By: Bill Spencer — April 2, 2021
Small Cap Monday - This Energy ETF Could Return 27% in No Time
Hi there… “Big Bill” here.
I’m writing this on Easter Sunday, at a weather-worn picnic table in the backyard of my sister Jeanne’s home on Long Island, NY.
Each year my family and I gather here (or at the home of my sister Donna) to celebrate.
Like many traditions, the trappings tend to stay the same from year to year. The visitors and guests... the chocolate bunnies and marshmallow peeps... the sirloin or ham…
But sadly, one tradition has fallen away as my sisters and I and all those nieces and nephews have grown older.
I mean the Easter Egg hunt.
I don't embarrass easily. But even I must admit it lacks dignity, beyond a certain age, to crawl through dew-damp shrubbery looking for luridly-colored hardboiled eggs.
That doesn't mean I don’t miss it. (I said it lacked dignity, I didn't say it isn’t fun.)
And I miss it because a good egg hunt made me feel two things at once.
I loved not knowing where the eggs were hiding...
… while at the very same time knowing for certain they existed and could be found.
This is a rare combination.
After all, in life we search for many holy grails -- our soulmate, that perfect-sounding jazz guitar, a cure for the common cold -- sustained only by the hope that we'll find them.
Maybe they're “out there”... and maybe they're not.
Not so with Easter eggs.
What do hidden colored eggs have to do with investing in the stock market?
As it happens… everything.
And that's because when you view the stock market through the "True Market" lens...
You can be almost certain that that high-probability trade you're looking for is in fact, "out there". (I say 'almost certain' because nothing is absolutely guaranteed.)
The key is to focus on what's already happening and align you decisions accordingly.
Do that, and you'll find yourself landing on the strongest parts of the market... and you'll have a roadmap to finding the strongest stocks and ETFs within that part of the market.
Which is exactly what we're going to do today when we look at one particular alternative energy asset.
This security stands to profit from Joe Biden's ambitious plan to make America "zero carbon" by 2035.
As you're about to see, it's in the soaring Energy Other sector. And it's poised to profit from small-cap strength.
More in a moment, right after we look at what the market's been up to.
It was an Easter-shortened week in the stock market. The U.S. markets follow the NY Stock Exchange schedule, and ever since President Kennedy’s administration, the NYSE has closed on Good Friday.
Apparently "less is more". Because all the major averages ended the week with gains.
(Click any image to enlarge)
The tech heavy Nasdaq led the way, closing up +2.60%.
The Russell 2000 (up +1.46%) came in second, breaking a two-week streak where it finished either last or second-to-last.
The S&P 500 gained +1.14% on the week and like the Dow Jones Industrial Average (up +0.24%) it too put in a new all-time high.
The small-cap S&P 600 gained +0.68%.
To dig a little deeper into the “true market”, or market breadth...
... we turn to the U.S. Industry Bell Curve - one of the premium indicators we provide in our Sector Prophets Pro data program.
The image below was generated after the market closed on Thursday, April 1.
The red boxes represent sectors that the bears (aka 'Supply') control. The blue boxes are sectors that are in the hands of the bulls (aka 'Demand').
This week, we found that control was nearly split in half. The bulls controlled 22 of the 45 sectors we monitor here at True Market Insiders. The bears controlled 23.
What a difference a short week makes. Last week all but seven sectors were red.
One reason for this newfound strength can be found in Washington, D.C.
Earlier in the week, President Biden put forth his $2.3 trillion infrastructure proposal.
As we alluded to above, Biden plans to use part of that massive outlay to advance his zero carbon emissions climate policy. His administration wants to see a carbon-free U.S. by 2035.
To that end, Biden’s policy focuses primarily on the generation of so-called green electricity.
The big institutions have been paying attention.
Because right now the Energy Other (ENER) sector (also known as the Alternate Energy sector) is outperforming.
Looking at our Sector Relative Strength Matrix, another premium tool found on Sector Prophets Pro, which we see that Energy Other is in the #4 position.
It’s performing better than 41 other sectors.
That tells us that the giant hedge funds are loading up on stocks within the sector.
Here's the Energy Other’s sector's Relative Strength chart (which shows how the sector is performing versus the Equal Weight S&P 500) we see it's in a rising column of X’s, indicating that Demand is in control over the short term.
If the chart fills in one additional X-box it will go on a point-and-figure 'Buy' signal, indicating strength over the longer term as well.
If President Biden is going to achieve his goal of seeing just the U.S. to zero carbon electric generation by 2035, well . . .
That’s a lot of wind and solar power, both of which require a lot of open ground for their buildout.
What's also needed is a power source that requires a smaller footprint - most likely nuclear generated electricity.
The Invesco Global Clean Energy ETF (PBD) affords us a great way to capitalize on the coming massive growth in alternative power.
This ETF endeavors to track investment results similar to the WilderHill New energy Global Innovation Index.
The underlying Index is made up of companies focused on clean and renewable energy.
This ETF is very well diversified. In fact no single security can make up more than 5% of its total holdings. Finally, even though PBD is passively managed, the index is rebalanced and reconstituted on a quarterly basis.
Take a look at PBD from our Sector Key, a Sector Prophets Pro premium tool.
The first blue arrow tells us that PBD is on Bull Confirmed status on its own bullish Percent Index (BPI) chart. That’s the strongest possible designation.
The second blue arrow shows that, as you've already seen, PBD’s sector (Energy Other) is outperforming the market (Sector RS).
PBD is weak among its peer group, designated by Peer RS (the red arrow). Probably this is because it, like other stocks and ETFs in the sector, pulled back after shooting up very quickly.
And finally, PBD is strong versus the stock market. That’s designated by the third blue arrow or Market RS.
When COVID struck early last year, PBD fell -43%. Then on July 8, 2020 the fund roared past its pre-COVID high of $17.11 and kept climbing.
The blue arrows show the massive volume that accompanies the ETF's push higher.
On January 8 of this year it opened at a new all-time high ($41.26) and then pulled back about -28%, completing a double bottom (the red arrows) on March 25, when it opened at $29.43.
The yellow highlighted line in the price chart above shows the key 78.6% Fibonacci level. PBD was finding support there before breaking down to form the first of the two bottoms.
That level (around $39.00) will form an important resistance level, should PBD me able to penetrate its 50-day moving average and continue to advance.
That would represent a gain of nearly 20% from the current price.
If it gets above that key retracement level, it should have no problem re-testing its all-time high. That would represent a return of about 27% -- possibly very quickly.
More conservative investors may want to wait until PBD moves above that 50-day moving average.
PBD has one more advantage that I've saved for last. And that is the small cap lithium stocks among its holdings.
Examples include Piedmont Lithium (PLL) and Livent Corp (LTHM).
Although lithium is known to be a volatile commodity (meaning its market returns tends to bounce a bit toward extremes), it could perform very well in the coming months and even years.
I say that because lithium is used to make lithium ion batteries, like the ones in your smartphone and in electric automobiles.
This is yet another tailwind that could propel this ETF higher.
Overall, PBD offers a great way to invest in an extensive list of small cap alternative energy stocks.
The ETF does not trade options, however. So this is a straight purchase.
PBD trades decent volume -- about 500,000 shares on a typical day. So there’s some liquidity here.
Until next time,
Editor-in-Chief, True Market Insiders