The broad market gapped sharply lower today on fears China’s highly indebted property developer Evergrande could cause a domino-effect of loan defaults in echoes of the 2009 financial crisis. That triggered a few of our sell-stops. It is our portfolio policy, born out of experience, to adhere to our stops, as priced on a closing basis. It hurts to sell, but preserving capital allows us to be positioned to take advantage of profit opportunities in the future. If we’re wrong, we can take the tax loss write-off and re-enter a trade in 30 days’ time and capture upside.
A strategy for selling: usually big down days are followed by early buying the next day as bargain hunters come in. That provides a chance get better exits Tuesday morning. If possible, don’t sell at the open but wait for the initial reaction to pass to avoid worse exits on gap-down opens. Statistically, prices will be better soon after trading than at the open, if a down day.
Chaos for some holdings often brings opportunity for others. We have two buy recommendations below as well. We believe Evergrande’s issues are not as broad-based or dramatic as the mortgage crisis, and therefore expect recent action to be temporary.
Sell:
Aptiv (APTV) gapped lower and closed at 143.44, below our “near 145” sell-stop. It’s below its 200-day moving average now, crucial support that makes a strong rebound unlikely for now and it should be sold.
Ameresco (AMRC) violated our sell-stop of 66, closing at 63.11. There should be good support around 57, where the 200-day moving average sits, but losing support there would be a bigger drawdown than we like in a negatively skewed market.
First Trust Water ETF (FIW) similarly broke our sell stop of near 88, closing at 87.02. The temptation is to hold FIW here – water has been a strong performer and shares finished at the top of their day’s trading range. Experience, however, tells us it’s important to commit to sell-stops.
KraneShares China Environment ETF (KGRN) gapped lower and closed at 42.14, the bottom of its day’s range and about a dollar lower than our sell-stop around 43.25. The combination of a China corporate debt crisis with Evergrande and recent crackdowns on businesses in general by China makes selling the safe move.
Two buy recommendations:
Aemetis (AMTX) and Centrus Energy (LEU) both fell in sympathy with the broad market. Neither has any real China exposure, although they can continue to be drawn in by market-wide sell-offs. Though affected by global commodity prices – ethanol and oil for Aemetis and uranium for Centrus – both are largely domestic (U.S.) plays.
Centrus dipped into our suggested buy range with its close at 32 and we will be buyers just after the open tomorrow as a result. It would be advisable to also wait to see how the market opens in the first half hour Tuesday to avoid buying into any potential panic selling. A sharply lower open Tuesday means pause any buying. BUY LEU
We like Aemetis at the lower price and don’t see China as affecting domestic renewable natural gas prices, which is the growth business driving Aemetis’ rise. Further weakness, within reason, could be a chance to get in at a good price. BUY AMTX between support at 10.60 and 12.
Our regular weekly update of SX Greentech Advisor is out Wednesday, September 22.
Please let me know if you have any questions or comments. You can reach me at brendan@cabot.net.