Kris’ note: Before we get into today’s Dispatch, a quick reminder about an important event hosted by our friends at Palm Beach Research Group…
Tomorrow night, world renowned cryptocurrency expert Teeka Tiwari will reveal what he says is his “third trillion-dollar trade.” However, here’s the thing, this new trade has nothing to do with crypto.
But if everything pans out as Teeka expects, he sees a 10x move on the horizon in one specific stock play. Make sure you tune in.
By Kris Sayce, editor, Casey Daily Dispatch
At Casey Research, we aren’t traders.
We don’t have anything against trading.
It’s just not our beat.
Instead, we like to play the long game.
We like to find hidden or underappreciated assets.
We like to back them when no one else cares about them – just with small stakes… because they can be risky.
Then we wait. If it plays out as we hope, our small stakes turn into big gains.
But just because we don’t trade, it doesn’t mean we can’t use some of a trader’s handy “tools.”
In today’s Dispatch, we’ll show how we’re using one of those “tools” to potentially play the ongoing inflation trade. Details below…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Nick Giambruno and Dave Forest. And from the founder of our business, Doug Casey.
Straight to the Trader’s “Toolbox”
According to a report in the Financial Times recently:
U.S. home price growth accelerated in April at the fastest pace in more than three decades as strong housing demand continued to come up against a shortage of residential properties.
The S&P Case-Shiller national home price index, which covers all nine U.S. census divisions, rose 14.6 percent year on year in April, data on Tuesday showed.
That followed a 13.3 percent annual jump in March, and was “the highest reading in more than 30 years,” according to the report.
Three weeks ago, Reuters reported:
U.S. homebuilding rebounded less than expected in May as very expensive lumber and shortages of other materials continued to constrain builders’ ability to take advantage of an acute shortage of houses on the market.
This is all part of the inflation trade. House prices, and building materials prices have hit record levels. Fortunately, there is some relief. After hitting a record high in June, the price of one crucial building material – lumber – has fallen 40%.
But the lumber price is still up 50% from where it was a year ago. And it’s double what it was two years ago. So it’s still too early for anyone to think the inflation problem is over.
With all that in mind, it got us thinking about how this setup looked from an investing and trading view. Could we borrow from the trader’s “toolbox” to see if the charts gave a clue about how this trade could play out?
For that reason, we turned to colleague and technical analyst, Imre Gams for his take. We got him on a call yesterday evening. Here’s how the call went…
“I Can Give You the Foundations of a Trade Idea”
We asked Imre if he had any trading ideas around housing and homebuilding. He didn’t hesitate to reply. He told us:
There’s an ETF I’ve been tracking for a few weeks. So not only can I give you a price chart, I can give you the foundations of a trade idea.
It’s the iShares U.S. Home Construction ETF (ITB). It’s currently up 24% on the year and I see more upside yet to come.
When you look at ITB’s price chart, pay attention to the indicator I’ve added. It’s called the Donchian channel, named after Richard Donchian, who is known as the “Father of Trend Following,”
We told Imre that we’d never heard of the Donchian channel. Our technical analysis knowledge is close to non-existent. So we asked him to explain further:
It’s actually quite simple. It consists of an upper band, a base line, and a lower band.
The upper band marks the highest price of an asset over 20 periods.
The lower band marks the lowest price of an asset over 20 periods.
The base line is simply the midrange of the two bands.
You can see this on the following chart of ITB:
Imre pointed out that the key feature of the chart is how the price hit the upper band in May. You can see that at the most recent price peak.
This is important because he said the upper band often acts as resistance in a bullish market.
If you look back along the chart, you’ll see how that has played out. After hitting the upper band, time and again the price has fallen back towards the middle line (the base line).
Importantly, if the price can then find strong support on the base line, then the pullback could be over.
Easy, right? So far.
But technical analysis is rarely that straightforward. If it were, even your editor would probably be an expert with it. Imre went on to say:
Just finding support on the base line, isn’t enough evidence to take a high-probability trade.
It’s important that the market prove itself to us. In the case of ITB, that means successfully breaking and holding above the $71.92 key level. This would be enough evidence to consider taking a position.
We’ve marked that level on the chart. The significance of that and the lower support line at $67.33 is that these are the most recent high and low points in that short-term pattern.
That’s interesting enough. But we also wanted to know if he had seen a similar pattern play out in the same ETF in recent months. He said:
As a technical trader, I always believe the best predictor of future price action is past market behavior. In December last year, the exact same setup happened.
You can see it on this chart:
The price hit the upper band in October 2020, before eventually finding the base line.
After that, using the support and resistance levels at the most recent high and low of $56.95 and $54.76, the price eventually sustained a move higher – gaining 34% over the next few months.
Get in Early for the Biggest Gains (But Not Too Early)
Look, technical analysis isn’t an exact science. If it were, traders would have a 100% winning record.
There are always variables that can upset a trend… cause the collapse of a support line… or result in the price busting through a resistance line.
But the fact is that technical analysis like this is a great way to help build the case for a fundamental investment idea.
To us, that’s even more important when we’re playing with non-mainstream investment ideas. The biggest danger isn’t necessarily that you’re wrong in the long term, it’s that you’re way too early on an idea, which results in tying up capital for longer than necessary.
The best way to play it is to try to get in early enough to make the biggest gains… but not so early that your money does nothing for years on end.
In short, from a fundamental perspective, we here at Casey Research believe the inflation trade idea is only just beginning. But we want to build as strong a case for that as possible.
Using technical analysis on a bellwether sector for inflation is one way to help us build that case. We’ll keep a close eye on the ITB ETF in the days ahead to see how it plays out.
Editor, Casey Daily Dispatch
P.S. ETFs can be a useful and simple way to play the markets. But we almost always prefer to use individual stocks.
The rewards are just so much more lucrative. Instead of getting broad exposure to a number of stocks – which will include bad stocks and good – by investing in individual stock ideas you get to choose what you consider is the best idea.
That’s why we like one of Dave Forest’s latest inflation-busting trade ideas. It’s also a play on the surging housing market… and inflation. And if it plays out as Dave expects, it could lead to a repeat of some of Dave’s biggest gains – including 4,942%, 392%, and 2,805%.
It’s an exciting opportunity. You can check out the full details here.