As I noted this week, the bull traps of this market have been hard to navigate. Once the S&P 500 failed to pop above 4,450 we saw another leg down for the index. The SPY (an ETF that tracks the performance of the S&P 500) continued its negative channel breakdown on Thursday.
You’ll notice the downward stair-step pattern. That’s common in negative momentum markets. It continues to produce lower highs and lower lows. For this to break out of its rut, we’d need to see a rally on Monday and another test of that 445 level in the chart above.
I think we’re in store for one more short-term pop in April. But I caution investors about the prospect of “going long” in this market. In May, the Federal Reserve will host its third 2022 meeting around interest rates and its balance sheet. I expect that the Fed will start tapering its balance sheet.
By tapering, I mean that the Fed will start to remove liquidity from the market faster than it did back in 2018. And that is where volatility will likely rise, and investors will start to fret.
Sell in May and go away might be good advice if the Fed continues its breakneck pace on interest rate hikes and tapering. That said… money has to rotate somewhere… and we’ll continue to break down the best stocks to hold in positive sectors.
I’m talking about energy, materials, and utilities. So there are a lot of opportunities ahead.
My Favorite Renewable Energy Stock
Yesterday, I said that I’d offer my favorite renewable energy stock.
My favorite one to trade is Standard Lithium (SLI), a company that aims to “frack” lithium by reducing the extraction time for the critical metal from brine. Now, this is a pure momentum stock, so I buy it when momentum is positive, and I short it when momentum is negative.
The company is working on a moonshot project with Koch Industries that would reduce the time needed to bring lithium to market by months, if not years. The valuation is tricky, and it moves in tandem with other growth stocks like ChargePoint (CHPT) and Nikola (NKLA). Right now, the stock is pulling back sharply.
My favorite renewable energy stock would be Brookfield Renewable Partners LP (BEP). The Toronto-based energy giant has its hands in every type of renewable project possible.
Wind? Of course.
Battery storage? Heck yes.
Even though many governments are creating short-term problems with their grids by phasing out oil-and-gas too aggressively (the latest is Quebec’s provincial government), this company will benefit from the trillions of dollars that they will throw at the problem.
Because spending money in outrageous sums always works out for everyone, right?
Why Brookfield is a Long-Term Buy and Hold
The key to owning a diversified energy portfolio never has to pay an expense ratio for it. Instead of buying alternative energy ETFs or funds that require a percentage to managers, you can simply own Brookfield Renewable and achieve the same result (and keep the money).
The company deploys about $1.2 billion each year into new clean energy projects worldwide. It has about $65 billion in assets and aims to return 12% to 15% per year. Given the $150 trillion (that’s their estimate) spent on the decarbonization effort, this is the pure player in the space that would benefit.
As I noted, Quebec is the most recent provincial government to rule out oil and gas further development. A recent vote will phase out all new projects within three years. Quebec is a leader in hydroelectric power. So too is Brookfield Renewable, as it generates about 8,100 megawatts of hydroelectricity each year. Further development of these assets only increases the value of their existing ones in the eyes of shareholders and buyers.
Finally, remember the trend is your friend.
It appears that each government around the globe (whether in Canada, Europe, or Australia) is trying to be the first across the finish line banning fossil fuels. Even California – America’s most liberal state on environmental issues – is trying to ban new gas-powered vehicles by the end of the decade. The faster the push to renewables – the more BEP will benefit.
Scale and capital matter right now. That’s why sticking with the biggest and the best will serve you well in this trend for the decade ahead.