On Monday we saw the price of gold rally over $40.00 and mining stocks pop with a key breakout. Yesterday we saw more money flowing into commodity related sectors as energy stocks simply exploded, with many of the big cap energy stocks up over 5% and some up over 7%. The action was incredible for a one day gain, but there can be much more room to run.
Take a look at the XLE ETF, which I have a small position in.
The XLE ETF has not broken out yet. What it has managed to do is rally back near recent resistance at $42.00. If it clears that then we will start to see a big run begin in the energy sector.
It will probably happen soon, as some energy stocks are already breaking out and it is just time for commodities to go up this year.
One energy stock that I own and like in this spot is Exxon, which is paying an 8% dividend.
The daily stochastics indicator for XOM gave a buy signal yesterday by closing above 20. Despite what we have seen this year with gold and mining stocks there is still not a single metals stock or ETF that is in the top 100 list of most owned positions on Robinhood. Smaller traders just aren’t in.
What Robinhood people are focused on are the big fad winners of last year as you can see from this Tweet.
How to turn your $600 stimmy into $13k. pic.twitter.com/p08SD29kyS
— TikTok Investors (@TikTokInvestors) January 4, 2021
I thought this was a parody, because it is so crazy. But this tweet is real. This girl is becoming a leader of Robinhood traders and was mentioned in a Bloomberg article yesterday inspired by her titled “Stocks, Bitcoin and More: Unusual Ways Americans Are Planning to Use Their $600 ‘Stimmy’”
One Robinhood trader was profiled in this article:
Albert Lewis III, a 19-year-old Iowa State University student who grew up in Chicago, has already decided where the money is going: into his Robinhood investment account.
“The $600 isn’t needed at this moment,” Lewis said. “I’m investing it hopefully to turn it into something more than that by the time I’ll need it. $600 in a year isn’t going to turn into $10,000, but if I invest it now, in 40 years it’s going to be worth way more.”
He says most of his essential expenses are already covered. Most of Lewis’s college tuition is paid for by scholarships. He lives at home with his parents, meaning he doesn’t have to worry about rent at the moment. Small side jobs allow him to cover everyday costs, like those for food and his phone. He hasn’t decided where he’s investing his $600 yet, but is considering “some company that’s not going anywhere,” like Apple Inc. or Facebook Inc.
The rise in the market is exciting many people new to trading, but is also causing some older market players with decades of seasoned experience to warn that this is just like what happened with real estate in 2006 and the stock market in 1999.
Jeremy Grantham put it in an article today titled Waiting for the Last Dance – The Hazards of Asset Allocation in a Late-stage Major Bubble:
“The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
“These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.”
“But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.”
It is difficult for anyone who manages client money to create a big cash position even if they fear a stock market meltdown, because if they get out and the market keeps going up their clients will revolt and take their money away from them and go to someone else. If they stay in and lose it’s ok, because everyone else is and excuses can be made as events can be claimed to be unforseen to put the blame on.
Grantham’s solution is to invest in cheap pockets in the financial markets. That’s what I am doing with energy stocks with a bit of my money.
I agree that the markets are risky, but I don’t think we’ll see a meaningful correction in the first half of this year. After that we’ll just have to see how things stand as I explained in this video I posted on the website Tueday:
In reality we are in a dream moment for new traders and people using apps like Robinhood. However, this environment is created thanks to Federal Reserve zero rates and QE problems. This is fun for people, but there is no such thing as free money – the cost will be rising inflation and a falling US dollar.
Gold’s rise Monday is confirmation to me of why I made my top stock pick for this month a small cap mining stock. Get the details in my post here.
If you are new to this website and want to learn more about stock trading and investing get my book Strategic Stock Trading.
-Mike
