Australian Investment Blog

Market Matters Morning Report Friday 7th October 2016

Gold or oil moving forward?

So far 2016 has been the year of the resource sector with stocks surging from an aggressively oversold position e.g. BHP +29%, RIO +17%, NCM +61% and Santos +8.7%. However there has been some enormous volatility within the various sub components of the broader resource arena that these stats do not do justice. This morning we await the US employment data tonight which will almost definitely determine the short-term direction for the $US, which is highly correlated to commodity prices. Hence we thought it was an ideal time to update our overall view of resources with stocks around 9-months into their recovery from an aggressive 2-year sell off.

Please note we remain of the belief that the resources sector is a short-term investing / trading vehicle due to the dependency on the underlying commodity prices to determine profitability e.g. we recently enjoyed a +40% return from an option position in RIO over a few days.

Gold v Oil

Different commodities often have a high correlation given they’re all priced in $US with oil and gold often tracking each other very closely. Since 2015 this correlation has become very stretched and it's our opinion that over the next year this gap will close i.e. buy oil and sell gold.

Gold v Crude Oil Monthly Chart

The $US

In many ways the $US is the key to commodity prices, and hence resource stocks moving forward. If we have more strong US economic data and rate rises for the US become more accepted by investors the $US should rally putting some pressurce on commodity prices. Conversely a weak number tonight and gold could easily jump $US40/oz!

Our view is the $US is headed to fresh recent highs ~6% higher prior to a significant decline. If we are correct this will put pressure on commodity prices and our resource stocks in the short term, hence our call recently to sell BHP and look for a lower entry in the weeks / months ahead.

$US Index Monthly Chart

What is also interesting is the recent strong correlation between the $US Index and the S&P500. If we are correct that the $US rises ~6% it implies that US stocks will also remain firm which is our short-term view.

$US Index v S&P500 Monthly Chart

Crude Oil

Crude Oil looks extremely strong after recent developments around Saudi Arabia as well as lower than forcast inventories. We remain bullish crude oil targeting ~$US60/barrel.

This is another great example of stocks getting ahead of themselves in both directions e.g. Crude Oil is now only 2% below its high of 2016 but stocks like Santos and Origin are ~20% and 10% respectively below their highs earlier in the year. The lesson is do not be afraid to take profit when everbody else is buying and vice versa.

We still hold ORG with a target ~15% higher

Crude Oil Monthly Chart

Gold

Local gold stocks have enjoyed a strong 2016 as we mentioned NCM is up over 60% for the year but it has also fallen 24% since its July high. Our concern for the gold sector over coming months is our bullish view on the $US.

Regis Resources (RRL) is our preferred stock in the sector and it has currently corrected ~20% from its 2016 high. For the gold bulls out there we could buy RRL under $3.40 with stops under $2.90 - we will not take this trade due to our view on the $US.

We are long IGO which has significant gold exposure but it also has significant nickel production coming on line and nickel is enjoying a great 2016 - we still may cut this IGO position early.

Regis Resources (RRL) Weekly Chart

Iron Ore

We remain neutral to negative iron ore moving forward.

Iron Ore Monthly Chart

Summary

We are wary the resources sector, except energy, moving forward due to our bullish $US view, specifically:

1. We are bullish crude oil targeting ~$US60/barrel.
2. While we are 50-50 gold right here there are no buy signals.
3. We remain neutral - negative iron ore.

Overnight Market Matters Wrap

• The US markets finished flat last night, with the looming US jobs number due tonight our time. The Dow closed down 13 points at 18,268, while the S&P500 finished up just 1 point to 2,161.
• As mentioned, the all-important Non-Farm Payrolls number is due tonight before the US market opens. A Reuters conducted poll of economists predicts an increase of 171,000 new jobs to be added.
• On the energy front, Crude finished above the US$50.00 level for the first time since June to US$50.54/bbl, which was up 71c (+1.4%) on the day.
• Iron Ore remains closed in Asia due to a holiday, with BHP expected to open with little change this morning, with a positive bias.
• The December SPI Futures is indicating the ASX 200 to open marginally higher this morning, testing the 5,500 area.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 07/10/2016. 7.30AM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.