When the Vaneck Vectors Rare Earth Strategic Metals ETF (NYSEARCA:REMX) first caught our attention heading into 2018, it had two strong trends moving in its favor: 1) the bullish shift in demand for and production of electric car batteries; and 2) the general increase in stock valuations.
The first of these trends is still partly intact — we’ll discuss the pause we are seeing in a portion of this trend in just a moment. The second of these trends, however, has taken quite a hit, but not a fatal blow just yet. Let’s start there.
General Increase in Stock Valuations
The general increase in stock valuations came to a screeching halt in early February when the yield on the 10-year Treasury climbed above 2.8% for the first time since early 2014 as faster-than-anticipated hourly-wage growth sparked inflation concerns and the CBOE Volatility Index (VIX) skyrocketed above 50 for the first time since mid-2015 as traders and inverse-VIX exchange-traded funds (ETFs), like the VelocityShares Daily Inverse VIX Short-term ETN (XIV), scrambled to cover their short volatility trades.
Since that time, the stock market has been bouncing back and forth between moments of bullish euphoria and bearish despair as traders have been forced to readjust to heightened levels of volatility and uncertainty.
Part of this readjustment has been a compression of the price multiples traders are willing to pay for the earnings companies are generating. According to data on multpl.com, the 10-year Shiller P/E ratio for the S&P 500 has dropped more than 8% from a high of 26.30 on Feb. 1, to its current level of ~24.08 (see Fig. 1).
Fig. 1 — 10-Year Shiller P/E Ratio for the S&P 500 (source multpl.com)
This means that even if a company continues to produce strong earnings, the stock price may remain depressed simply because traders are not willing to pay as much for those earnings.
This rethinking of stock valuations has been far-reaching. Even the lithium-producing companies in Australia and Canada that make up such an important part of REMX’s holdings have been caught in the downdraft of price-multiple compression on Wall Street.
Demand for Electric Car Batteries
The second headwind REMX has been facing comes from the stalled price increases of both crude oil and gasoline. While demand for electric car batteries is still increasing thanks to government-imposed quotas, demand from individual consumers could wane if gasoline prices don’t continue to increase.
As you can see in the daily chart of the United States Gasoline Fund (NYSEARCA:UGA) in Fig. 2, gasoline prices reached their near-term peak in late January and have been consolidating at lower rates ever since.
Fig. 2 — Daily Chart of United States Gasoline Fund (NYSEARCA:UGA)
In fact, the consolidation range UGA has been in for the past six months is starting to take the shape of a “head-and-shoulders” bearish reversal pattern. If completed, this pattern would be a strong indicator that gasoline prices are not likely to rebound in the coming quarters, which would likely lead to increased consumer demand for more fuel-efficient automobiles.
Conclusion on the REMX ETF
REMX has been under quite a bit of fundamental pressure during the past two months, and it is showing. The stock has already started to reverse course from its January highs and has recently broken through an up-trending support level (see Fig. 3).
Fig. 3 — Daily Chart of Vaneck Vectors Rare Earth Strategic Metals ETF (NYSEARCA:REMX)
We are waiting to see if $26 may hold as support in the near term. However, if the underlying fundamentals that have been pulling the stock lower for the past two months can’t turn around, it will be difficult for REMX to climb back up to $33.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here. As of this writing, they did not own shares of REMX.
