This Week in Episodic Pivots: October 1, 2023

2 New Positions This Week

The markets were down 5% in September. And that capped off the worst quarter of the year. It was a good time to sit aside with most of our trading capital in cash and watch stocks fall.

We even closed out a few winners in the month, including that quick 25% gain in Splunk as it received a buyout offer from Cisco. That’s the power of finding these episodic pivots.

Now, I don’t think this pullback is over yet, but we’re getting close.

The S&P 500 tested resistance at the 10-day moving average on Friday and just got clobbered back down. That’s a sign this pullback may not quite be over. But… I see support at 4,200. And that’s only 2% lower. So it’s close.

I see a short-term bounce coming. And because of that we are going to add a couple new positions today. But before we get to that, let’s lay out some predictions for the fourth quarter.

Obviously, we’ll let the price action dictate our trades going forward. That won’t change. But I think we’ll have to be very tactical this coming quarter.

I see a few parallels now to 2006-07 and also with the fourth quarter of 2018. Let’s start with 2018. That year the Federal Reserve had started raising interest rates for the first time in a decade. And it was also working on shrinking its balance sheet. And there was also a government shutdown at the end of the year.

All of that led to what is now called the “taper tantrum.” That was a quick 20% fall in the markets.

We now have the Federal Reserve raising rates, higher than a lot of people think is necessary. And they are shrinking their balance sheet. All that sets up for increased market volatility.

And we have another potential showdown for a government shutdown at the end of November. That’ll be fun to watch… Sigh…

Those things alone are enough to make worried about the markets. But at the same time, it’s like we are lemmings walking into the abyss just like 06-07. Back then everyone knew something was wrong with the housing market. But it didn’t matter. Stocks kept going up.

But eventually all that negative economic data mattered. And 2008 happened. It feels the same now.

The economic data is terrible. I’m not going to rehash everything. But the Leading Economic Indicators – which is a compilation of about 12 forward looking indicators have trended lower for the past 17 months. Eventually this negativity will catch up with economic activity.

I believe most of Wall Street believes we will have a recession next year. And I think there’s a good chance many of them will start rebalancing their portfolios for this eventuality at the end of this year.

This rotation will likely take the form of selling megacap tech companies and a buying bonds. That’s the kind of rotation we would see heading into a major recession. And with the FAANG+ stocks pulling back, we could be witnessing the tip of the iceberg here.

So let’s keep our stops tight and be careful adding positions the rest of the year.

That’s my theory for what happens in the coming months. But we can still trade around that. And with that being said, let’s get onto our picks for the week.

ESS Tech ( GWH 0.00%↑ )

ESS Tech is a $300 million company that produces energy storage systems. The design, build, and deploy iron flow batteries for commercial and utility-scale energy storage applications.

These are the kinds of batteries we need if we want to see renewable energies like wind and solar expand. We need massive batteries to make that happen.

Now this is still a company looking to reach profitability. And that’s why their stock is trading so low. But last week things changed. That’s when Honeywell – one of the largest industrial conglomerates in the world – bought 16.5 million shares of GWH.

Honeywell did this because they’re going to help GWH commercialize its battery products. And they want part of the upside of their help. Honeywell likely already supplies many of GWH’s potential customers. So it will be easy for them to sell these batteries.

That absolutely changes the way the market will look at this company. And will likely mark a long-term turning point for the company. And the markets loved it too, pushing the stock price up on huge volume.

Let’s buy this on Monday and use the 50-day moving average as our trailing stop.

Sea Limited ( SE 0.00%↑ )

Sea Limited is often called the Amazon of Southeast Asia. They have a great delivery network built out in Vietnam, Thailand, Taiwan, and Indonesia. And this gives them quite a moat.

The news that propelled them last week was that Indonesia is about to lay out some rules for ecommerce sites. These rules are expected to be neutral for Sea, but harm TikTok’s business. And that’s their biggest up-and-coming competition.

This sent the stock surging higher last week on massive volume. The perfect setup for an episodic pivot.

Now we’re going to do something a bit different with this position. I’m excited by this stock right now. But it did face a little resistance at the 50-day MA on Friday.

So let’s wait for the stock to pull back to $41 before entering this position. This will also give us a tighter stop. I’d want to use $35 as an initial stop on the position right now anyway.

And that’s all for this week.

Happy Investing!