Is it time to buy banks or resources?

James Gerrish

Market Matters

Our banking / financial sector dominates the local market to the degree that we are often heard to say in the office "it cannot get up without the banks" - the big 4 banks make up around 26% of the ASX200. Let’s compare 2017 so far to an average year for our banking sector on a seasonal basis:

1. The January fall and rally into the end of February fits into normal seasonal patterns, albeit in a relatively extreme manner this year.

2. There is often a 1-2-week pullback in banks around now before rallying nicely through to late March.

3. Historically good buying in the 1st week of April and a significant sell at the end of the month.

Hence, unlike the resources, we are not negative our banks at current levels but we do think logic dictates being patient with further buying for now. This week, we simply tweaked our exposure to the sector, rather than adding to it, by reducing CBA (ex-dividend) by 3% and adding those funds into ANZ.

Australian Banks Seasonal Performance

Bank performance chart

Resources

After last night's trading in the US, BHP is looking to open down ~70c (2.7%) at $25.83 which is a large fall with no significant moves in commodities, or US stocks. As we mentioned earlier the market feels very ready to take profits on stocks which have run hard since the US election. Putting this in perspective for coming weeks:

1. We are targeting a pullback in BHP to challenge the $24 area i.e. almost 10% below yesterday's $26.55 close. We are likely buyers of BHP under $24.50.

2. We remain short FMG targeting a move to at least $6, well over 10% lower. We are likely buyers of FMG under $6.

If these 2 corrections unfold in these large big cap resource stocks, it's hard to imagine the ASX200 powering over 5800 in the short-term.

BHP Billiton Weekly (BHP) Chart

BHP chart

Fortescue Metals (FMG) Weekly Chart

Fortescue chart

Conclusion

Two simple messages:

  1. We are neutral banks at current levels.
  2. We remain negative resources targeting a correction of around 10% before we become buyers.

 

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Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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