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Technical Tuesday - Energy’s Topping Out - Here’s My Recommendation

By Chris Rowe August 2, 2022 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

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Hello…

I live in South Florida where it’s very sunny and very, very hot. (“How hot is it?” I hear you ask.)

It’s so hot our state bird is the rotisserie chicken. It’s so humid we get in the pool to dry off.

What I’m driving at here is, number one, that I’m hysterical. And number two, that in South Florida we live in fear of the central AC conking out.

Which means we Floridians are, at some level, always thinking about energy – electricity, oil, gas… Whatever keeps the juice flowing and keeps us cool.

I’ve been thinking about energy a lot lately, and, as an investor, you should think about it as well.

That’s because energy in general—and oil in particular—seem to be making a long-term top.

That doesn’t mean they can’t make higher highs for a while. But it looks to me like big institutional investors are distributing.

More importantly, a long-term top implies that the “baton” is being passed. Institutions are rotating out of one sector (energy/oil) and into another (which I’ll name in a second). 

First, here’s the Invesco DB Oil Fund (DBO), an ETF which tracks Light Sweet crude and serves as a proxy for oil.

(Click any image to enlarge)

The red arrows show heavier volume on the way down.The highlighted area shows the price heading back up. The longer-term trend for energy and oil is: institutions are selling on the way up as the price approaches new highs.

Where will we finally see THE top? Nobody knows. But what we DO know is that the sector baton is being passed.

Specifically, it’s being passed to alternative energy.

Here’s what’s important right now…

The Green Energy Bull

When oil (fossil fuels in general) become more and more expensive, alternative energy begins to make more and more sense as an investment. 

That idea makes intuitive sense, and also happens to closely track what we’re seeing right now.

This chart shows the relative performance of three alternative energy ETFs versus DBO since June 30. The pink line at the bottom is DBO.

I think this development – the passing of the baton to alt energy – could turn into THE investing story for the remainder of 2022.

That’s more than a hunch. In fact, two of our main investing services are telling us the same thing, and from two different perspectives.

Two “I’s” Are Better Than One

If you close one eye, the world looks flat and unreal – two dimensional. With both eyes open, with two different perspectives, you see things in three dimensions and in context. You get a true picture of the world.

Market “vision” is like regular vision. Two eyes are better than one. Only in this case, I like to say that two “I’s” are better than one.

Those two “I’s” stand for: Insiders and Institutions. And together, they show you a true picture of the market.

Let’s start with… 

“Insiders”

Costas Bocelli’s Dark Money Indicator (DMI) system was built to sniff out whenever insiders are placing unusual bets in the options market. 

When we suddenly spot a gigantic order come through, it almost has to be that the person placing that trade knows something. It’s possible that what they know they obtained by shady (even illegal) means.

The main point is that they’re insiders. And insiders tend to make moves that make them a whole lot of money.  

Let me give you an example of how the DMI system picks off unusual activity and lets us see it up close and in real time.

Last Wednesday (July 27) DMI spotted a massive bet being placed on an alternative energy company called Array Technologies, Inc. (ARRY). They make equipment that positions solar panels for maximum performance.

Specifically, DMI uncovered a massive order for Call options on ARRY. Again, this was on July 27. 

Somebody, somewhere was buying 2,578 option contracts worth $294,000. This was going on while the stock was trading at $12.76. Of course Costas sent an alert to his DMI readers with his recommended action.

Here’s what happened next. The top green arrow points to the day of the alert. You can see the stock gap higher the following day where it made an intraday high of $17.17.

The green arrow at the bottom shows the massive trading volume that went with that spike in price. From an initial price of $1.14, this Call option then traded up to $3.30 – a 190% return in just two days! (I’ll say it again. Costas is the GOAT – the Greatest Of All Time.)

So, what was going on? Personally, it doesn’t matter to me (and it shouldn’t matter to you) why a stock or the market does what it does. The point is to see what it does clearly and act accordingly.

But since we’re talking about insiders, you might like to know the following.

The Green Energy Bill

As we said, that DMI alert came out on July 27. On July 28th Congress passed a $370 billion spending package that included provisions (i.e. “pork”) for green energy. The bill includes things like tax credits for investments in wind and solar construction, as well as for carbon capture.

That spending will directly benefit the alternative energy space. And my guess is that whoever bought those 2,578 option contracts knew what was about to go down and ran out ahead of it.

Again, two “I’s” are better than one. We just looked at Insiders, now let’s look at…

“Institutions”

Stock prices move based on the buying and selling of giant institutions who have millions to spend on research and billions to spend accumulating their positions. Plus, they buy into their positions gradually to avoid running up the price. So you can trust sector trends, as they tend to last a long time.

My sector research and data platform Sector Prophets Pro also just flagged alternative energy, just like DMI did.

Here’s a screenshot, taken after yesterday’s close, of one of our premium tools – the Sector Relative Strength Matrix.

As you can see, the Energy Other sector (which is made up of alt energy stocks and ETFs) is currently ranked #2 out of the 45 sectors we monitor. That means giant institutions are rotating into that sector.

Here’s another Sector Prophets indicator, one geared specifically to track important changes in the Energy Other sector. It’s called a bullish percent index (BPI) chart.

The most recent column (filled with X’s) is highlighted at the far right. A column of X’s means that Demand is in control of that sector over the short term. And look at how high up that column goes. It’s higher than the previous X-column. 

That tells us that more stocks are participating in this current move higher than participated in the previous one. (As a point of fact, Energy Other hasn’t seen this much participation since back in March.) 

Bottom line? Institutions are buying the hell out of this sector. And the sector is responding as you’d expect. 

Here’s a sampling of ETFs that track the alt energy space. In all three charts the top green arrow shows the gap higher following news of the green spending package. And the one at the bottom shows the massive volume that went along with the gap higher. 

SPDR Kensho Clean Power ETF (CNRG)

Invesco Solar ETF (TAN)

iShares Global Clean Energy ETF (ICLN)

My “Two I’s” Never Close

What you just saw is far from the first time a focus on Insiders and Institutions has paid off. I’ve been viewing the market through those twin lenses for more than 25 years.

In fact, just two weeks ago I wrote about how insiders appeared to be front running another piece of pending legislation. Paul Pelosi, husband of Nancy Pelosi, took a $5 million dollar position in NVIDIA Corporation (NVDA).

This was just before passage of the CHIPS Act of 2022, a bill designed to strengthen the American semiconductor industry. (And benefit firms like Nvidia and the semiconductor sector as a whole.)

How did this all look through the lens of “Institutions?”

Readers who join Sector Prophets also get free live webinars where they receive coaching in my particular style of investing. On July 19, during one of these events, I recommended a number of semiconductor stocks.

Here’s how some have performed since then. (Purple arrows point to the day of the Sector Prophets webinar.)

ON Semiconductor Corporation (ON)

Photronics, Inc. (PLAB)

QuickLogic Corporation (QUIK)

If you’re not yet a member of Sector Prophets, I highly recommend you give it a try.

If you put me on a desert island with no TV and no news… nothing but a powered laptop and Sector Prophets, I’m sure I’d beat the pants off most fund managers.

To give it a try, just give us a call at 855-822-0269.

Stay safe and stay cool,

Chris Rowe

Founder, True Market Insiders

 

 

 

 

 

“You see it in the price before you see it in the news."

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