From conversations we had yesterday, it was clear that one large down day was enough for investors to question the valuation of the local market around the 7700 level. Our answer has been consistent since the market spiked under 7000 in late 2023 – “don’t look at the index; focus on individual stocks and sectors” because overall selling across the market often provides excellent opportunities to accumulate quality stocks. We believe the macro backdrop will support equities through 2024 as we frequently hear and see, not all boats will float as one.
Gold advanced again on Friday, taking it up +5.6% year-to-date and posting fresh all-time highs in the process. Increasing optimism that the Fed will start cutting rates in 2024 has been the backbone for advancing precious metals, but the early foundations were laid in China. The gold market turned higher three weeks ago, with the $US2,200 level now only one good day away. The move has danced to the same tune as most risk assets, from equities to crypto, with algorithmic momentum traders set to become increasingly interested as gold rallies on the upside. However, it’s been a tough journey for investors in gold stocks, who have largely struggled over the last year while the precious metal rotated around the $US2,000 area.
At MM, we missed the rally in discretionary retailers, but what about now? Arguably the only thing worse than missing a strong move is being sucked into a FOMO trap and buying just before it pulls back. Ironically, several analysts have fallen on the sword only to see some decent corrections unfold over recent weeks, but as we saw last night, rates are set to fall, and the Consumer Discretionary Sector is highly correlated to bonds, i.e. if the sector remained strong with high rates, it's not surprising to see it rally higher with markets looking for the Fed to start cutting in June. Some of the takeouts across the sector from the recent reporting season provide us with some clues as to what comes next.
The insurance sector discussed in an MM report last November has largely followed our expected path, albeit in a slightly more positive fashion, i.e. cautiously bullish. The performance of the major companies in the local sector has generally been strong, with three of the names up ~10% or more year-to-date. However, interest rates are only one piece of the puzzle as premiums continue to rise well ahead of inflation, e.g. in February, Suncorp (SUN) slugged consumers with a 16% price increase on car insurance in an effort to increase margins, while this week has been all about private health premiums rising by over 3%, the largest annual increase since 2019 - it's not surprising that an increasing number of Australians are experiencing financial stress.
US indices fell for a second day as profit-taking washed through the “Magnificent Seven”; the NASDAQ closed down -1.8% while the Russell 2000 (small cap) index fared better, finishing down just -1%. Apple Inc (AAPL US) tumbled 2.8% after reports that iPhone Sales had plunged 24% in China, while Tesla (TSLA US) -3.9% and Microsoft (MSFT US) -3% also struggled, both actually underperforming Apple. Outside of technology, Target Corp (TGT US) popped +12% as another retailer beat earnings estimates. Even Bitcoin experienced some profit-taking overnight after posting a fresh all-time high above $US69,000. The cryptos intraday ~10% swing demonstrated it's not an asset class for the faint-hearted.
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!
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 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.
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.
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.
Gold advanced again on Friday, taking it up +5.6% year-to-date and posting fresh all-time highs in the process. Increasing optimism that the Fed will start cutting rates in 2024 has been the backbone for advancing precious metals, but the early foundations were laid in China. The gold market turned higher three weeks ago, with the $US2,200 level now only one good day away. The move has danced to the same tune as most risk assets, from equities to crypto, with algorithmic momentum traders set to become increasingly interested as gold rallies on the upside. However, it’s been a tough journey for investors in gold stocks, who have largely struggled over the last year while the precious metal rotated around the $US2,000 area.
At MM, we missed the rally in discretionary retailers, but what about now? Arguably the only thing worse than missing a strong move is being sucked into a FOMO trap and buying just before it pulls back. Ironically, several analysts have fallen on the sword only to see some decent corrections unfold over recent weeks, but as we saw last night, rates are set to fall, and the Consumer Discretionary Sector is highly correlated to bonds, i.e. if the sector remained strong with high rates, it's not surprising to see it rally higher with markets looking for the Fed to start cutting in June. Some of the takeouts across the sector from the recent reporting season provide us with some clues as to what comes next.
The insurance sector discussed in an MM report last November has largely followed our expected path, albeit in a slightly more positive fashion, i.e. cautiously bullish. The performance of the major companies in the local sector has generally been strong, with three of the names up ~10% or more year-to-date. However, interest rates are only one piece of the puzzle as premiums continue to rise well ahead of inflation, e.g. in February, Suncorp (SUN) slugged consumers with a 16% price increase on car insurance in an effort to increase margins, while this week has been all about private health premiums rising by over 3%, the largest annual increase since 2019 - it's not surprising that an increasing number of Australians are experiencing financial stress.
US indices fell for a second day as profit-taking washed through the “Magnificent Seven”; the NASDAQ closed down -1.8% while the Russell 2000 (small cap) index fared better, finishing down just -1%. Apple Inc (AAPL US) tumbled 2.8% after reports that iPhone Sales had plunged 24% in China, while Tesla (TSLA US) -3.9% and Microsoft (MSFT US) -3% also struggled, both actually underperforming Apple. Outside of technology, Target Corp (TGT US) popped +12% as another retailer beat earnings estimates. Even Bitcoin experienced some profit-taking overnight after posting a fresh all-time high above $US69,000. The cryptos intraday ~10% swing demonstrated it's not an asset class for the faint-hearted.
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!
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 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.
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.
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.
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