Investor, There’s a Bug in Your Olive Oil (CGNX,BOTZ,TGT,LVNTA,QQQ)
In what might be considered a perfectly apropos metaphor for the state of investing these days, the Kansas City Star yesterday reported that Vincent Van Gogh’s ‘Olive Trees’, painted in 1885 directly before the artist took his own life, has been hiding a secret for better than 125 years.
Curators at the city’s Nelson-Atkins Museum report finding a grasshopper that was lodged in the paint all those years without anyone noticing, attributing it to the simple vicissitudes of painting outdoors.
The Bug in the Oil
And we wonder if, after the ‘suicide’ of the current bull run, this stock market’s ‘grasshopper’ will be so easily identified.
For we’re no doubt headed toward a structural event in the financial world. And though many will point to their favorite bugbear as being responsible for the calamity-to-come, we believe that the larger cycles of human history – and particularly those related to finance and economics – make it all too predictable.
No geniuses here. Just keen observation.
The market cycle is essentially one of arrogance and humility. It follows the larger course of human events and can therefore be monitored more or less by reading the news. When we enter ‘new eras’ where ‘human ingenuity’ continues to ‘expand the boundaries’ and ‘break open never before imagined vistas’, opening ‘limitless possibilities’ for humankind… then you know we’re close to the top.
It’s happened before.
Right now we’re veering toward just such a point with the advent of artificial intelligence, robotics and planet-saving technologies that will apparently do away with everything from hard work to sour milk.
Take a look –
Spending on new AI technologies is still in its infancy, and, as the above chart shows, the growth curve in both R&D and purchases of new, robotic technologies is going to skyrocket as the potential for savings and the discovery of new products and applications picks up steam.
Those technologies, incidentally, are the focus of our letter today AND the ultimate source of the bull market’s doom, as we see it, a point that will become clear to all when the dust finally settles.
We’ll have a lot more to say on the topic in coming letters. But first…
It’s the Arrogance, Stupid!
Hubris inevitably leads people to make bad choices, and it’s no different in the world of finance. The malinvestment that has accumulated in the current system is eventually going to be exposed for the silliness that it always was. Bad companies, ideas, management, and even countries will evaporate, and a new more solid foundation will be built on the ruins.
And this is where our trade for the day resides.
But before we get to it, a quick look back at two initiatives that require some discussion.
The first was launched back on August 18th in a letter called The Face That Launched A Thousand Ships. There, with great faith that an imminent rise in the indexes was about to transpire, we urged you to consider a speculative purchase of the QQQ December 15th 157 CALLs, then trading for $0.49 each.
Today, that same dame is trading for a healthy $1.09, and we’re all in favor of liquidating. Yes, there’s over a month remaining before expiry, but no one knows what sort of insect might happen along to ruin the picture.
It’s a 122% profit in less than a quarter, and it’s well worth it.
Next up was our August 25th effort. The letter was called When Liberty’s the Target, and it didn’t pan out well. We recommended you consider buying the TGT October 20th 55 PUT for $1.18 and selling the LVNTA October 20th 60 PUT for $1.45. Total credit on the affair was $0.27.
And here is how it looks today –
The TGT options melted wicked-witch-worthless on expiration, but the LVNTAs ended up in-the-money, making us proud owners of one lot of stock at $60.
At present, LVNTA shares are trading for $57.44, and we’re therefore advising you to sell the LVNTA June 15th 60 call for $3.50. That will extricate us from the trade with a profit of $377 if LVNTA trades above $60 by expiry, as well as offering us downside protection to $53.67.
We’ll monitor the stock and offer you advice should anything untoward transpire. For the time being, however, rest easy. You’re covered
Now Back to this Week’s Barn-Burner
We’re going to take a closer look at the robotic/AI space this week, and open with a view of the sector as a whole, as represented by the ROBO Global Robotics & Automation Index ETF (NASDAQ:ROBO) –
As you can see it has been elevator-up for the sector for 22 months, the last two of which have seen an upside break from the trend channel on good volume.
Does that mean the end is near? Or is there more to come?
Truth is, we’re not sure.
But we do know that one of the constituent stocks in ROBO’s holdings is due for a break.
That company is called Cognex Corp. (NYSE:CGNX), and it makes a variety of ‘eyes’ for machines that allow them to scan barcodes or spot anomalies or defects on assembly lines, among other things. And it has been growing tremendously.
Have a look at the chart –
With price now climbing almost parabolically (in red) and RSI and MACD reads well into the overbought on the WEEKLY chart (in green), our best estimate is that CGNX has gotten ahead of itself. And despite its regular quarterly earnings beats, the stock will probably no longer catch the attention of the robotic bulls.
Look for investors to rotate away from eyes toward something that looks even better.
Today’s trade pits CGNX against the Global X Robotics & Artificial Intelligence ETF (NYSE:BOTZ), a newer AI sector ETF whose options’ spreads are far tighter than ROBO’s.
And it goes like this –- Content protected for Normandy Executive Lounge, Option Trader Elite, Executive Lounge members only]
Incidentally, the CGNX option is 37% out-of-the-money and the BOTZ only 2.8%!
Many happy returns,