Australian Investment Blog

The ASX200 has received a few leads over recent sessions to commence a Christmas rally but continues to ignore them as closing above the psychological 6000 area remains a stubborn hurdle. However as every day ticks away we are getting closer to the strongest seasonal fortnight of the year. This morning the overnight futures are pointing to the market opening up ~15-points but we believe the resources may take us higher e.g. BHP is trading up 45c / 1.6% in the US.

The view of MM remains intact with a 6125 target to say goodbye to 2017, or a 8.1% return for the year not including dividends.

Today we are going to focus on resources following our recent purchases of Fortescue (FMG) and OZ Minerals (OZL), plus our previous existing holdings in Woodside Petroleum (WPL), Newcrest Mining (NCM) and Independence Group (IGO).

ASX200 Daily Chart

The Resources Sector

Australian resources stocks have enjoyed a stellar 2-years with BHP advancing almost 100% however investors would be wearing blinkers if they did not recognise their relative poor performance since the GFC with BHP still down 40% from 2008 levels compared to CBA which is up 30%, plus having paid significantly greater dividends.

At MM we firmly believe that resource stocks are shorter-term investing vehicles simply because they cannot accurately forecast / predict their profitability years in advance as its highly dependent on the respective underlying commodity prices which is driven by the ebbs and flows of economic trends and importantly the miners reactions (in terms of supply) to those trends. Two factors maintain our caution towards these stocks over the medium-term, at least for now:

1. The Bloomberg Commodity Index remains firmly in a 7-year downtrend.
2. The highly correlated $A has generated excellent sell signals targeting the 65c area, or ~13% lower.

Overall we’ve enjoyed some great success in this sector by adopting a more active but patient approach. We certainly feel no obligation to hold resource stocks in the Growth Portfolio as was demonstrated for the first few years of our inception when BHP more than halved.

Bloomberg Commodity Index Monthly Chart

Australian Dollar $A Monthly Chart

In the short-term the Bloomberg base metals spot index has corrected ~7% enabling us to buy OZ Minerals (OZL) under $8. Ideally we will now see a rally to fresh 2017 highs unfold from this index.

Bloomberg Base Metals Index Weekly Chart

1 OZ Minerals (OZL) $8.07

We are happy with our trade location under $8 with a current target ~$9.

OZ Minerals (OZL) Daily Chart

2 Fortescue Metals (FMG) $4.61

We are happy with our trade location at $4.60, especially while strong $4.50 support holds firm. We are at least targeting a “pop” back over $5.

Fortescue Metals (FMG) Weekly Chart

3 Woodside Petroleum (WPL) $31.75

Again we are happy with our trade location at $31.29 following the Shell placement. We are targeting a minimum rally back over $34 which may be assisted by some Christmas “window dressing” especially considering most fund managers are now very long WPL.

Woodside Petroleum (WPL) Monthly Chart

4 Independence Group (IGO) $4.06

In hindsight we should have been more active with this gold / nickel miner IGO having watched a 8.4% paper profit become a 4.9% paper loss. We remain bullish targeting ~$5.

Independence Group (IGO) Weekly Chart

5 Newcrest Mining (NCM) $22.69

We are slightly uncomfortable with our NCM position because we are bullish global interest rates, not an ideal backdrop.

MM is keeping a close eye on this holding and may simply cut it.

Newcrest Mining (NCM) Monthly Chart

Global markets

US Stocks

No change, we still need a ~5% correction to provide a decent risk / reward buying opportunity, no sell signals have been generated to-date but it’s struggling slightly above 2650.

The feeling is traders are going short and then getting caught as the market fails to correct.

The current strong rally since Donald Trump’s election adds to our confidence with buying a decent ~5% pullback.

US S&P500 Weekly Chart

European Stocks

European stocks look to be failing after their recent break out to fresh 2017 highs, we remain neutral / negative Europe over the next few weeks.

German DAX Weekly Chart

Conclusion (s)

We are overall comfortable with our 5 holdings within the resources space i.e. a hefty 21.5% of the MM Growth Portfolio.

At this stage we plan to sell all / most of these holdings into January strength, especially if we see fresh highs from the Bloomberg base metals index.

Overnight Market Matters Wrap

· The US share markets closed higher overnight, advancing from earlier losses ignited from a small explosion marked as a terrorist attack.

· Investors focused back on its key interest rates along with the strength of the energy sector after crude oil was up 1.13%.

· BHP is expected to outperform the broader market, after closing in the US up an equivalent of 1.61% to $27.65 from Australia’s previous close, ignoring a 0.8% decline in Iron Ore.

· The banks and insurers are expected to be under the spotlight today, with dividends set to be paid this week and ANZ selling its life insurance arm for $2.85b – a reasonable outcome.

· The December SPI Futures is indicating the ASX 200 to open 17 points higher, testing the 5715 level this morning.

Disclosure

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