Down & out vs. Down & opportunity

April 16, 202016 Comments

A few sectors, namely retail food industry and companies having anything to do with remote work access have done well in this free-fall market. Beyond those areas, pretty much everything else is under water. Some sectors are more or less in line with the markets. So, that means most stocks or sectors are down about 18% right now. This, after recovering from being down more than 30% at the low of March 23.

Leaving the few winners noted aside for a moment, lets look at the masses. While the market has recovered about half of its peak to trough meltdown, some sectors have not had that nice recovery rally. Clearly, such sectors or stocks have under performed for a reason. Expectations of longer recovery periods, longer termed negative impacts on their businesses, or outright failure will suppress these sectors or stocks from participating in neartermed positive moves.

Sometimes, the market guesses incorrectly about a companies prospects, though. Sectors or stocks are nearly annihilated as stories circulate as to why that sector or stock will never return. But some do return – and make huge profits for those willing to risk the trade!  For example:

  • In 2000, the NASDAQ (tech heavy at the time) peaked at 4696. By mid-2002 it had declined 75% to 1172. Yikes!!!! But…3 years later in 2005 it had risen 140% back to 2859 from that low level of 1172. Its recent peak was 9150 – almost a 9-bagger from the bottom in 2002.
  • Utilities were more than halved between 2001 and 2003. They doubled (fully recovered) two years later by 2005, and have doubled again since then. They were also cut by 2/3rds between 1962 and 1974, only to recover (150% gain) within a decade.
  • In 1980, silver fell from $36 to $6 just 2 years later in 1982 (you read that right, an 80% drop!), ultimately declining to about $3.60 by 1993! By 2011 it was peaking again at $48!!!!…You do the math on that trough-peak profit! This 13-bagger took quite a bit longer to reap the rewards, but…wow, it would’ve been worth the wait!
  • Oil – chart below, has been a real trading gem. Standouts included the 1997 peak at $25 to the $11 trough in late 1998, only to see $33 – a triple from the bottom- just two years later in 2000. The other one that impresses me was the “peak oil theory” oil bubble of 2008 that saw a $140 to $41 decline. That was followed by a 270% return within 2 years as oil retraced back to $113 by 2011. I participated in some of that rally and made off pretty well.

  • Finally – a recent example that ValueTrend took a piece of recently. We bought Cameco in our “ValueTrend Aggressive Strategy” on a potential rebound in Uranium from an oversold position. I noted this opportunity back in July of last year on this blog. Chart below.

Down and out candidates of today

The one thing you want to avoid buying within any type of recessionary environment is a sector, or a stock, that is notoriously over leveraged. For that reason, despite energy’s attractive looking dump-and-base action of late, you probably want to pick only the least-leveraged stocks in the sector. As such, perhaps a sector ETF is NOT the way to play this hurting sector. Nonetheless, here is the sector chart to give us an idea on that base setup. The XLE chart needs to break $36 to establish a base-breakout.

 

The US Financials sector is basing. A break of $23.50 on the XLF chart would fill the gap and move the sector back into a positive position.

 

Industrial stocks have been hit hard. We sold the sector a while ago, but now the sector is showing signs of basing. Another gap in the high-$60’s would likely be filled if we see the current mid-$60’s level base break.

 

The problem with materials-ETF’s is that they include the precious metals, which are mixed in with the industrial metals. While that mix sure did help to limit the downside in the ETF’s, they don’t reflect the truly beaten down segment within the metals sector. The industrial metals sector, which includes aluminum, copper and zinc, has been hammered. Is there an opportunity for an oversold recovery coming? Peaking in 2018 at $19/share, the DBB ETF now sits at just over $12. The recent selloff drove it down from $15 to current levels. Early signs of a base might suggest a rebound into that $15 zone. We shall see.

Last but not least, lets take a look at the Canadian banking sector. This sector, due to the Canadian economies reliance on energy and an energy-enemy at the Federal Government level, had been treading water from 2017- 2020. The pandemic pushed the sector over a cliff, and it hasn’t recovered as sharply as the majority of stock sectors here or in the USA. You can see it struggle to base at its old low’s in the $20-$23 area.  If $24.50 is broken, you will probably see that gap fill and the ETF move back into the high-$20’s. It really depends on how much support the suddenly-awakened Canadian government will provide the sector. The carbon tax hike wasn’t such a help. Keep an eye on the base for signs that something is changing for the banks and the Canadian economy. This one is a long shot, and I’ve ranted before on the reasons why I am worried about the Canadian economy.

Post your Down& out rebound ideas below

I’d love to read your discoveries on bottom fishing candidates.

16 Comments

  • Thanks Keith. I think another reason the Canadian banks (and economy) in general is worrisome, is the housing situation. The economy was not great before the oil price war or pandemic. One reason some regions like Toronto and Vancouver were shielded was due to real estate valuations. Personal debt is off the charts in these two cities and the banks are going to get hit when there is a price adjustment.

    Bloomberg article today talks about this:

    https://www.bnnbloomberg.ca/once-safer-than-gold-canadian-real-estate-braces-for-reckoning-1.1422032?spUserID=MjQ3MTk5NjI4MTYS1&spJobID=1683681801&spReportId=MTY4MzY4MTgwMQS2&spMailingID=32132165

    Reply
  • Might the S&P be setting up a Head and Shoulder pattern ( or a megaphone-as per an earlier blog) ?

    Might we be heading for S&p 2000?

    Reply
  • Based on the mortality numbers going forward government’s will have to shut down the economy each flu season. Why? Because influenza kills between 30 and 70000 per year in America. Covid has only killed some 30000 in the USA

    Reply
    • As I understand it Dave (and this comes from an insurance analyst I spoke with)–the difference is in the fact that you have a smaller chance of dying from the flu because of hundreds of years of adaptation by our bodies to it, thus recovery is more likely. Right now, assuming today’s announcement of Gilead’s inoculation is way ahead of its actual distribution, or its just another day of hype, we are not yet able to control the spread. Yes, the common flu has a head-start in its total numbers – but given that there is no “COVID-shot” that you can get your doctor to do as with the common flu, that total number of affected people can grow exponentially without isolation tactics–until a vaccine is widespread. That, and we are not “naturally adapted” to fighting this particular virus (yet) as a species, at least to the same degree as the common flu. Mortality rates differ between the diseases. So its true that more die from the common flu, but not the same percentage. Thus, the difference. At least from what I understand.
      All that said, I remain a humble chart watcher, and a semi-fast old guy cyclist. That’s about all I’m actually capable of offering too much insight on!

      Reply
      • Yes, these kooks crawling out of the woodwork with their “more die in car crashes” etc. need to stop.
        Car crashes, seasonal flu, etc are irrelevant – this thing is EXPONENTIAL, super-contagious, nobody has immunity and Trump’s plan for opening up America will be a disaster of epic scale despite his being a self-proclaimed genius.
        So turn off infowars and foxnews and “Dr” Phil and all the other garbage out there and #StayTFHome…patience,grasshopper

        End of rant, thanks for listening.

        Reply
  • Hi Keith,

    I’ve been watching two sectors closely and have made significant capital allocations to them recently. One deals with home health care in the US (of which there are two US companies trading on the Canadian exchanges of particular interest to me) Secondly, I’m watching two renewable natural gas (RNG) companies. Both groups appear to both be technically rebounding, although they are small caps. The latter group has recently reported minimal fundamental changes secondary to the pandemic, with the former updating a substantial boost in revenue expectations from the “newly-sick” respiratory patients from COVID.

    Chris

    Reply
  • The easy gains have been made. Looks to be time to lighten up especially in names like amazon. I think it will be tough sledding rest of the summer now

    Reply
  • Also there is a completed small ABC up formation on the daily S&p which was the extreme oversold bounce. I expect it to start rolling over this week or next and think it will have a hard time getting over the 200 day MA. I also hear a lot of people who don’t normally talk about the market in the past few days now talking about it. Could be a sign they were a bit late buying

    Reply
    • Funny you mention the people speaking about the market who normally don’t. That is one of my “qualitative” ways to get a feeling about the market – beyond the quant stuff I look at.

      Reply
      • Yes it’s always fun to hear people that don’t normally follow markets make comments. Of the few I have heard lately all are the same comment they heard how much stocks have went up recently.

        Reply
        • Dave if you don’t get our emailed newsletter–you should subscribe–I wrote a bit on that phenomenon today–it will be published and sent to subscribers either late today or tomorrow.

          Reply

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