This week is seeing the S&P 500 back off the all-time high it set Friday, and there are signs that investors are turning more defensive. Rotation charts show the market preferring utilities and, to a lesser extent, consumer staples – both are traditional defense areas. Recent internal price action for the S&P also shows a meaningful divergence between its price – which has been rising – and its relative strength index (RSI), which has been declining. That suggest the overall market is shifting to a pause or step back, since a divergence like that means the upward move of the past month lacks conviction. That’s means that the weakness in technology probably will continue. Tech has been the worst sector of the S&P lately and since tech plays a big part in advancing the market indexes, the broad market can only swim against the tide so long. What does that mean for Greentech? Much of the sector trends with technology, and the broad weakness there helped push Greentech down through support we calculated last week should hold. In our sector specifically, the lack of a passage of a federal infrastructure bill emphasizing clean energy also is weighing on action, encouraging traders to move to the sidelines. All that means we have some more time in the wilderness. Eventually tech will lead the broad market back up and Greentech is a supercharged version that should accelerate more quickly when the time comes. Until then, we have options: we can shift our gaze to utilities that are Greentech leaders as well as companies in other sectors that show some resiliency – mainly industrials (Interestingly, consumer staples in Greentech – a small group of a dozen U.S. organic food-related stocks we track – aren’t advancing with broader staples and remain under near-term moving averages). Blue chip stocks that are highly rated in the social and governance portions of ESG are also options we can focus on opportunistically. For our nascent SX Greentech Advisor portfolio, however, there are headwinds. Energy Recovery (ERII) The riskiest time in any trade is the moment you enter it. There is always the chance the stock can move immediately against you, then quickly run down to stop you out of the trade at a loss. That’s exactly what happened to us with Energy Recovery. The portfolio added ERII last Wednesday at 21.07 a share with a sell-stop recommended for around 18.83, which we noted was a confluence of support. That level didn’t hold midday Monday and we were stopped out there, a loss of $2.24 a share, or 11%. Ostensibly the catalyst for ERII falling was its first quarter earnings. They were good: Sales leaped 52% compared to the same period in 2020 and diluted per-share net income was 12 cents, both exceeding Wall Street analyst expectations. The core desalination business was strong with management highlighting opportunities in large desal projects being planned. Plus, the company is very positive about the emerging wastewater pressure exchange market and their manageable expense dynamic to meet future demand there. Less positive: the pandemic probably shifted some sales out of the current quarter (Q2) and a decision has still to be made on commercializing VorTeq, its long-delayed oil and gas pressure exchanger. Overall, though, ERII showed excellent results. For what it’s worth, one Wall Street analyst raised their price target for ERII after the call. What’s really going here is less about ERII specifically than the market looking for any excuse to sell growth names. For potential buyers, there’s no reason to come in now when prices continue to fall and share can be had cheaper later on. What point bulls will come in to support shares isn’t clear. Technically, ERII now will have some work to do to regain their upward stance, which will take time. That means if you didn’t have a sell-stop and exited with the portfolio on Monday, the best move is to sell now, wait at least 30 days to take the tax write-off, and reconsider entry afterwards. SELL Trex, Inc. (TREX) Trex was added to the portfolio last Wednesday at 107.44 with an initial sell stop for the portfolio at 93.50. Monday the company reported 42 cents a share earnings and $246 million in sales for its first quarter, both beating expectations. Management’s outlook for the second quarter was raised too and a slew of Wall Street analysts reacted to both by raising their ratings. So, naturally, shares declined. The downward move isn’t dramatic at about 3%, and it has the action of a temporary weak move that should soon recover. We continue to recommend a sell-stop around 93.50. With the lack of positive follow-through on earnings, it does raise the risk of a test of support just under 100. If that fails, a bear move to the low 90s is possible. HOLD The next issue of SX Greentech Advisor will be published Wednesday, May 19. Always feel free to contact me with comment or suggestions at brendan@cabot.net
