Australian Investment Blog

What a difference a few days and months make!

In Monday’s report, we discussed the CRB Index and resource stocks, specifically stating we would only consider buying BHP around $13. This morning, BHP is set to open over $18.50, up an impressive 15% for the week!

More importantly, this is over 30% higher than the panic lows in January when everybody was stampeding out of the resources sector, led by an excited press. We often quote Warren Buffett, but how appropriate the below is today:

"Be greedy when others are fearful and fearful when others are greedy" - Warren Buffett.

While we are not going to run out and chase BHP at these levels, the strong rally in resource stocks this week cannot be ignored and today we will reassess our view on the sector.

Last night the Canadian market, which is highly correlated to resources, made fresh 2016 highs as forecasted in yesterday’s morning report.

It should be noted that while we believe a pullback is close at hand for the Canadian market, further gains are still anticipated to unfold thereafter.

This short term view is similar to our medium term view for US equities that we have held for over a year...US equities look set to make fresh all-time highs, which are now only 2.5% away, prior to a significant correction over the next 12-18 months.

BHP Billiton (BHP)


Technically, BHP now appears to be rallying in an "ABC" style fashion, with a target around $21.20, which is another 10% higher than where the stock is likely to open this morning.

Interestingly, this would also be a rally of around $7.20, just like it did back in March 2014.

The overall Materials Index looks to be in a similar position, hence this should give a solid tailwind to the ASX200 in the short term.

ASX200


The ASX200 has enjoyed a significant "bid tone" over the last 48 hours, as rumours of “Asian money” and short covering have been circulating. The local market has been a massive underperformer over the last decade and again, so far in 2016 as our banks have again been whacked.

At the start of 2016, Market Matters forecast this decade in the wilderness would vanish as we expected the resources would shine, but as mentioned above, the banks are the damaging part of this prediction.

However, if the resources sector continues to hold up, concerns over bad debts for our major banks are likely to reduce and a run of short covering may quickly evolve - if it hasn't started already.

Hence when we take into account the below thoughts, a potential new path for the local market has emerged:

• Market Matters remain of the opinion that the US S&P500 will make fresh all-time highs, prior to a decent correction.
• The Australian resources sector looks set to rally another 10%.
• Fund Managers / traders have amassed record short positions, increasing the potential for a blow off top in equities over coming weeks / months.

Experience tells us that often markets run against a particular view longer than we all anticipated. For instance, our view that the U.S market is making an important topping pattern, prior to a decent correction has prompted us to increase cash levels. Right now, that view is being tested. We often see that players trying to short stock or play a particular view on the short side be squeezed, out prior to that view coming to fruition. Right now, shorts are high on the U.S markets and market often like to move in the direction of most pain – and this may be another time where that is happening.

On a daily basis, the ASX200 is very messy, but major resistance around the 5100 area is likely to be tested today.

However, on a weekly basis a potential ABC bounce for the ASX200 to 5400 cannot be ruled out.

Summary

• Short term equities remain firm. Traders can buy any 50-point pullback in the ASX200 with stops under 4980.
• Investors like ourselves who are overweight cash, should look for short term buying opportunities, again using 4980 as a stop on the ASX200 to change this view.
• Investors / traders long BHP should be fussy around selling now, targeting the $21 area which may well coincide with a top in the sector.

Markets are fluid and views need to be nimble enough to react to changes in the market.

An aggressive resources rally has played out over the past few days. That has helped sentiment enormously which is now flowing through to other sectors. Clearly, we are now open to opportunities to reduce our 39% cash holding, HOWEVER IMPORTANTLY, we are still of the opinion that the U.S corrects after making new highs. That should and will remain front and centre in any decision to amend our current positioning.

Look out for alerts via email and SMS which will notify you of any action taken.

Overnight Market Matters Wrap

• The Dow rose to its highest level in four months, closing up 187 points (+1.1%) to 17,908 whilst the S&P 500 closed up 21 points (+1.0%) to 2,082.
• China was the focus on virtually all overseas markets, where investors update their current global macro view and switch their risk appetite on.
• Iron Ore continues to improve and fits well with the current information coming out of China. The metal rose US$1.26 (+2.1%) US$60.48.
• The June SPI Futures is indicating the ASX 200 to open 40 points higher this morning, above the 5,090 level.

The Numbers That Matter



Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000