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As global equities continue to post new all-time highs, we have to embrace the bullish trend until further notice; from a technical perspective, the MSCI World Index is in a “buy the dip” cycle unless we see a break back below the 3150 level, or just over 6% lower. Many investors, including ourselves, thought equities might struggle to add to their late 2023 gains, but the grind higher has been unrelenting, and as the likes of the Nikkei and Bitcoin have demonstrated, there’s plenty of money looking for a home, remember the more than $US2.5 trillion in cash reserves being held by private equity looking for an opportunity, enough money to buy the ASX200!
The ASX hit record highs early on before some profit-taking kicked in mid-morning. Selling was pretty benign with the index falling around -0.4% from highs to the close driven by softer Business conditions data which showed a larger than expected fall in inventories in Q4, likely to weigh on GDP growth. Small caps continued their push higher though, the Small Ords closing at a new 52-week high today.
In early February, one of the most dominating stories in the financial news was the plunging lithium price and demise of the related stocks. Less than 2-years ago, analysts were extrapolating huge demand for EVs over the decade ahead would continue to push the required materials, such as lithium, cobalt and nickel, ever higher, generating huge profits for the related miners, but as we now know, the demand for EVs has fallen short of estimates, especially in the influential US, which combined with increasing supply of lithium drove down prices over 80%, i.e. in this case making the market not wrong, but very wrong! However, all good things usually come to an end and in the case of the lithium “shorters” last week was a tough one, with heavyweight Pilbara (PLS) bouncing +19.4% taking it up +10.9% year-to-date.
The ASX waved goodbye to reporting season at the end of last week and immediately focused on the new business at hand, making fresh all-time highs. Come Friday’s close, the index had advanced +1.3% for the week, breaking clear of the psychological 7700 level in the process. The main movers on the stock level were related to the tail end of the reporting season, but there were noticeable strong moves from the ESG and tech stocks, which helped both the index and market sentiment.
A strong session to end a strong week at new record highs, the 6th weekly gain from the last 7 with investors happy to buy stocks after a good reporting period where beats outnumbered misses, and earnings in most parts held up well. At an aggregate level, earnings estimates have been revised lower, however, the driver is resources on weaker commodity prices, a backward-looking indicator in MM’s view, and the broader market has been resilient.
The number of stocks advancing and declining can give a good read-through on the health of the underlying market; for example, at MM, we often refer to “broad-based” buying. The difference between the advances & declines is usually referred to as the market breadth with the running cumulative total of daily breadth known as the Daily Advance-Decline Line, an important read on the market’s underlying health as it provides another tool to quantify the movements of the market other than looking at the price levels of indices. We often read about how the “Magnificent Seven” are driving US indices on their own, but the below chart illustrates the internals are still firm, although, of course, from a points perspective, they are aiding performance.
A strong session eventually played out today, with the index +70pts from the morning (11 am) lows, trading to all-time highs in the process (7703.8), and closing the month just 5pts below the milestone (7698), a good outcome and as we’ve been suggesting, it seems the market is priming itself for an ultimate breakout, we just need the support of the influential materials sector!
We’ve written a couple of times this year about the ASX losing stocks faster than it replaces them with quality IPOs, with the Building Sector epitomising this trend:
• CSR looks set to be swallowed up by French giant Saint-Gobain in a $3bn deal.
• The Stokes Group has bid to take full control of concrete business Boral (BLD) – it already owns 71.6%.
• Cement maker Adbri (ABC) has agreed to a $2.1bn buyout from Irish giant CRH Group.
This morning, we’ve taken a look at the depleted lineup of ASX’s building stocks to see if we perceive any value remains after the major M&A action in the sector.
Early gains were given up swiftly today, the high set just 10mins into the session up ~20pts, but trading lower by 10.30am before chopping around breakeven for the day from there. Some big hitters going ex-dividend today – Telstra (TLS), Fortescue (FMG) & Woolworths (WOW) – weighed on the cash market outcome. The monthly CPI print landed late this morning, coming in at 3.4%, below the 3.6% expected, however, this failed to have a meaningful impact on equity markets.
On Monday night the major US indices slipped lower, with the S&P500 ending the quiet session down -0.38%, but the underperforming market segment of the last two years, the small caps, managed to advance +0.6%. This trend extended overnight, with the S&P500 edging up +0.1% while the Russell 2000 (small cap) Index rallied +1.4%. It may surprise many subscribers to know that the unheralded US small caps have advanced +25% from their October low, slightly more than the S&P500 without any of the benefits of the “Magnificent Seven”. We see no reason to fight this new area of outperformance, albeit minor, through 2024.
