Commodities look toppy!
What Mattered Today
The market pulled back today with the index closing near enough to the lows – which is fairly typical after a good five session bounce from below 5400. We expect some consolidation/ slight weakness in the short term before we have a crack at higher levels into the back end of December. Worth remembering that seasonally this is a very strong period for equities – particularly the second half of the month, however we have moved higher in early December, which is more unusual. That feeds our thinking that from a very short term tactical sense, we’ll pullback / consolidate in the coming days before moving up again. It seems there is a genuine fear of missing out (FOMO) trade underway and this should keep equities supported on pullbacks.
Some of the recent underperformers had a better day today – CSL the main example here putting on more than +3% while some of the recently strong commodity stocks found some selling.
CSL Daily Chart
The contract price for Met Coal used in Steel was settled last night for the next quarter, and it was better than the market thought at $275/t while the spot price sits at $285/t. Big prices and a huge difference from this time last year however there are a few more bearish trends starting to emerge in that area of the market that should be considered. We’re big believers in going against the trend and the coal stocks have been on a tear this year – the market is now very positive. Whitehaven (WHC) is your leveraged play in this space and we’ve written a number of times that we think this stock is the canary in the coal mine – or more clearly, WHC has topped and will be the stock to leads the rest of the commodity sector into a correction. Picking tops is difficult, but signs are starting to emerge.
Coal has been the bellwether for the broader commodity space - it was sold off more than others last year and has bounced more than the rest this year. Contract pricing is still strong but if we look at spot pricing Thermal Coal has dropped more than ~20% in the last month or so, while Met Coal is down around ~10%. As we wrote above, the majority are now turning bullish the broader commodity story (Citi an example here) who recently turned from outright bearish to outright bullish – despite the already BIG run up in prices. We think caution is warranted here and now have no commodity exposure in our portfolio.
Whitehaven Coal (WHC) Daily Chart – the canary?
BHP Daily Chart (BHP) – top forming here although likely to remain choppy
RIO Tinto (RIO) Daily Chart
At 6am on Thursday morning we are likely to see US interest rates move higher. The market has positioned for it – is expecting it and it should happen. If they don’t raise rates the market would likely take this as a negative and sell off. The unlikely scenario eventuating is one that has been typical of 2016, and we would be stupid to discount that outcome – but it’s a long shot. Then again, so too was Trump!! The issue for the Fed is around guidance going forward. Be too hawkish and the $US rallies hard which at some point will provide a big handbrake to US economic growth, be too dovish and they threaten temperamental consumer confidence. Getting the message right will be key on Thursday and clearly this does present a near term risk - we will keep this in our thought processes for the remainder of the week.
Although we now have 16% cash in our portfolio after taking a nice profit on Ansell yesterday (ANN), we’re looking for opportunities into the short term weakness – the Fed may play into that .
We had a range today of +/- 30 points, a high of 5573, a low of 5543 and a close of 5545, off -17pts or -0.32%.
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