Lithium stocks are seeing ramped up put option activity
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Last week on Schaeffer's Market Mashup, Senior Market Strategist Chris Prybal chopped it up on a wide range of subjects. Below is a transcribed excerpt of the episode, exploring the EV sector, the Fed’s task at hand, and a copper signal.
What are your thoughts on the electric vehicle (EV) sector and lithium mining?
Prybal: Per the chart below, I put together the five main lithium stocks and their buy-to-open option activity. It's apparent from that chart that there are a lot of call speculators chasing this trade already. With the pullback today, in most of the stocks, you're finding a low technical sell off, but it appears within a general uptrend. It's not as if they're creating a new downtrend. It’s just a pullback within an uptrend. You've got skepticism on several of these players; they might be call heavy, but those options are going to expire. Most people are trading short term options these days, so they could expire a week from now and you could remove that headwind.
From an analyst perspective, looking at all Albemarle (ALB), it has as many “hold” ratings as it has sells. Livent (LTHM) has twice as many “sell” ratings as it does “buy” ratings. If we're going to ramp up production at such a high pace, there's got to be battery players that step up and serve the market. Since President Biden has stated that if you want to build an electric vehicle in America, 75% of the components have to be derived from our continent. Who is going to manufacture all those parts if it's not China?
What other macro market events are you looking at?
Prybal: I went and looked at the CME Fed Watch tool, and there's about a 50-50 chance that we'll either get a 50% or another 75% interest rate hike in December, in addition to the 75 one last week. So, you're looking at February 2023, the highest probability that the market is pricing is that interest rates will be 100% higher than they are now. That’s one full percentage point higher, that’s what the market is pricing in. That's what we're staring at going into the seasonally strong end of the year. Remember, the Fed is looking at employment, they're looking at wages. And neither one of those indicators have shown any signs of stopping their unbelievable run. Wages continue to rise, and employment continues to be very low.
The Fed has to keep their foot on the brake, they have to maintain some discipline. They have to raise rates no matter what people want. They've got a job to do. People say ‘well, there's already signs of it turning over.’ So, you're telling the Fed to just guess? They're looking at hard data from the past month and the past quarter. And when they look at that data, they don't really have a choice. They've got to slow down the train. And if you aren't prepared for that, you're still living in that zero interest rate wacky world where anything can go up in value if you gotten a good business idea. You have a $10 billion valuation, and you did only $150,000 in sales?
You have to scratch your head there. Why would a company that has minimal revenue be valued at such a high level? The Fed is doing a good job of bringing the market back into a valuation metric. The S&P 500 Index (SPX) is about 16 or 17 times the past year's earnings. Anytime you get above 20, that's usually expensive. Anytime you get below 15, that's usually a good buy. We're kind of still in that little sweet spot that the Fed can push the market lower and we're not really on sale. There's a discount on stocks right now, everyone likes a sale. But they're not really rock bottom prices yet.
You're not at those long term moving averages, like the 500-day or the 1000-day. Those have historically been the best times to pounce. We're not there yet. We're in a short term bullish balance and an intermediate and long term downtrend. And the Fed is going to keep that up. They don't have a choice.
Another thing I'm doing right now is monitoring the three-year relative strength lookback. And I look at three years because it encompasses the ‘before Covid’, ‘during Covid’, and ‘after COVID’ periods. You can see how a stock reacted throughout those different environments. It's just fascinating to see a stock that's below their Covid lows right now; that's not good.
There are stocks that are at their Covid lows and analysts love them. And people are buying calls left and right, expecting this big bounce. But why is the stock at these Covid lows in the first place? Maybe it's a shitty investment? And why would it not have gone up through that entire Covid period where the government flooded everyone's bank account with money? That stock can't go up during that time frame? That's one of my flavors of the week, a shiny object for me.
Any other indicators or alarm bells going off?
Prybal: I wanted to also remind you about Dr. Copper. We’ve talked in the past about the 50% Fibonacci retracement from the Covid low to the Covid high. We’ve traded at $3.50 for four months straight, right at that 50% level of that range. That pretty much tells you there's a lot of indecision out there, and people do not know if we're going lower, or higher. When the Fed makes that decision later next month, we're probably going to find out. I'm excited for it.
