Market Matters Morning Report Wednesday 27th July 2016

Morning Report 27/07/2016

Market Matters Morning Report Wednesday 27th July 2016

Buying the Dips and selling rallies

We have talked both recently and frequently that 2016 will be a more "trading / short term" investing style year as stock markets complete their bull market rally since the GFC. Obviously, we will not know if our forecast of a +20% correction for stocks in the next 12-8 months unfolds for a while yet however we can illustrate that the market characteristics are currently different and buying "beaten up" stocks is working for now.

The following chart shows the performance of buying stocks in the Russell 3000 which are technically oversold (an RSI of under 30) and selling them when their RSI closes the week over 30, simple but the performance is excellent. This index is up ~30% for 2016 compared to the S&P500 of ~10%. Two points are important from this performance for us:

1. Buying stocks that are being sold off has worked well on a relative basis in 2016; we believe this will continue until close to the market top – say 6 months away.

2. This strategy over time is a poor one which tells us the current market has an unusual characteristic i.e. a liquidity driven market "blow off" style top.

* The RSI is the Relative Strength Index which can be easily set up on most on-line brokering charting packages, for further explanation go to: http://www.investopedia.com/terms/r/rsi.asp

We continue to follow stocks that we like for the next 3-6 months and are looking for oversold levels to buy with good risk / reward. Our favourite 3 at present and how they are unfolding have been outlined in this morning's report.

On a similar subject we have been asked about Woolworths (WOW) recently after Mondays huge 8.5% rally, simply we want to watch the next few days / weeks unfold prior to making a strong opinion, BUT we can easily see $26 (10% higher) from WOW due to the huge negativity / short position in the stock.

The US oversold Index in 2016

Newcrest Mining (NCM)

NCM has corrected 18% from the highs of this month; our ideal buying scenario is a test $22 in early August. We are also watching Regis Resources (RRL), which closed at $3.60 yesterday, ideally looking to enter under $3.40.

Newcrest Mining (NCM) Monthly Chart

Whitehaven Coal (WHC)

We remain keen buyers around the $1.60 area.

Whitehaven Coal (WHC) Weekly Chart

Independence Group (IGO)

IGO is a stock we haven’t mentioned in some time, so as means of background it’s a diversified miner operating in four segments; Nickel, Copper, Zinc, and Gold. The big swing factor for IGO is their Nova project with is mainly Nickel located in Fraser Range WA – juts off the Eyre Highway for all those grey nomads out there!

IGO report production numbers today, and importantly will give an update on the development of the Nova mine - which is predominately Nickel. First production forecast in Dec 16 with the mine in full production by Mid 17. The Nickel price has started to move higher at a time when IGO are about to bring on production.

We like IGO now and missed the ideal entry under $4 however news has just broken this morning that the company has entered a trading halt announcing a $250m institutional placement and $30m share purchase plan fully underwritten at $3.75. Clearly this is an opportunistic raise given the strong share price gains of late, and unfortunately, now makes our call to BUY somewhat muted. We now need to give it time to digest to raising.

Independence Group (IGO) Weekly Chart

Summary

We will continue to search for opportunities from a buying perspective in "oversold" stocks and will have no hesitation in selling ones in our portfolio when / if we feel they have run too hard.
IGO is the type of technical/fundamental combination we like and will target, however, the equity raise announced this morning makes this view less clear in the short term. We will stand aside for now.

Overnight Market Matters Wrap

The US share market closed with little change overnight, as investors sit on the sidelines while the US Fed Reserve members discussed its next policy decision.
McDonalds, reported its worst earnings since 2009, assisting the Dow to finish down 19 points (-0.1%) to 18,474. The S&P500 managed to close just 1 point higher at 2,169.
Oil finished down 21c (-0.5%) to US$42.92/bbl on continual concerns of supply. OPEC is pumping out a record number of barrels per day, there’s an oversupply of refined products and more and more oil rigs starting up.
On a brighter note, we did get a jump in the Iron Ore price, with the metal settling up US$1.22 (+2.2%) to US$58.08/t. BHP and its peers are expected to outperform the broader market, after ending the US session up 1.8% to $19.62 from Australia’s previous close.
The Australian Consumer Price index (CPI) will be released at 11:30am, with analysts expecting a slight increase on the quarter of +0.4%.
The September SPI Futures is indicating the ASX 200 will open up 22 points to the upside this morning testing the 5,560 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 27/07/2016. 9:00AM.

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