SBLK - Shipping Sector Breaking Out Of Big Bases Bullish On BOAT ETF (Technical Analysis)

2024-01-03 22:18:11 ET

Summary

• Small caps are breaking out higher but most sectors are extended.
• A number of shipping stocks have been steadily building big bases, and a handful have already broken out higher from theirs.
• The market is heavily positioned for a 2024 recession, having already priced in 6 rate cuts by the Fed. This mitigates the downside risk in shipping stocks.
• The BOAT ETF provides diversified exposure to the shipping space, especially into international shipping stocks which are more inaccessible.

Small caps breaking out, but most sectors are extended...

By now, the majority of market participants would be aware that the Russell 2000 ( IWM ), being used as a proxy for small caps, is on the verge of breaking out higher from a 2-year base.

The more tricky part is to find a sector to buy that is not overly extended. By overly extended, I refer to how elevated prices are from their key moving averages on their daily charts.

Buying strength in a healthy bull market is a viable strategy, as momentum tends to beget more momentum in a fast-moving bull market. However, buying exuberance may greatly reduce the reward-to-risk ratio of the trade.

...with the shipping sector as an exception

One sector that is stealthily building a big base / starting to break out higher is shipping stocks.

This caught my attention, as shipping stocks outperformed between 2021 to the start of 2022 as a result of supply chain / logistics bottlenecks during the Covid-19 crisis. With the crisis arguably behind us, and with country borders opened, I would not have expected the sector to show the strength it is currently showing.

If shipping stocks break out higher, this could surprise the market as the market is positioned for a recessionary 2024, and a recession typically adversely impacts cyclical sectors like shipping. This under-the-radar move that runs contrary to logic could be explosive, and I will delve further into the technical charts below.

First off, we may observe that the Russell 2000 is on the verge of breaking out higher from a 2-year base.

Weekly Chart: IWM

The move from $161 to $205 (+27%) in a short span of 1 month was explosive, and prices are now extended from the rising 10/20/50 week moving averages.

That means most small cap sectors / stocks are extended, and may be in need of a period of consolidation before they can assertively push out of this base as an aggregate.

Before I move on to shipping stocks, I would like to show the below chart of the ratio of small cap growth ( IWO ) against small cap value ( IWN ).

Weekly Chart: IWO/IWN

We may observe that despite the strong performances in small cap growth stocks in recent weeks, such as the software, technology, AI, crypto mining, and biotech sectors, small cap value has actually been outperforming small cap growth since February 2021.

My point is that this adds another layer of probability to the scenario where shipping stocks outperform the broad market.

Technical charts: BOAT ETF and shipping stocks

Now, let us take a look at the technical charts within the shipping sector.

The SonicShares Global Shipping ETF ( BOAT ), which holds a diversified portfolio of shipping stocks listed in various exchanges globally, has broken out higher from its 1.5-year base on high volume. The breakout just occurred, so this sector is by no means extended.

Weekly Chart: BOAT

I like the technical charts of some of the shipping stocks within this ETF.

ZIM Integrated Shipping Services ( ZIM ) just broke out higher from a flag pattern on high volume. The catalyst for the flag breakout was Maersk halting Red Sea shipping till further notice due to Houthi attacks on its vessel. Prior to this event, ZIM had risen more than +60% on high volume despite a lack of an apparent catalyst. Short interest is elevated at 25% float, and the stock is trading -75% below its all-time high.

Daily Chart: ZIM

There are a handful of shipping stocks on verge of breaking out of big multi-month bases. Navigator Holdings ( NVGS ) is trading right at the breakout pivot of a base it has been building since April 2016.

Monthly Chart: NVGS

International Seaways ( INSW ) is building a 10-month cup-and-handle bullish pattern and looks likely to breakout higher.

Weekly Chart: INSW

Safe Bulkers ( SB ) has broken out higher from a 1.5-year base.

Weekly Chart: SB

Global Ship Lease ( GSL ) is building out a 1.5-year base.

Weekly Chart: GSL

Star Bulk Carriers ( SBLK ) is building out a 1.5-year base.

Weekly Chart: SBLK

Eagle Bulk Shipping ( EGLE ) is building out a 1.5-year base.

Weekly Chart: EGLE

Breakwave Dry Bulk Shipping ETF ( BDRY ), which aims to track dry bulk prices, is trading right at the breakout pivot of its 1.5-year base. Higher dry bulk prices typically translate to higher demand for shipping services, which benefits the sector.

Weekly Chart: BDRY

From the above technical charts, we may observe that a number of shipping stocks are on the verge of breaking out of / have broken out of multi-month bases.

Market heavily positioned for 2024 recession, mitigates downside risk in shipping stocks

As mentioned earlier, this is a curious development, as the market has priced in a recession in 2024. This can be observed from how the market is positioned for 6 rate cuts this year, after the December FOMC policy statement. The statement shows Fed officials expecting only a total of 3 25bps rate cuts in 2024. As such, the market may have gone overboard in pricing in recessionary fears.

Therefore, even if a recession does occur, it can be argued that a severe one which warrants 6 rate cuts in a year has already been priced in. Regardless, the fact that shipping stocks are building such constructive technical charts in the face of heightened recessionary fears adds great credence to their relative strength.

BOAT ETF

While I am currently long ZIM, I am looking for opportunities to add exposure to the sector. The BOAT ETF can be considered, as it buys into international shipping stocks listed in Japan, Denmark, Hong Kong and South Korea, that would otherwise be difficult to gain access to.

Keep in mind that the BOAT ETF has broken out ahead of its US holdings, as shown in the charts above. That means the international shipping stocks are the ones leading the sector. The expense ratio of the ETF is 0.69%, which is a small price to pay in exchange.

The BOAT ETF aims to track the performance of the Solactive Global Shipping Index. The currency composition of the index is shown below, which provides a rough approximation on the exchanges that its stock holdings are listed on. An estimated 1/3 of the holdings are USD-denominated, and as mentioned earlier, the ETF provides exposure to international stocks, which make up an estimated 2/3 of the holdings (NOK, HKD, JPY, EUR, KRW, DKK, SGD).

The ETF does a decent job in tracking the aforementioned index - both returns are largely similar on a QTD, YTD, 1Y basis, as well as since inception.

When we look into the estimated sector composition of BOAT below, we may observe that about a third of the shipping holdings are involved in energy (crude oil, petroleum, natural gas) transportation. Therefore, it is likely that the fortunes of BOAT will be influenced by the demand for / prices of these energy products.

When we look at the long-term monthly chart of WTI Crude Oil, we may observe that it is trading right at support. After breaking out from a 7-year base and reaching heights of $130, WTI Crude has spent the last 1.5 years ranging and consolidating above the breakout pivot of $70. Interestingly, this 1.5 years of pause / consolidation coincides with the amount of time many of these shipping stocks have spent consolidating and building bases.

Monthly Chart: WTI Crude Oil

BOAT may be considered both as a thematic capital gains play, and also a dividend play. The estimated dividend yield is 8.72%, which gives an attractive premium above Treasuries. This means an investor may be paid for sitting in this thematic play, although I am in the sector primarily for capital gains personally.

Do note that BOAT's net AUM is not significantly high at $37m. The ETF has an average trading volume of 33k shares traded a day, or daily traded volume of about $1m a day. As such, the ETF is not extremely liquid. This can be viewed as a negative or a positive in the sense that the sector is under-invested. The average price-to-book is 1.15x for its holdings, which is inexpensive.

Conclusion

Overall, I think shipping stocks are an under-invested sector that is stealthily building big bases / breaking out of big bases. The sector has not garnered the attention of the majority of the market yet.

The strength of the technical charts of shipping stocks (a cyclical sector) is impressive and BOAT can be considered, given the market is positioned for a recession this year. Even if a recession does materialise, the downside risk is arguably largely priced into the sector already.

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