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Last week at Schaeffer’s Market Mashup, Senior Market Strategist Chris Prybal covered a wide range of topics. Below is a transcribed excerpt from the episode, exploring the EV sector, the Fed’s task ahead, and a copper signal.
What do you think of the electric vehicle (EV) sector and lithium mining?
Prybal: According to the chart below, I’ve put together the top five lithium stocks and their open call option activity. It can be seen from this chart that there are already a lot of call speculators chasing this trade. Looking back today, in most stocks you see a weak technical sell off, but it appears in a general uptrend. It’s not like they are creating a new downtrend. It’s just a pullback in an uptrend. You have skepticism about many of these players; they might be call heavy, but those options will expire. Most people trade short-term options these days, so they could expire in a week and you could eliminate that headwind.
From an analyst’s perspective, looking at all Albemarle (ALB), it has as many hold ratings as it has sells. Livent (LTHM) has twice as many “sell” ratings as “buy” ratings. If we want to increase production at such a high rate, there must be battery players stepping in and serving the market. Ever since President Biden said if you want to build an electric vehicle in America, 75% of the components have to come from our continent. Who is going to manufacture all these parts if not China?
What other macro-market events do you foresee?
Prybal: I went to the CME Fed Watch tool, and there’s about a 50% chance we’ll get an interest rate hike of 50% or 75% in December, on top of the 75 the week. last. So in February 2023, the highest probability of the market pricing is that interest rates will be 100% higher than they are now. That’s one percentage point higher, that’s what the market is pricing in. This is what we plan to tackle in this seasonally strong end of the year. Don’t forget that the Fed looks at employment, it looks at wages. And none of these indicators showed signs of stopping their incredible run. Wages continue to rise and employment remains very low.
The Fed must keep its foot on the brake, it must maintain a certain discipline. They have to raise the rates no matter what people want. They have a job to do. People say “well, there are already signs of a turnaround”. So you’re telling the Fed to guess? They look at hard data from the past month and quarter. And when they look at that data, they don’t really have a choice. They have to slow the train down. And if you’re not prepared for that, you’re still living in this wacky zero-interest world where anything can go up in value if you have a good business idea. Do you have a $10 billion valuation and only made $150,000 in sales?
You must be scratching your head there. Why would a business with minimal revenue be valued so high? The Fed is doing a good job of bringing the market back into a valuation metric. The S&P 500 (SPX) index is about 16 or 17 times the earnings of the previous year. Every time you go over 20, it’s usually expensive. Anytime you drop below 15 is usually a good buy. We’re kind of still in that little sweet spot where the Fed can drive the market down and we’re not really in the short. There is a discount on stock right now, everyone loves sales. But these are not really low prices yet.
You’re not at those long-term moving averages, like the 500 days or the 1000 days. These are historically the best times to pounce. We are not there yet. We are in a bullish equilibrium in the short term and a bearish trend in the medium to long term. And the Fed will continue this momentum. They do not have the choice.
Another thing I’m doing right now is monitoring how relative strength has changed over three years. And I’m looking at three years because it encompasses “before Covid”, “during Covid” and “after COVID”. You can see how a stock has reacted in these different environments. It’s just fascinating to see a stock that’s below its Covid low right now; It’s not good.
There are stocks that are at their Covid lows and analysts love them. And people are buying calls left and right, expecting that big bounce. But why is the stock at these Covid lows in the first place? Maybe it’s a crap investment? And why wouldn’t it have increased during this whole Covid period where the government flooded everyone’s bank account with money? This stock can not go up during this time frame? This is one of my flavors of the week, a shiny item for me.
Are other indicators or alarm bells going off?
Prybal: I also wanted to remind you of Dr. Copper. We have talked in the past about the 50% Fibonacci retracement from the Covid low to the Covid high. We’ve traded at $3.50 for four consecutive months, just at that 50% level of that range. That pretty much tells you that there’s a lot of indecision out there, and people don’t know if we’re going to go down or up. When the Fed makes that decision later next month, we’ll probably find out. I’m excited for this.
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