Morning Market Thoughts

Good morning! Hope you had a relaxing weekend and were able to spend some time with your family and friends, doing things other than persevering about trading. If not, you’ll get another chance this afternoon and tomorrow. The exchanges close early today, and you’ll hear the closing bell at 1 pm rather than 4 pm.

The biggest news I see this morning is the announcement that Tesla is ahead of schedule for starting production on their Model 3 vehicles. Tesla expects to deliver the first Model 3 cars on July 28th, with an exponential ramp in production from there. Musk projects a monthly output of 20,000 Model 3s by the end of the year. If you can’t do that math, that means that they are projecting an annual output of 24000 cars — not this year, but that will be their rate of production by the end of the year.

That’s pretty impressive to me, and the stock is up $8 bucks pre-market.

One subject that I researched this weekend was the small cadre of biotech companies in the immuno-oncology industry. Very interesting article in IBD over the weekend, discussing $CELG, $BLUE $KITE and $JUNO. These companies are all developing immuno-oncology drugs that use the patient’s own immune system to fight cancer. It’s a pretty interesting and exciting project, and full of complexities. I am not a biotech expert, so I won’t take your time by trying to explain the actual process of development. But I can say that the charts are instructive, and I’ll have a bit more to share in tonight’s abbreviated Strategy Session.

Going into the second half of the year, we’re going to be sensitive to big shifts in the market. Large investors are always looking to get invested when a sector is down, and then ride it up on the backs of momentum-based funds and finally, retail investors who tend to buy stocks after they have made much of their run and are quite expensive based on traditional metrics. And as they are unloading the long-held positions, they are looking for the next group of stocks that have potential for big gains. We could certainly see this happening in the months to come.

There is a possibility (not a prediction) that the energy sector could start finding buyers that will push stocks from out of the doldrums and into the sunlight. We could see the same thing in the retail industry. I have absolutely no idea whether these rotations will occur, but they are possibilities that I will be sensitive to. If something like this does happen, I like to be able to consider participating early rather than ignoring the first part of a big move.

By the way, I think this type of rotation is already happening in the solar space. Look at the solar ETF ($TAN). This ETF was at $300 back in 2008. Now it’s at $20 bucks. And in the interim, it formed an 11 month base and carved out a very obvious inverse head and shoulder pattern in 2012-13 before advancing nearly 300% in 2013. Since 2015, the solar ETF fell from $50 down to $16 in about a year and a half — a 66% retracement. It’s now forming what could also turn out to be an inverse head and shoulder reversal pattern. At the very least, it’s in a volatility squeeze that’s just popping above the 50-day moving average.

Could it be that institutions are making a bet that solar energy stocks are the next stocks to make serious moves? They have started buying just during the last week, so things look promising. This is a volatile sector, so any stock position should be given a lot of room to move. A really great dancer needs a lot of room to move on the dance floor. Get too close, and you’ll get an elbow in the forehead. So if you’re taking the plunge in solar (and biotech, for that matter), make sure that your position size is such that the volatility swings are tolerable for you. Heck, they might even be fun, as long as you don’t have an excessively large position.

I’ll also be discussing more about this sector tonight.

Market closes in 3-1/2 hours. And it opens in 7 minutes. See you in the forum.

–Dan

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