By: Bill Spencer — January 11, 2021
Small-Cap Monday - Will Biden's Darling Be the Hottest Play in 2021?
Hi there my friend...
This week the market got some of what it likes best -- certainty.
Wednesday's runoff elections in Georgia gave Democrats control of the U.S. Senate.
And Joe Biden was declared the winner of the 2020 Presidential election.
Today, you're going to get some of what you like best.
I mean a strong play on a soaring market sector.
First, let’s check in with the market. The new year picked up where the old one left off.
The Dow Jones Industrial Averagegained +1.61% for the week. The S&P 500 and the Nasdaq Composite rose +1.83% and +2.43% respectively.
(Click any image to enlarge)
But small-caps led the pack. The S&P 600 gained +6.37% while the Russell 2000 added +5.91%.
On Friday, our #1 risk barometer, the New York Stock Exchange Bullish Percent Index (NYSE BPI) added one more box to its current column of X’s. (More about this indicator here.)
The BPI is now at its highest level since May 2013 (the blue arrow). More importantly, the BPI has moved further into overbought territory. That’s the region above 70%.
At some point the bulls will run out of investable capital. Investors will sell to take profits and short sellers will take the field by taking bearish positions.
All that selling will drive prices lower.
But for now the bulls have their hooves dug in.
Here's the US Industry Bell Curve. It’s one of the indicators that comes with our premium data service, Sector Prophets Pro.
Bullish sectors are blue and bearish ones are red.
As of Friday's close, the bulls (demand) controlled 36 of 45 sectors -- 80%.
Here's the Curve eight days earlier.
Then, the bulls controlled 30 sectors -- 67%.
Right now this market is pedal-to-the-metal "risk on". Here's how the six broad asset classes rank.
- U.S. Equities
- International Equities
- Fixed Income
When we break down U.S Equities further, we see this same appetite for risk.
Of the 11 broad sectors within U.S. Equities, Technology and Consumer Cyclicals rank #1 and #2. Safe sectors like Utilities and Consumer Non-Cyclicals rank #11 and #9.
Same thing with the fixed income asset class. The riskier bonds -- U.S. Preferreds and U.S. Corporate High-Yield ("junk") are strongest.
The safer instruments -- Municipals and Short Duration U.S. Treasuries-- are the weakest.
So we have a strong market... a herd of bulls who are gluttons for risk... a still-Herculean technology sector...
And a new administration expected to be friendly toward certain industries and cold (even hostile) toward others.
One of the sectors that should benefit from the goodwill of a Biden administration is alternative energy.
Katie Bays is a managing director at consulting firm FiscalNote Markets.
On January 6, Bays told Bloomberg that "a Democratic win in Georgia could pave the way for Biden to aggressively push for a clean-energy package".
For his part, Biden has already floated an ambitious plan (worth $2 trillion) to have a carbon-free power industry by 2035.
Invesco Solar ETF (TAN) tracks the results of the MAC Global Solar Energy Index.
That index itself is designed to track stocks in the global solar energy sector, which is one of the sectors that could gain from Biden's policies.
TAN’s holdings include Enphase Energy (ENPH)... SolarEdge Technologies (SEDG)... Sunrun Inc. (RUN).
This ETF occupies the #4-ranked Energy Other sector.
Right now Energy Other is on bull confirmed status on its own BPI chart. That’s as strong as it gets.
The fund is strong versus the market (the fourth blue arrow).
After falling -49% in the wake of the coronavirus, TAN gained +437% in the next 10 months.
Its recent gaps higher have come on heavy volume (the blue arrows in the chart below).
So we know there's strong bullish conviction behind those moves.
This ETF is very overbought right now. Its Relative Strength Index (RSI) reading stands at 79.40. Like with the NYSE BPI, readings above 70 are considered overbought.
That said, we've seen how much the bulls like risk. And "Overbought doesn't mean over".
Nevertheless, if you're a conservative trader, you might hold off buying in case there's a significant selloff coming. If there is, wait until you see a few up days on heavy volume before you jump in.
TAN can be had for around $119. That’s a bit pricey, but not too bad for a tech-focused ETF.
If you trade options, consider buying the July 90 Strike Call.
With a delta of 80 and 189 days to expiry, this option is an excellent candidate for the stock replacement strategy.
Right now the TAN July 90 Strike Call has a mean bid/ask of $35.10.
If the fund gains 10% within 30 days the option will be worth at least $45.33. That’s a gain of 29% -- a 353% annualized return.
Thanks for stopping by!
Editor-in-Chief, True Market Insiders