September 22, 2023

Investing in History

I’ve frequently written about technical analysis as an important piece in my overall strategy, to buy low and sell high. The interest in this form of analysis began during my early years as a Treasury trader, and has never been more interesting, and important, than in today’s AI world. The reason is that AI both possesses information that it’s been fed externally and through machine learning internally. The result has been the clear driver for the trading crowd dependent on AI for trading signals and more broadly to a handful of investing giants such as JPMorgan Chase (JPM) and Goldman Sachs (GS), and including Hedge Funds such as Bridgewater, founded by worldwide influencer Ray Dalio. The bigger result is the welcome evidence that market based activity has shown clear correlation to traditional technical analysis. Indicators such as traditional Wells Wilder Relative Strength Index (RSI, >70% overbought, <30% oversold) a good indicator for intermediate and longer term investors, and the Stochastic Oscillator (low positive cross indicates oversold, high negative cross indicates overbought) are fueling short term excitement. In short, AI is capturing historical measures and applying them today to the benefit of active investing strategies, essentially, history is repeating itself, albeit without the suit and tie.

 Of course, everything depends on more than this technical analysis, fundamental analysis is the primary source of ideas to invest in. But what is fundamental analysis composed of, and where does one look in a world of markets that has over 8,000 publicly traded companies. This is where technical analysis can help focus in sectors of an economy, how each is performing and where indicators show weakness at the expense of strength. For example, in 2023 the Technology sector is up over 35% this year, while Utilities is down nearly 10%. Is this a good reason to look at Technology stocks or Utility stocks?

 The answer, in today’s market, is both.  However, the question is why is Technology going up and Utilities going down. Historically, the economy is resilient to innovation, vital to an inclusive economy, hence every revelation from fire to the internet has seen a tidal wave of consumers. But the innovation that gains traction is more often met with deference and therefore the consideration to bring to the table in today’s market, is technology going through one of its most impactive historical periods? Yes, history is repeating itself, albeit most employees might be computers.

 Utilities are a sector that isn’t void of innovation, but most of it isn’t disruptive, a key component of technologic gain. Because most people are consumers of utilities such as water and electricity, utilities are also consistent in their flow of revenue, as demand tends to remain steady in strong or weak economies. Therefore, most investors hungry for risk will ignore utilities in favor of technology. To combat this challenge utilities have shared much revenue in the form of dividends, attracting those investors seeking defense over risk. However, in my opinion, we’re at a curious time for utilities, that is the challenge of climate change, and the steady growth of solar and wind electric generators. In the last few years, we’ve invested in companies that follow this trend, but as with any innovation, it has been wrought with problems, such as over use and harsh weather induced grid crashes. Therefore, it has been my aim to seek utility exposure that is both defensive, and innovative, but a different innovation, that is nuclear fusion. The total transformation from historical nuclear fission, it brings total renewal obligation and the potential for both steady income and growth. That combination is welcome, and when history repeats itself, the outcome is far more manageable.

This week the broad indexes traded lower on the back of the Federal Reserve, who decided to refrain from raising interest rates, but not from talking up future aggressive hikes should they be warranted. In my opinion, as inflation is slowly dropping, oil and gas are not. Also, unemployment is still very low and the consumer is spending and complaining about high prices simultaneously. A correction was necessary for the indexes and they’re getting what they deserve, until earnings suggest otherwise. Therefore, as the quarter ends, I’m expecting to see a more positive close to the year, and welcome a responsible Fed.     

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