Exited my position in Redfin and Energy Recovery

I had written about Energy Recovery Inc., (NASDAQ: ERII) on my blog on July 25, 2020. I had taken a small position in Energy Recovery on July 24, 2020 at $7.70. Since then the stock has had a nice run and I sold my position today at $8.50 for a 10.3% gain. The technical indicators are still flashing a buy for Energy Recovery. But the stock has had a sharp run-up. The MACD also had a bearish crossover and that was partly the reason for my sell. The Relative Strength Index was at 63 today and I did not wish for it be in the over bought territory before I sold this position. 

Exhibit: Energy Recovery Technical Indicators on August 11, 2020.

 (Source: Tradingview)

I took a position in Redfin on August 10, 2020 at a price of $41.80. I never had full conviction for this trade. I felt Redfin (NASDAQ: RDFN) was too overvalued and there were too many uncertainties in the economy and in the housing market. Given the loss of unemployment benefits for millions of Americans, I wasn't sure how this was going to impact the demand for housing. The Federal Reserve has done an admirable job of lowering the interest rates and stabilizing the financial markets. But even they cannot create jobs or pay unemployment benefits or prevent evictions. So, I felt that the economy is in a very precarious position.  In this current situation, I did not want own a company like Redfin. It may be a speculative bet at these valuations and economic conditions. I sold Redfin at $43.50 for total gain of 4%.   

 

     

     

How did the U.S. Markets have the Best Quarter in Decades?

    The quarter that ended on Tuesday, June 30th was the best quarter for the market in two decades. How did the U.S. stock market end with such a statistic in the midst of a global pandemic and record unemployment?

    On February 12th, 2020, the Dow Jones Industrial Average (DJIA) had hit an all-time high of 29,551. But by February 21st, 2020, the fear that the COVID-19 virus is going to bring life to a standstill in the U.S was taking hold in the market. The markets were in free-fall from around that time until March 23, 2020. On this date the Dow Jones Industrial Average was at 18,591. It was a drop of about 37% from the top.

                             Exhibit: Dow Jones Industrial Average hit bottom on March 23, 2020

                                            (Source: Google Finance)

    March 23 would end-up being a monumental date for the country as a whole and a one for the history books. This was the date on which the Federal Reserve made an announcement that they are "committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time."

    This announcement was interpreted by the markets that the U.S. Federal Reserve is going to provide a backstop to the losses mounting across companies of all different sizes. The demand for products and services provided by airlines, restaurants, cruises, and malls vanished overnight. Most of these companies did not have a plan or funds in place for such a dramatic drop-off in demand. The Federal Reserve did not want to see problems in one sector of the economy, mainly in discretionary spending, spillover into other sectors. For example, when fear of COVID-19 took over and many states instituted lock downs or quarantine orders, malls and restaurants were forced to close their doors. That in turn led to these companies not generating any revenues that could be used to pay their bills, such as paying their rent or their suppliers. This cascading effect would lead to companies, cities, and states all across the U.S. laying off millions of people and plunging the U.S. into another great depression. 

    The Federal Reserve started buying high-quality assets in the open market along with making billions of dollars of loans available to companies of all sizes. Even though millions of people still lost their jobs, an argument could be made that this move by the Federal Reserve did prevent a great catastrophe. Without the bold intervention of the Federal Reserve, a worldwide health crisis could have easily grown exponentially larger when a worldwide economic crisis is unleashed at the same time.

    So, it turns out March 23 was the day the U.S. markets hits bottom. An epic stock market rally started that day and by June 30, 2020, the Dow Jones Industrial Average had gained about 38% from its bottom of 18,591. The DJIA stood at 25,812 on June 30, 2020.