In today’s Exponential Investor…
- What a power cut taught me about investing
- The divergence between the oil price and oil stocks
- A technical setup of doom
I scrambled around in the dark looking for matches, or torches.
It was late at night when the lights flickered, and then shut off. Everything was dark, all appliances switched off.
I lit the candles, and then went down with my phone torch to check the fuse box – no problems there.
I googled “power cut who to call”, and rang 105 who put me through to UK Power Networks.
And I learned one very important lesson about investing…
In the end, we had to wait until 9am the next morning, and suffered through a night of drilling outside our window (so excuse any loose arguments or typos in this letter!).
My 53% battery charge on my phone suddenly became precious. It was my source of updates from UK Power Networks, it was my torch and my way of contacting work if I needed to.
But the fridge, the freezer, the boiler, the Wi-Fi, the TV… nothing would work for over 12 hours. Nothing without a battery, without any stored energy.
So even though it was a Sunday night, probably the best time for such a thing to happen as we could all just go to bed, it still made me think.
Not too far in the future, where I live will have an energy storage system, and a power cut will never be able to get me that badly again, except in truly extreme circumstances.
After all, a 12-hour outage is the worst I’ve ever had, and 163 homes were affected I’m told (a local substation issue was to blame, heavy weather related apparently).
But energy storage is precisely aimed at releasing power as needed in such situations. Whether for a grid or a home, energy storage can keep things running during outages, using only clean energy (from solar or wind, probably).
This power cut affected 163 homes. But what if it were 163,000, or millions…
Not only will our electricity be renewably produced in an environmentally friendly way, but it should actually be more reliable (as well as cheaper, don’t forget).
This is the most crucial thing that so many people are yet to really grasp, or accept.
The energy transition was an environmental and moral argument for a while, but now it’s one that’s happening for economic and efficiency reasons. Storage is going to be a key part of this. What is coming around the bend is better than what’s in the rear-view mirror.
This point is so crucial.
Moving on though, I’d like to look at what may seem like a completely contrary point, but isn’t (clue: time horizon).
There looks to be some great opportunities in oil stocks again. Since the oil prices rally stabilised, they have been trashed once again, diverging to an unusually large degree. Here’s the three-year chart of Shell (in red) vs the crude oil futures price (blue), which were tightly correlated until June of this year:
Source: Yahoo Finance
But in the short term… falling oil prices are oddly having the opposite effect. Here again is Shell vs the crude oil futures price. Since the start of the week, oil futures (for December) are down nearly 12%, while Shell is up 5%. The same is broadly true for any basket of big oil shares, though Shell is admittedly the top performer this week because of its small dividend hike.
Source: Yahoo Finance
The interesting point here derives from our reading of Russell Napier’s book The Anatomy of the Bear.
In that, he observed that bear market bottoms are marked not by a total absence of good news, as common investing folklore has it to be. Instead, a bottom is near when bad news is no longer pushing prices further down – ie, all the negativity is priced in already.
I wonder if we are seeing something of that here. The divergence between oil prices and stocks was wide and had to come together at some point, whether with lower oil prices or higher stock prices.
Either way, the short term falling of oil prices no longer affecting oil stocks is very interesting, and could be a sign that the equity investors in the oil space are “over it”, so to speak.
Oil prices may not be the major threat to stocks in that sector though. A broader market crash is top of my watch list at the moment, for stocks in any sector.
In a very rare case for me, I would like to offer some “technical” analysis. This involves looking merely at the lines on the graphs, and judging things that way.
I don’t know how much faith to put in this kind of thing. It’s not the predictive super weapon that its acolytes sometimes claim, but nor is it the musings of madmen and witch doctors that its critics believe it to be.
I find technical analysis merely “interesting” and “worth watching”.
In my limited experience, some aspects of the craft have stuck out to me. I am no expert, no professional, and these observations must be taken in almost pure salt form. But they are interesting, I think.
Firstly, bear in mind that my inherent bias is that we are approaching a crash of epic proportions, led by the (Halloween-themed) FAANGs.
Thus I am prone to look for things which confirm this view. This is known as confirmation bias. So here are the things I’ve found which might confirm my view…
A double top. This is when a powerful rally dips, rallies, and then dips again from a similar level. A lower high second time round is an additional bearish signal.
It might be significant that the Nasdaq and S&P 500 both formed near-perfect double top formations, after a particularly wild rally.
What’s more, both are trending down towards a significant “support level”. This is where a straight line on a chart is repeatedly “bounced off”. You can see the double top, with lower highs, and the support level marked on the chart of the S&P 500 below. If it breaks down lower from here, then it will be a very traditional double top formation.
Looking at the S&P 500, we can add a note of complexity. 20% of the S&P is made up by only five stocks, I hasten to add, a concentration level which eclipses even the dotcom bubble of 2000.
The S&P is displaying the same double top with lower highs. The support line, here marked at around 3,270, is actually even stronger with bounces recorded pre-pandemic in January of this year, again in June and July, before the main resistance in late September, which we could be about to re-test.
Technical analysts whom I follow regularly outline that when a resistance in is broken, significant moves can follow.
The S&P is also displaying a wedge-shaped formation of expanding highs and lows, with the next high or low being reached not long after meeting or crossing the resistance line.
If you believe in such things, this might not be the week to forget your broker’s phone number.
One more thing on this. Going back to a theme from the oil market discussion above, the fact that the FAANG stocks, an epic bubble, all posted earnings which beat expectations but mostly didn’t move higher, suggests that all the good news is mostly priced in.
Napier’s analysis would suggest that when good news no longer translates to upward moves in price, we may be nearing the top.
This week could be crucial, if you believe the technical standpoint.
We have an intensely complex and emotional election, a Federal Reserve meeting, second lockdowns all coming into place, and are on the brink of breaching a major resistance line to the downside.
Best wishes, and best of luck,
Editor, Southbank Investment Research