious damage of political vote buying & ESG posturing. And the charts concurred. But now the market has caught on. So….We decreased our exposure from around 15% of the portfolio to about 10%. We are still in the trade. I do anticipate further reduction of the positions as the chart above (more importantly, the charts of our stocks) reach technical targets.

Remember the wall street adage: Bulls make money. Bears make money. But Pigs get slaughtered.

Agriculture stocks

BA asks for my take on agriculture stocks. He notes his interest in the various offshoots of that play, such as fertilizer producers, farm equipment and food producers.

My answer here is a bit like the energy response. We have been involved in the fertilizer trade since early 2021 – way before the market caught on. And yes, I have blogged on that subject back then. See? Ya gotta pay attention, folks. Fertilizer stocks like Mosaic (we bought another name) have tripled since then. The chart below is that of Mosaic (MOS). Note how first resistance was taken out, next target is about $120++. That’s nearly a double from here. So….load up the truck, right?

Well, perhaps not so fast. The problem here is that some of the recent movement has been absolutely parabolic. Ukraine is a big potash producing country, so thats added to the frenzy. But, parabolic is parabolic. Like with energy, we recently took some of our fertilizer position down a bit. We still hold it. But if a position becomes overweight by certain limits, we must reduce it. I actually explain how our system works for position management in my TA course available here. Bottom line with potash: we like it, but its getting pretty heady, so look for a dip sooner or later.

Regarding farm equipment, the issue here is like that of automobiles. Yes, we hold one farm equipment manufacturer. But if the cost of materials and the shortage of chips continue for a while, we do not expect neartermed super outperformance. It is, in our view, a longer view on world food shortages. But no ticket – no laundry. You can’t sell what you don’t have. The charts for Deere and Caterpillar (disclosure: we hold this) are certainly healthy. DE (below) just broke out of a consolidation, CAT is still in its consolidation but moving up. But they may just chug along at a decent but not overly impressive pace until things get easier on the supply chain. Our view is that of patience here.

As far as food producers, there are too many to pick from. But the bottom line with these guys is that they are consumer staples type stocks. They are typically lower beta, safer names. They have challenges, give that their raw costs on wheat, sugar, wages, etc are higher. So that hits profitability. However, they have been offsetting this problem to some extent via cost cutting – and passing the inflation on to the consumer. Checked your grocery bill lately? At the end of the day, the food producers are OK, but nothing to get excited about. We hold one small food producer position, and we have a consumer staples ETF. Again, I can’t tell you the specific names or I’d have to kill you. Its that secret! Both are producing fairly acceptable performance, which is not a bad thing considering the falling markets of late. Just don’t expect the food producers in particular to act like the commodity trade has (aka big gains).

 

Incorporating dividends into stock charts, ETF types

BA and David asked about incorporating dividends into price charts, and my view on that method of plotting charts. David also asked about currency hedged ETF’s and covered call ETF’s.  These are pretty straight forward questions and I’ll bang them off quickly:

First, I will cover stock charts – is a straight stock price chart better or worse than one incorporating the dividend? Well, I have blogged on this subject a few times. Here is a video I did addressing the subject recently. Bottom line: the point of Technical Analysis is to view investor psychology surrounding trends and prices (support resistance). For example, if a stock bounces off of $10 over and over, it means investors are motivated to buy there, and you should be aware of that should you be looking to buy that stock. If the price chart incorporates a dividend, it distorts that price.  Take a look at the Chemtrade (CHE/UN) chart below – which pays a high dividend. The black line incorporates the dividend. The red line removes the dividend from being added to price. This stock has had many dividend variations over the 20 year period illustrated. Note how the same stock appears to be two different stocks on the chart. This matters more with high dividend stocks like CHE, Canadian banks, utilities, telecoms etc. With stockcharts.com, simply put an underscore before the ticker to remove the distortion.

Regarding the ETF questions:

Currency hedged ETF’s are great if you can get them for countries (eg USA) who you suspect will have a relatively underperforming currency vs. the C$. The downside is a bit more cost for that hedge, and of course, if you turn out to be incorrect and the USD (in this case) goes up vs the C$. We utilize them if we want an ETF and we view the USD as underperforming. We analyze the currency charts before making the decision.

Covered call ETF’s also have additional costs over their non-covered call variations. But, they can add extra income to the investors cashflow. The downside (beyond cost) is that if you have a fast moving sector, the stocks are sometimes called by the options writers. The fund must then rebuy the stock – typically at a higher price. This distorts the returns negatively vs the non-covered call variations. But if you have a fairly benign performing sector such as utilities, they can be a good option. Low volatility sectors don’t see their stocks get called away so often.

Day trading

I will finish todays blog with a question by Lon on day trading. This will be quick. To start, I am not a day trader, and not the best guy to ask questions surrounding that mode. I am an intermediate termed trader, which in my world means I rarely hold stocks for less than a couple of months, and often up to a few years. Most of our trades at ValueTrend end up being held in the 3-9 month window. So, as you can see, day trading is not our “thing”.

Having said that, Technical Analysis can be applied to any chart timeframe. Lon asks me if there is a level of the % ATR (average true range) indicator that would help him identify tradable stocks for day trading. Honestly, I cannot offer advice here. FYI, this indicator doesnt give us trend indications. It simply measures price-bar swings and calculates the averages of those bars to come up with a reading of current volatility. Clearly, day traders might want to focus on higher %ATR, but I’ve never studied anything trying to identify that ideal level. I’d suggest you do some exploration via online day trading sites, etc.

Lon also asked if we trade leveraged inverse or bull ETF’s. Again, no. We have hedged the portfolio on occassion with single inverse ETF’s. Here is a good explanation from etfdb.com regarding the perils of leveraged ETF’s:

Suppose an investor purchases a leveraged ETF for $100.00 and it ends the day up 10% at $110.00 and the investor realizes a 2x profit of 20%. The next trading session, the leveraged ETF falls 9.1% from $110.00 to $100.00 and the investor realizes a 2x loss of 18.18%. While this doesn’t sound all that bad on the surface, an 18.2% loss on $120.00 amounts to $21.84, which puts the position at just $98.16. In effect, a loss is realized on what would have been a neutral position

 

Back with more answers this week

Based on the number of questions received, I’d anticipate at least 2 more blogs to get through them all. Possibly 3 more. So, if you don’t see your question answered on this or the next blog, don’t worry. Its coming.

quote-teal

2 Comments

  • I am confused. You say ‘If the price chart incorporates a dividend, it distorts that price.’
    So for best TA use price only chart to see investor motivation levels.
    You then advise to ‘underscore before the ticker to remove the distortion’.
    However, you use stockcharts.com charts with no underscore for your TA (ie: XEG, MOS, DE above).
    Please advise.
    David

    Reply
    • I tend to use the underscore to remove the dividend on the higher div stocks.

      Reply

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