Yes, Buy This Dip

Summary

• It's been several weeks since I wrote about "bubbles" developing in various sectors.
• Despite an S&P 500 correction of only around 6%, many areas in the market declined by 30% or more during the recent meltdown.
• Some of the most heavily-sold sectors likely represent some of the best deals right now.
• We're looking at EVs, lithium providers, alternative/solar energy, China and more right now.
• This idea was discussed in more depth with members of my private investing community, Albright Investment Group . Learn More »

Source

It's been several weeks now since I put out my "Yes, Of Course, There Is A Bubble" article. While discussing the idea that there are "bubbles" in various areas of the market, the segments that we put most emphasis on in the article were EVs, alternative energy, and digital assets. Now that a few weeks have gone by, these areas as well as others have deflated by quite a bit. After seeing significant corrections in various areas of the market we see some notable buying opportunities materialize at this time.

Looking Back on Some Pullbacks

Several specific names we discussed as being substantially overbought included Tesla (TSLA), NIO Limited (NIO), Plug Power (PLUG), iShares Global Clean Energy ETF (ICLN), and Dogecoin (DOGE-USD). Yet, the argument wasn't designed to single out these names. Rather the discussion was meant to shine a light on the extremely overbought nature of several particular sectors as well as other frothy areas in the market.

From recent peak to trough:

Tesla declined by 40%.

Source: StockCharts.com

Tesla's correction has been ongoing for about two months now, and the stock has given up approximately 40% of its value. We also see the relative strength index RSI at about 27, a level indicative of extremely oversold market conditions. Furthermore, Tesla has a very solid technical support level around $550.

NIO gave up 52%.

NIO, much like Tesla, is also notably oversold here. The stock was down by more than 50% from its highs, the RSI is around 27 as well, and the stock hit a level consistent with a major technical support level in recent sessions.

PLUG lost 56%.

PLUG, along with many other solar/alternative energy names, has gotten crushed lately. This stock filled some key gaps, and also hit a very key technical level in recent trading sessions.

ICLN gave back 38%.

With an RSI at around 25, ICLN is drastically oversold now. We see that this ETF also filled a key gap from several months ago. In fact, this ETF along with other key solar/alt energy ETFs has dropped to levels not seen in around 4-5 months.

Dogecoin went down by 53%.

Source: Binance.com

After Dogecoin's rapid ascend the digital asset put in a double top followed by a prolonged correction process. While we do not invest in Dogecoin, the correction pattern is largely emblematic of the digital asset industry in general.

Now that the Nasdaq and other major market averages have gone through healthy corrections, this is likely a very attractive level to get into some badly beaten down names. In fact, we recently started new positions in Tesla, NIO, as well as in a number of other stocks, ETFs, and digital assets.

Why Markets are Headed Higher from Here

Some people may be saying, "but what if this is only the beginning?" To address this concern let's examine why this correction occurred in the first place. Several primary reasons for the recent selloff include rising rates, frothy valuations in some sectors, an end to earnings season, passing of fiscal stimulus, and some good old profit taking. These appear to be transitory factors, and there doesn't appear to be anything systemic threatening markets.

The 10-year has exploded higher, essentially going vertical recently after tripling from its August 2020 lows. Now, I don't think that such sharp moves are sustainable from an intermediate or longer-term perspective. The U.S. simply has too much debt for Treasuries to continue to move notably higher from here.

Therefore, the sharp uptick we've witnessed recently is likely a knee-jerk reaction to expectations for higher growth and higher levels of inflation going forward. Furthermore, higher growth and elevated inflation are bullish elements for stocks, commodities, and other risk assets going forward.

Corporate earnings and the announcement for fiscal stimulus can be "sell the news" type events. This is very likely what occurred, as earnings were largely better than expected, and better than expected earnings along with fiscal stimulus are both favorable for stocks as well as for other risk assets.

Yes, valuations were very frothy in certain areas of the market. EVs, alternative energy, areas of technology, many small cap names, lithium providers, growth stocks, and high multiple names, as well as other areas in the market had gotten notably overbought. Therefore, markets needed a correction, some profit taking in frothy areas, and some rotation to more value oriented, more defensive areas in the market was necessary. This is exactly what occurred, and now markets can continue to move higher after the recent reset.

Things to Buy on the Dip

I mentioned that we bought Tesla, NIO, and several other names in recent sessions. I want to share several other beaten-down names in areas that are likely to rebound and move higher going forward.

In lithium:

Lithium Americas Corp. (LAC)

Sociedad (SQM)

Global X Lithium ETF (LIT)

We've seen some notable downside in the lithium sector during the recent pullback. This segment essentially goes hand in hand with EVs, as lithium is needed in increasing quantities to meet growing EV demand. With increased demand for EVs, and a likely uptick in inflation lithium should perform very well going forward. Therefore, we like the underlying sector after the substantial pullback in recent weeks.

In solar/alt energy:

ALPS Clean Energy ETF (ACES)

Invesco WilderHill Clean Energy ETF (PBW)

The solar/alternative energy space is full of compelling ETFs and attractive companies. In addition to the names discussed, First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), and Invesco Solar ETF (TAN) are amongst our favorite picks in this space. The alt energy/solar segment was on fire throughout 2020, and after the recent selloff 2021 could be another blockbuster year for this space. Higher energy prices, a global push toward cleaner energy sources, inflation, as well as other factors are creating a favorable environment for the underlying space.

In China:

Baidu (BIDU)

Alibaba (BABA)

Global X China Consumer ETF (CHIQ)

China remains the land of growth and opportunity. Now that global demand is coming back online, this huge export economy should do particularly well going forward. There has been a significant pullback in Chinese companies, and now appears to be a favorable time to get back into some of the best quality names.

Analyst’s Disclosure: I am/we are long TAN, CNRG, PBW, ACES, NIO, TSLA, BIDU, CHIQ, LAC, SQM, LIT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments

[dlsbrk]

Now nearly a month later and here's how we're doing, G/L%:
TSLA 3.44
LIT 3.15
LAC -0.32
QCLN -0.51
ACES -0.51
ICLN -1.29
CHIQ -1.39
SQM -1.97
TAN -2.41
BABA -3.84
PBW -4.38
NIO -4.86
BIDU -12.88
PLUG -21.92

Average G/L has shot up to -3.55%.

[dlsbrk]

@dlsbrk Here we are on May 6, 2021, a few days shy of 2 months on, and the group is now down, on avg, 13.89%. All but one (LIT) are in the red. PLUG leads the plunge at -47% followed by BIDU (-24.7%) and LAC (-22.9%) and PBW (-22.1%).

[Victor Dergunov]

@dlsbrk What about DOGE? It's up like 10x since then...

[jahanal]

@Victor Dergunov What about DOGE? You literally wrote yourself "While we do not invest in Dogecoin, the correction pattern is largely emblematic of the digital asset industry in general." There isn't a single endorsement of DOGE in your article. You wrote "buy the dip" but the things you suggested to buy are down on average. You can't get every call right, just accept it and move on.

[Bonusplus]

A faulty premise falling for the fake bargains, but can work like any other style.

[dlsbrk]

Now ~14 days later, and the group is down a collective 8%, PLUG in the lead at -22%. Looks like the dip wasn't quite over for these gems.

[Dr. LouX]

Excessive volatility = heart attacks for the uninitiated.

[Illuminati Investments]

I don't always say buy the dip, but when I do I prefer to buy things that have run up 600% before the recent "correction"...

[P. Forts]

How about THIS one?

[Pyraminsider]

Volume seems to be a little lighter for the major stock indices so I imagine the algorithmic computer traders might try some different patterns to increase investor appetite for risk. Even 10% dips get returned in just a couple weeks if they are on light volume.

[Rex Rode]

Semiconductors are going to have a big surge this week (for several key reasons.) Just keep in mind QCOM, TSM, and Intel pay a dividends that rival the big banks. This interest rate rise effecting high tech has been completely overblown. AMD will hit $90 this week. Massive options expiring by Friday.

[divvysaavy]

As interest rates rise, tech stocks suffer since most don't offer dividends. Maybe they need to begin offering them.

[OregonRoss]

Dergunov knows his stuff. What an awesome article. Points made crystal clear with charting.

[Phil Dumfee]

With two weeks left Moderna and Pfizer are not going to deliver 100 million doses on time. Joe better kick em in the butt again.

[Phil Dumfee]

Don't miss the final wave. It's the big one.

[jahanal]

From your article: "The 10-year has exploded higher, essentially going vertical recently after tripling from its August 2020 lows. Now, I don't think that such sharp moves are sustainable from an intermediate or longer-term perspective. The U.S. simply has too much debt for Treasuries to continue to move notably higher from here.

Therefore, the sharp uptick we've witnessed recently is likely a knee-jerk reaction to expectations for higher growth and higher levels of inflation going forward."

So your whole argument for 'buy the dip' is that you don't 'think' that 10 year yields can go higher? That's an extremely weak position. What is going to force yields lower? If investors expect growth to accelerate, why would they buy bonds here and force yields lower? Are you assuming the Fed will intervene with YCC? Why would they when credit spreads remain tight? What assurance do they have that YCC would even work?

Here's the truth: yields can, and most probably will, go higher. Look at how much faster 30-year yields have been rising than 10-year yields. Why is this important? Because 30-year yields reflect inflation expectations whereas 10-year yields tend to reflect growth expectations. While it can be argued that rising 10-year yields reflect rising growth expectations, it is dangerous for equities when inflation expectations are rising much faster because this may have implications for monetary policy. Ultimately, rising inflation expectations crystallizing into actual inflation will force the Fed to tighten way in advance of their presently communicated schedule. Tightening liquidity will be the catalyst for the next >10% correction in the S&P 500.

There is too much focus on the 10-year yield and not enough focus on other interest rates. For example, the spread between 30y and 2y yields hasn't been this overbought on weekly RSI for over 12 years. This is telling you that there is a clear paradigm shift among investors with regards to inflation and growth expectations; this is not a knee-jerk reaction. This paradigm shift will have consequences for monetary policy (liquidity).

It may take a few months before the Fed starts to fret about rising inflation expectations, but now is certainly a time for a much more nuanced analysis . Making a big call ('buy the dip') based on your THOUGHTS about ONE interest rate is, to put it mildly, irresponsible.

[mrs2001]

Nice solid article and charts!

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[Investrava Analytics]

@klonk33 where can I find out more about your investment service? I cannot find anything on SA or elsewhere.

[The Central Scrutinizer]

“In bear markets equities return to their rightful owners.” JP Morgan

[Industria]

I am not sure JP Morgan can own all equities.

[Phil Dumfee]

He's 6 feet under. You can't take bitcoin with you... even on vacation. You can leave home with out it.

[Rex Rode]

U left out the biggest future winners.....The semiconductor sector will be the leaders moving from these lows. Expect AMD, QCOM, TSM, NVDA to go 50+% higher in the next 12 months. Plus, some pay a dividend. Revenues and profits will be huge in the 2nd half and all of 2022. Consider this 25% sector dip a gift.

[blucrab]

ANY OPINIONS ON RIOT?

[P. Forts]

Great title, but where was the insight?

The first half of the article argues that I should buy this dip because prices are nearing their 200 day simple moving averages.

The second half of the article argues that China's economy is growing. To be fair, that's a great point, and a possible hedge against a US bear market. (I don't claim to know how good of a hedge it is.)

[mercls95]

@P. Forts Just like the Motley Fool (been around forever) and a host of other ones they will baffle you with bullshit to get your money. If they ever did have good info, the iron has long since cooled off.

[roseandsong]

Correction is between 10% to 20%
Stock is considered in bear market territories when it goes below 20%
can any body explain why some growth stocks and EV are exception?

[ZeppKF]

@roseandsong Seems to be rebounding now isn't it? It can't go down forever

[Ignatijus]

@roseandsong Because a stock is not a market?