Solar Flair

As I evaluate solar technologies and vendors for an installation in my home, I was interested to see the shift in US electricity generation in the first half of the year. It’s hard to believe that just 5 years ago coal had a 40% share in power generation. The relentless cost declines, government subsidies and capacity increases for both wind and solar are now very much a part of coal’s current declines. Combine that with the learning rate of renewables should add further downside pressure on coal, estimated to fall to the low 20-25% with wind and solar picking up the slack for a combined 15% by 2020.

The technological advances have pushed efficiency's into the low 20% making solar installations nearing a 5-6 year ROI. While solar for the home becomes more cost competitive and an increasingly better ROI, you can’t say the same for solar stocks. TAN, the solar ETF is down 90% from its inception date.

For now and until things change most of your eco-friendly investment dollars appear to be best utilized in your home rather than your portfolio.

You Can Observe a lot by Just Watching

Normally I post investment opportunities after-the-fact as those charts tend to hold a lot more information and are much better learning tools. Everything else up to that point of confirmation is just a “potential” opportunity that holds some level of interest. My level of interest grows or falls depending upon a number of factors, one of the highest being the development of high probability patterns. 

So it goes with today’s post, oil has formed an almost perfect bullish inverse head and shoulders reversal pattern from an oversold divergent low. There are, of course, no guarantees but my experience is this setup has produced some of the biggest returns. The first of its two targets is just above at the 60 area and if that level is breached, I see a potential retest of the 75-77 area. Notice how the (red) 200 day moving average contained price on the way down and how it is now acting as support on the way up.  This is symmetry in action. Price bounced right off the moving average on its first pullback after gapping above it in April. RSI momentum is rising and has a lot more room to the upside if price wants to push higher. An investor couldn’t ask for a better setup. And yet I am hugely skeptical and a non-believer.

This is not because a confirmation break above the blue horizontal neckline has yet to occur but rather because oil’s fundamentals, quite simply, suck! Too much supply, stagnating demand and world economies that have flat-lined (at best). This is NOT the sort of backdrop that we want to see if we are betting on higher oil prices.   So I should pass on the investment, right?

This is a great example of a bias. Everyone has them, even those who are not supposed to, including me. Based upon the fundamental backdrop, I have formed a belief (justified or not) that oil prices can’t move higher. The fact is anything can happen and if I pass on this investment I am committing to make one of the cardinal sins of successful investing. This is exactly how retail investors act and why they consistently under-perform the market.  A better approach might be to take the investment opportunity (once confirmed) but manage your risk (biases) by reducing position size. Instead of committing say 5% of your investment capital, reduce it to say ½ or 2/3rds of normal. You never know this single investment could be the difference between this year’s portfolio performance being a winner or loser. My mentors, some of the most successful market traders/investors all agree in that typically in any given year just 10-20% of their investment ideas make up 90% of their annual gains. The rest are either no impact or turn out to be losers. This is why a good investor cannot let their biases enter into their investing process.

In case I have done a poor job, this post is not really about oil and the potential big move to the upside (well, maybe just a little) but rather about accepting our natural human biases/beliefs and managing the biggest obstacle to investment success, that person in the mirror. To take liberty on one of my favorite Yogi-isms …. Investing is 50% process and the other 90% is mental.    

As an aside, as I get ready to submit this post, oil inventory data is being released in a couple of hours which can move the price oil dramatically in both directions. So it’s a good time to remind everyone that news always trumps the charts. ALWAYS

Just for the Smell of It

The Hard Rock Café Hotel in Orlando pumps out artificial scents of sugar cookies and waffle cones that act as “aroma billboards” to draw people to their ice cream shop in the basement (increasing sales by 45%). The marketing company ScentAndrea attached chocolate artificially-scented strips to some vending machines in California, tripling Hershey’s sales. The Hershey’s store in Times Square uses artificial scent machines that blow the scent of chocolate into their store. Disney reportedly applies an artificial “grilled scent” to their frozen burgers to make them smell fresh, along with strategically placed scent machines in the bushes that disperse scents of cotton candy, popcorn, or caramel apples. According to the Scent Marketing Institute, when the smell of fresh baked bread was pumped into a grocery store, sales in the bakery department tripled. A grocery chain in New York (Net Cost) admittedly places scent machines that release scents of chocolate and baking bread to make customers hungry, and sales jumped.

Even subtle changes in operations can trick our noses and make a big impact on increasing food sales. For instance, Panera Bread recently moved its baking time to daytime hours so that customers smell the bread all day long and their New Haven, Connecticut location has a small “show oven” without a hood, so the smells vent into the restaurant. This is the same reason that Subway places their bread ovens up front in their restaurants, so that smell hits you when you walk in the door. Starbucks has an “aroma task force” to make sure their stores smell like coffee and not the cheese from their breakfast items

So don’t be surprised the next time you drop into our office and feel rich as we are working with the SF Federal Reserve to capture a new, “crisply minted $100 bill” scent for use in our Glade “office fresh” dispensers.

June's Charts on the Move Video

My latest video recapping notable activity in last month's markets is posted at the link below.

The summer grind continues. Still waiting for the impetus to push US stocks out of their longstanding trading range. European and Japanese equities are in serious need of a lifeline.  

https://youtu.be/0qQDRhNMfCo

Italy Needs Some Stickum, Otherwise Arrivederci

2016 will likely go down in the books as one of the toughest (in my experience) years to invest if you are a market technician. Technical analysis has been helpful but not anywhere near as it has been in the past. I have never experienced so many failed patterns both bullish and bearish. I believe it can be explained and chalked up to the fact the US stock market has been range bound for almost 2 years, while most foreign markets are languishing in bear territory.

The Italian stock market peaked in June 2014 with negative RSI momentum divergence falling almost 30% before it bottomed and rallied up to the 61.8% fib line. There it chopped around and formed a symmetrical head and shoulders pattern which confirmed in early Jan of this year gapping below the blue support line. It came to rest at important prior support (red horizontal line) and is once again chopping around trying to digest the 20+% decline. This is one pattern that did not fail but rather did exactly what was expected and met its objective.

While there is no pattern that has developed (yet), Italy has formed lower highs and lower lows while the 200 day moving average is steeply pointing south which screams “AVOID ME”. Because of the number of touches, we know the current (red) ~$10.75 support line is hot and if it should fail on another retest we can expect a much further decline. The first level of expected support would be another 20% lower at the July 2012 lows. Beyond that if further downside is on the table, we could see a retest of the 2009 financial crisis lows on the radar.

I believe in the short to intermediate term Europe is in deep trouble and their stock markets are a real reflection of that concern. From what I see and read Italy is in the top 5 of European countries in the worst shape. While anything can happen, the awful fundamentals combined with equivalent technicals is pointing to potential lower prices ahead. Until proven otherwise, long only investors should look at Italy with caution while those with the ability to short should be licking their chop