High Risk, High Return Potential in Speculative Sectors

May 23, 2023No Comments

We’re going to talk about high risk, high return sectors today. I personally don’t get involved in a lot of this, but on occasion, within our aggressive strategy, we roll the dice and take technically attractive, high-risk, high-reward type plays. So I’m going to talk about a few that are kind of common as far as when people are looking at speculative opportunities, these names often come up.


So this is again, a conversation that is going to appeal to you if you have a speculative side to your nature. None of these ideas would be in any way appropriate for a conservative investor. Let’s start off with the good old venture exchange. This is the S&P TSX Venture Exchange. And you might remember I recorded a blog about a week ago and it was called Lots to Talk About and on that blog, I talked about how the S&P 600 Steel Cap Index in the US was diverging negatively against the S&P 500 Large Cap Index and that’s a sign of risk-off. In other words, markets are steering away from risk right now. In a previous blog I had talked about how junk bonds were also diverging negatively against the S&P 500.


Now bonds aren’t normally associated with stocks, but junk bonds in some ways are because they are another risk on play. What we’re seeing right now in the US markets is a lot of risk off happening. In other words, people moving out of the small caps, people moving out of the venture-type stocks and other such type of securities in favor of more safety. So junk bonds wouldn’t appeal to anyone seeking safety. Here in Canada, the Venture Exchange, you can see it’s not had so much of a risk off type of view. It’s more of a consolidation pattern and you can even see here that the accumulation distribution line is showing a little bit of an upwards slant. In other words, there’s no money leaving this trade. So it’s something to be considered as far as the potential of the Canadian Venture Exchange versus say the US Small Caps. There’s more of a basing look to the venture exchange.


What I want to point out is that you don’t buy any security while it’s in a base unless there’s a big swing pattern, and we’ll be looking at one of those in a minute where you can trade the swings. You don’t buy a tight coil, you wait until it breaks out. If you are a speculative, more aggressive investor and you say, identified an ETF that has an exposure to the Venture Exchange, you might want to wait for the breakout. And by the way, I believe iShares has an ETF that reflects this index, but you can check on that. I know there are indexes that reflect this venture exchange out there. So one to keep your eye on, not necessarily one to be too excited about at this moment, but bases are good because they can be powerful. So let’s go to the next one, which is China.

Now this is the overall China Index, and what I want to show you here is that there is a bit of a possible bottom head and shoulders formation in the works, but in the meantime, there’s a little bit of support at the shoulder level. Now you might say no, Keith, because this shoulder is higher than that shoulder and it hasn’t been completed yet. Well, I want to just bring you to one specific stock that is a very high percentage of many China ETFs and indices, and that is Alibaba. You’ll notice the difference in this chart. The head is nowhere nearly as low and the shoulders are relatively equal. So this shoulder formation, it’s kind of a double shoulder, is coming in around $80 support and maybe $120 resistance. That’s a pretty nice trading pattern. So what ValueTrend recently did is we did not buy Alibaba, but we bought an ETF to get a little bit more diversification within our China play.

But we bought an ETF that has a fairly large exposure to Alibaba because we like this as a speculative play. Again, this is not a conversation for conservative investors where we think there’s maybe a play up to here. Now again, we don’t own Alibaba. We chose to invest in an ETF, but the idea is that if you are looking for a decent potential trade, you know your downside because if it breaks $80 you have to get out, you count your three days or so and then you get out. But your upside is fairly high and that would go for either Alibaba or the Chinese ETFs that have high exposure to Alibaba. So I just wanted to bring you to that chart. Back to the overall China index and you can see it’s similar but not quite the same. So, you know, choose your weapons, but I don’t mind this trade as speculative.


In fact, as I mentioned, we just bought in a small amount into a China trade. Now here’s one that lots of people were talking about over the past few years, not so much anymore because it basically got pretty hammered, but Bitcoin fell from a high of around 70,000 to a low of around 15,000. So that’s quite a spanking. But recently it’s formed a pretty nice little cup formation with a breakout at the neckline and this would be the handle. The handle’s returning to the neckline so you don’t want to see that broken, but if it can find support, I’d give it a bit of time to prove, but if it doesn’t move through that neckline, so through around let’s call it 25,000 to the downside, then it might actually have potential for a speculative high risk play to move higher. So Bitcoin is of interest to me as a speculative play, although we have yet to actually have ever entered into a Bitcoin trade at ValueTrend.


It’s just an interesting point to talk about. So for those of you interested in Bitcoin, maybe there’s an opportunity in the works. There’s an area that was very, very talked about just a few years ago, probably about five years ago when our beloved Prime Minister was elected and all the millennials voted for him so he would allow them to buy marijuana and you will see that just because lots of people are using the product, and that’s a fact, here in Canada there are marijuana shops pretty much on every corner, and if you drive around anywhere you’ll see them. By the way, some of the northern states have just started adopting that. I was driving through Michigan recently and there’s marijuana places everywhere as well. Not quite as prolific as in Canada, but it’s the same concept. So why is the stock or the index, I should say, this is the Horizon’s Marijuana Index falling like a brick?


It’s not getting very high. So the reason is because this is a sector and a concept that you’ll see a lot and you have to understand something. Just because everybody’s buying a particular product doesn’t mean it’s a profitable venture to the company. I’ll give you an example of Kraft Heinz a few years ago. Now Kraft Heinz has been in a pretty nice base lately and it’s moving sideways and it’s not at all bearish, but you might remember just a few years ago, Kraft Heinz was pretty darn bearish. It was in a free fall and the reason it was in a free fall was because even though people buy their products, Mac Cheese Kraft Dinner is a very, very big seller for them but their profits in making Mac Cheese and their salad dressings and all the other stuff that these folks make were the materials were getting very, very expensive to produce.


And they were also getting competition from no name brands, but it was more the materials of their production of their products such as cheese in their Mac Cheese recipe. So their profitability fell even though lots and lots and lots of people eat Kraft Dinner. Keep that in mind because that’s what happened in marijuana. Sure, there’s a shop on every corner, in Ontario anyways they’re all over the place, but nobody’s making any money selling this stuff because it’s really expensive to produce and it’s not as profitable as everybody imagined. So keep that in mind. Just because everybody’s buying it doesn’t mean it’s a good opportunity and marijuana has shown no signs of basing. It’s been in a free fall for quite some time. Just because it became legal in some states and there’s a big market there, it hasn’t helped this stock cycle.


So don’t become thematic. Watch the charts. Final one I’m going to look at is psychedelics, dude. It’s the Horizon Psychedelic Index. This is listed in the US, PSYK, and there are psychedelic stocks obviously that you can look at within this index, but it’s the same story. I knew a number of not-so-informed investors that were investing heavily in psychedelics and at the time I said, this is just like marijuana and every other thematic play you can talk about. These people were unsophisticated investors and believing in the theme that everybody would go out and buy LSD and get high and burn their brains out and they would be wonderful for the companies. The problem is that may be true. I saw that Vancouver’s opening up shops to sell, for example, magic mushrooms and other psychedelics, and sure people want to burn their brain cells out, go for it, I don’t care.


But it’s not necessarily profitable for the companies that are supplying those products. Again, it comes down to the cost of regulation and meeting government safety and whatnot. Safety with psychedelics. Okay, there’s an oxymoron, but you know the safety requirements of manufacturing and just the materials, the cost of labour, and all these different things you need to make a profit in order for a company stock to eventually go up. You can see that’s clearly not happening in this sector. It’s a sector that I would tend to stay away from until it bases and breaks out. So that’s the bottom line. There are some high risk opportunities out there for speculators, but I would caution you not to get thematic, but to look at the charts and make sure you’re doing it right.


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