The Unpopular Commodity, Coal

June 14, 2021No Comments

Hello there and Welcome to the Smart Money – Dumb Money show. And I am your host and Chief Portfolio Manager, President and Founder of ValueTrend Wealth Management. And this is a weekly video that I put out and trying to present you with ideas that I am not currently presenting in either the biweekly blog that I write or the occasional ValueTrend email updates that I send out. And by the way, if you don’t subscribe to the updates, then please do so. It’s free and it’s an excellent source of information. The newsletter is emailed periodically. I really don’t have a schedule that I follow to mail these out. I email them when there’s an idea that I want to talk to my existing clients about. And for those of you who are not clients, you can still get a subscription to the newsletter.

Although I don’t usually talk about too many of the individual stocks that we at ValueTrend are buying in that newsletter. I do talk about the sectors and if anybody has followed my work over the past number of years, you know, that we’re pretty timely with our rotations. So really the most valuable stuff that comes out of my work is from the sector rotational look that I try to give from a technical and a contrarian point of view. And on that note, again, subscribe to our newsletter or updates, subscribe to this video and you’ll get them sent to your inbox every week. And of course, read my blog and subscribe to that. So on that note today, I want to talk about the current sector rotations. Now, every once in a while on the blog I post a one month look back, which is 22 business days, by the way of what sectors have been outperforming the S&P 500.

It’s a look at the US markets really, but the US kind of leads the charge as we know with most markets across the world. I haven’t done this for a while, so I thought I would do a video today where I do the sector look back, and I want to pull up a sector rotational chart that I posted back in March and contrast it with what we’re seeing today, you know, three months later. It’s kind of interesting their rotations back in March, we were positioning. We still are, but we were heavily positioned in many of the commodities in staples and industrials. Now we’re there, but we’ve pared back, not so much on the staples, but we’ve pared back a little bit on our commodities, and I’m not going to talk about that in a minute.

This is March 24th. And if you go to my blogs and you look up the March 24th blog, you’ll see this exact sector performance chart, and you’ll see the commentary I wrote around it. But in a nutshell, what I was looking at is communication services, industrials, consumer staples, and utilities were leading the charge. And this is a 22 day look back from March 24th. And that’s really one month’s worth of data when you incorporate the weekends. All right. So what you can see is these sectors relating to charge. Now, I want you to pay attention to a couple of things.

Energy was, was lagging a little bit at the time, over a couple of other sectors, like financials and real estate. Let’s fast forward. Now we’re seeing that some of the staples that, as I said, we still own them, but then pulled back they’re underperforming. This is not an actual performance chart, by the way, this is a relative performance compared to the bench line market. So, the market, the S&P 500 is a flat line versus the market. How did these, each of these individual sectors, it’s not necessarily that this energy sector, for example, made 4% outperformed the S&P by 4%. But what we can see here is that really a market’s been pretty flat over the past month. So this is 22 days, one month. Look back as of June 11th. And what we’re seeing is that a lot of the sectors are kind of flat, but energy and real estate are definitely the movers.

That’s interesting because I just mentioned that we at ValueTrend started peeling a little bit of our energy back, but I want to propose that it wasn’t an actual pull out of the sector. It was a rotation into another part of the energy sector that we feel is undervalued. And I want to look at that. So let’s focus our attention on energy and real estate today. And let’s take a look at some of the charts. Now, why would I want to reduce, not eliminate our oil stock exposure? Now we still have plenty of oil. I do want to point that out, but we’ve reduced it a bit. And we swapped into something within a related trade. So let’s take a look at why I might be thinking like that. Whereas you can see here, you’ve got stochastics line. It’s been overbought for quite a while, which is fine.

It’s a fast-moving indicator, but we also have an RSI that signalling quite overbought and MacD is quite ahead of itself. So, at the same time, we have a chart that for oil, this is the iShares energy ETF, which is going to hold a lot of Canadian energy stocks, as well as some global players. And what you’ll see is that the energy sector is coming into a level of old resistance while it’s overbought. And interestingly enough, energy stocks tend to get a little bit soft and performance seasonally over the summer. And then you typically look for another spot in July or August where the seasonal trend starts suggesting you could rebuy them. There’s this point where typically seasonally, they’re not super strong over the summer and the sector’s overbought. So we said, okay, let’s, peel a little bit out, it is a little bit overdone.

The other sector that we were just talking about is real estate and for one major sector for Canadian investors, because there’s not a lot of real estate stocks like builders and whatnot listed in the TSX, but there certainly is a lot of REITs, and that’s been the primary way Canadian investors buy real estate. So you can see again coming into a level of resistance, overbought, RSI very, very overbought RSI here, sorry, an overbought stochastic here my mistake, and very growingly overbought, Mac D indicator. All right. So for that reason, again, I’m a little wary, even though they’ve been the outperformers in technical analysis says you want to follow the crowd. Home is that crowd is overbought a couple of sectors. It has been very quick. You can see the movement on real estate. It’s been like the past couple of months. It’s just gone parabolic.

Let’s look at what, within the energy sector. I mentioned that some of our oil stocks, not all, but one of them specifically that was a big position for us. It was a 4% position and we flipped into some pipelines. Now go back to my blog and you’ll see, about three weeks ago, I wrote a blog called This is the Next Value Play, and I was talking about pipelines. And this is a stock that I will disclose that we own at ValueTrend. We own Pembina, we’ve owned it for quite some time. And unlike the oil sector itself, it’s still got a ways to go before it comes into technical resistance. You’ve got a little bit of air up here before you get into kind of this zone here.

So there’s some room to go, and it just broke out. Unlike a lot of the oil stocks, you can take a look at them like Suncor and whatnot, which is one that we sold actually keeps hitting a particular price level and falling. This stock, the pipelines are breaking out. We owned three of them and they’ve all broken out and they all look pretty good. And they look like value plays. Plus they have very high dividends. Yes, they’re overbought from a stochastics point of view, but not as much on the RSI and not as much overbought on the MacD. So, absolutely they may not go up like gangbusters over the summer, but I do think if you are planning on buying into the energy sector, pipelines might be a good place and we’ve put our money where our mouths are.

Cause we do own some pipelines right now and we’ve rotated into them recently. So that’s an idea for those who like the pipeline sector. And the other sector that I might recommend within the commodities is believe it or not coal. Now, if you follow my work, you know, that I have been kind of contrarily talking about coal. It’s not a subject that people who are environmentally sensitive like to talk about. It’s an unpopular commodity. It’s a dirty burning fuel source. So true enough, North America beyond steel usage to coal is used in steel production. But North America is largely backing out of the coal trade and backing out of coal usage. However, two major economies, China and India still use coal as one of their main sources of energy. And with that in mind, sure.

They both produce coal to a certain extent, but they also import coal. So we evaluate trends within our aggressive platform. We have a conservative and aggressive platform. The investment platform we have been, we bought one coal position. I should say two, we bought two coal positions and we’re looking at buying this one. Now I will tell you that we do not own Arch Coal, which is the chart we’re looking at. I believe I may be mistaken, but I believe Arch Coal is the biggest coal producer in the world that you could debate that I, my speaking out of what I believe to be true, but what I do know is that this chart is breaking out. There’s a pretty strong neckline that was somewhere around, let’s just call it 55 bucks or so. And it’s definitely broken that. So I see a lot of upside on this trade, at least in the old support level, which is in the $75 area.

So to me, the trade is there because it’s another energy source. I know it’s a dirty energy source, but India and China are burning this stuff. And you know, you can’t fight the facts if they continue to expand as they have moved out of COVID basically ahead of not India, but China has definitely moved out of the COVID infection problems fairly rapidly. Their economy’s growing once again, and their usage for energy and need for energy is there. So they are definitely on side for potential buyers of coal. So it’s a value play on the energy trade that hasn’t yet been recognized. It may not be popular with, with people watching this video who are environmentally sensitive, but it’s something that we are buying within our aggressive platform, because we do think it has some upside in the, at least the next number of months, of course, understand that coal is a more volatile commodity than some others.

So you could lose out on this trade if the chart and the prognosis towards China and India using the product is incorrect or turns out to be incorrect. But I think it’s for a risky side of your portfolio for a risk trade, which is why we put it into our aggressive platform. I think it’s not a bad idea for those, with risk tolerance. You could lose money, but you could make a reasonable dollar too. And it’s a risk-reward, Trade-off. You always look at with any play within any stock sector or even commodity. So I hope that helps it’s a view of what markets are moving into right now. And as we saw in the real estate, market’s a bit overbought. And we saw that temporarily energy seems to be hitting a level of resistance. And it’s a bit overbought but I do think energy has much more upside.

I just do think it’ll pause. And then we looked at some ways of maybe playing the value side of energy with that upside in mind, but not necessarily wanting to go into the higher beta plays within the energy trade during the summer. A couple of ideas for you, pipelines and for aggressive platforms. If you have an aggressive side to your personality or aggressive side of your portfolio, coal was an option. So thanks for watching. And I hope that helps. And again, please subscribe to the video, make sure you read the blogs regularly and take a look at our newsletter. It’s I think it’s one of the best resources we offer people, and it’s all free. Thank you very much for watching again, Keith Richards, your host, we’ll see you next week.

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