Beyond Logical

Those that have studied mania’s or bubbles know the common theme that logic, common sense and discipline are thrown out the window. It’s all about investor sentiment (emotion) and the fear of missing out. They happen regularly with investments and sadly, all end the same way ….. the majority get taken to the cleaners. The most difficult thing about them is not that it is hard to see the bubble, but rather when it will burst. It will pop … they always do we just never know when.

The latest example – Beyond Meat

Beyond Meat's market cap just passed that of Conagra’s ...

Those that aren’t familiar with Conagra, they

·         Were founded in 1919

·         Make many food products under the brands Duncan Hines, Hunts, Slim Jim, Orville Redenbacher, Healthy Choice, PAM, Birds Eye, Earth Balance, etc.

·         Employ 18,000 people

·         Generated $9.5 Billion in revenue

Beyond Meat

·         Founded in 2009

·         Create fake meat products

·         Employ 383 people

·         Generated $95 Million revenue

Beyond Meat is now worth more than the market value of Shake Shack, Wendy's, Jack in the Box, Red Robin, Habit Burger, and Good Times ... combined

This one too, will end badly. I am happy for those that caught and continue to ride the euphoric wave higher, I just hope you have a management plan for when the party ends. At some point in the future it will be worth circling back around and seeing when and where it lands. Will we be able to add beyond meat to the forgotten pile of disasters of the past such as dot com stocks, beany babies, tulips, 2007 US real estate market and many, many others?

Any Questions?

Fundamentals or technicals. Technicals or fundamentals? Which method provides the best returns has been an ongoing, raging debate for years. When it comes to the markets there rarely ever one right answer. Both systems can work but a study (back test) was done to see which one provided better returns after signaling long term buy signals. The chart (back tested data) seems to finally put an end to the performance debate question anyway.

Which return would you prefer?

Boeing - Time for Take Off?

Its been a rough few months for Boeing. Their handling of the 737- Max crashes have been a public relations nightmare. There is no doubt this will be in future B-school case studies for now NOT to handle a crisis situation. In the end, just throw a whole bunch of money at it, sweep it under the rug and move on. 

Looking at the chart of Boeing’s stock, BA, it appears as if investors have started to feel the storm clouds are clearing. You can see where price peaked just a few days before it gapped down on the news of the Ethiopian Airlines crash.  From there it bottomed mid-May losing ~25% peak to trough. It consolidated for a month before it broke out higher on a substantial buying spike, making its first higher high since the start of the March decline. From then price went back to retest the breakout level, forming its first higher low and is now attempting to make its second higher high, once again on high volume.

A break higher here will confirm the end of the prior downtrend and providing an excellent low risk entry of a stock that has reversed its downtrend and begun a new uptrend.  With a first upside target at T1, 15% higher than Friday’s close, it offers a compelling reward to risk ratio for those who are looking for further exposure to US equities. With seasonality nearing a less interesting period of the summer doldrums, I would expect this requires an extra dose of patience for an upside target meet to materialize.

Is it Time for Small Caps to Lead?

US Small cap stocks (IWM) have been underperforming their bigger brethren (SP500) for more than a year, lagging by more than 15% over this period. Looking at the ratio chart (middle pane) of US small cap stocks to US large caps below, you can see we are at a potential inflection area. When the line is rising, small caps are outperforming and when falling they underperform. Over the past 15+ years each time the ratio reached this level, small cap stocks bottomed and went on to outperform. Additionally, you should also notice in the bottom pane of IWM price, each touch of that level resulted in a very significant, long run higher for the index. When combined with the positive RSI momentum (top pane), signaling a potential upcoming trend reversal, small cap stocks are back on the watch list.

Currently clients have zero exposure to the small cap sector since there has been no reason to own them due to their underperformance. But, when looking at the weight of the evidence if we get a trend reversal in the ratio, a breakout of the current consolidation on larger (institutional) buying, it seems like the right time to be adding a starter position into the index.

CRISPeR

If you don’t know about CRISPR technology and you have a vivid imagination of what could be, I would recommend you spend a little time doing a quick search. It is so exciting to read about new medical technology like this as it holds the potential to solve many human medical problems. But it also comes with ethical questions which I will avoid tackling (like politics) here. Gonna just keep it simple and focused on opportunities to make money.

With client investment capital, I prefer to avoid highly volatile (boom/bust type) single stock exposure due to the desire to avoid large losses. On stocks like these, historically the only way to make money is to actively trade them. Even doing that provides no guarantee. Individual biotech stocks like CRISPR therapeutics, symbol CRSP, fit that bill to a tee. As you can see in the chart below, from the early 2018 base breakout, the stock rose more than 200% well exceeding its target (T1) in just 5 short months …. BOOM. Soon thereafter, huge institutional selling started the waterfall decline as it fell almost 70% (peak to trough), giving back all its gains, in 7 months …. BUST.

The current setup and recent breakout look awfully familiar, doesn’t it? (look left)  …. 1) A breakout from a long base 2) institutional accumulation and 3) strongly rising prices. All 3 things investors would like to see before committing investment capital. The upside target from the breakout pattern at T1 points to a 45% increase in price, with 25% more to go before its met. If the market were to continue its bullish trend into the end of the year, I would expect CRSP to exceed that target like it did last time and retest all-time highs, some 50% north of here. For those with high risk tolerance and well honed game plan when dealing with highly volatile stocks, CRSP looks as good an opportunity as I have seen of late..