The ‘Sell in May’ call starts to play out
We made an interesting and in hindsight well timed comment in the AM report today suggesting that one day soon the afternoon rally which local stocks have regularly enjoyed in 2017 will not materialise and this is likely to be an ideal trigger to sell for the short term traders out there. We saw that play out today with the index soft on open however the selling intensified for most of the session with only a slight bullish whimper in the last 30mins of trade.
The ‘Sell in May’ thematic looks like it has now started and the main drivers of the selling today were the large cap stocks – which is typical at the start of a pullback. We’ve talked about seasonal significance for some time now and obviously nothing in markets has a 100% certainty however it makes sense to increase cash levels and position more defensively going into a weak period – which May/ June typically is.
In terms of the market weights today, the big 4 banks were a clear drag while BHP was also soft courtesy of a 2% drop in Oil overnight. That said, Oil / Energy stocks are actually entering a period of seasonal strength courtesy of the US driving season which seems to support energy prices. Woolies was also weak today losing -2.71% and taking 3 index points from the 200.
Big index movers today
More broadly, the index had a range today of +/- 66 points, a high of 5948, a low of 5882 and a close of 5892, off -58pts or -0.98%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
The most recent major low on the market was back on the 28th June 2016 with the index closing that day at 5103. Since then it’s been a very strong market with the index putting on 15.46% up to today’s close. The financials have been the backbone of this strength adding an impressive 21% while materials have been biting at their heels. The May/June period is the weakest for the year for the banks and also the market generally, which goes some way to explain our ~30% cash levels in the MM Portfolio. We’re positioning for a 5% correction over May / June, similar to last year. If that prevails, and todays price action adds to that likelyhood, the will be keen buyers into this weakness targeting further gains later in 2017.
Source; Bloomberg
It was bitter sweet today (probably more bitter) after Vocus (VOC) came out with an earnings downgrade and the stock dropped by 27% to close at $2.44. VOC was a big disappointment for us this year and we cut the position nearer to $4 on the expectation that another hit to earnings was likely. After market yesterday that happened and the stock today was sold down sharply. In terms of guidance, they lowered FY17 guidance by ~22% to $160-$165m at the net profit line and $365-$375m at the EBITDA line. According to the company they reviewed their accounting policies and took a $40m impact at the revenue line and $33m impact at the EBITDA line in FY17!! Clearly management are struggling with this business and doing a poor job of integrating recently acquired assets.
The real issue now is around their balance sheet balance. This was one of the main topics on the conference call this morning. They have $1.05bn of debt on $365m of earnings- which is leverage of 2.9x. They have a debt covenant of 3.5x. and also market cap to debt parameters which after today’s fall may have bankers having a good look at it. If we see any further downgrades VOC will likely breach debt covenant levels and they would be forced to raise capital. The is not one to buy to dip.
Have a great night,
The Market Matters Team
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