What Mattered Today; Alumina trades into sell range

James Gerrish

Stocks were back in favour today after the ASX opened down (-23pts at the low) but was bid up fairly strongly throughout the session. Initial weakness was overcome early with a ‘bullish’ speech by Chinese President Xi Jinping ignited buying in Asian equities while US Futures quickly put on +300pts – the market rallying +72pts from low to high ultimately finishing up +48pts or +0.83% to 5857 – the best one day reversal I’ve seen in a long time (6th March to be exact) + it fits the thesis we’ve written about in the weekend report + reiterated this morning saying that….

Our overall short-term bullish outlook for stocks is based on old fashioned valuations as we move into the US reporting season. We’ve witnessed a 10% correction in stocks against a backdrop of earnings growth - the elastic band feels ready to snap back. The US market is now offering the best value in over 3-years as it trades on 16.74x forward earnings compared to over 20x in January – dropping to 15x expected in 2019 based on current earnings forecasts. Our own market is on 15.56x expected with forecast earnings growth of 5%...which looks okay. (Resources 11.1%, Banks 1.7%, everything else 5.2%).

Unfortunately while we have Mr Trumps trade war and overall personal uncertainty simmering away in the background the markets overall valuation is likely to be capped but the pessimism - optimism tussle looks to have gone too far and we can easily see equities rally back towards at least 18x forward earnings

We can easily envisage a bounce by the ASX200 to the 5850 area but a close above 5900 is still required for us to become bullish short-term.

We got that move today, now we need some follow through tonight in the US – more than the +300pts the Australian market has already factored in during today’s session. Just on the index more broadly, consensus (the aggregation / average of all analyst expectations) see the ASX 200 trading at 6270 by year end. UBS moved today to reduce their year-end target (marginally) / 6250 but still flirting with consensus as most do. Based on consensus v todays close, the market has another 7% in it. We’re always cautious about consensus – and generally go against it, however it’s good to keep a handle on the streets expectations…for now, it remains marginally bullish, but less so than it was early in the year.

Price Targets for ASX 200 by year end

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE Xi Jinping (Chinese President); Put a bid tone under stocks today pledging a “new phase of opening up” in his keynote address Tuesday to the Boao Forum for Asia, China’s answer to Davos. While the speech offered little new policy, Xi affirmed or expanded on proposals to increase imports, lower foreign-ownership limits on manufacturing and expand protection to intellectual property -- all central issues in Trump’s trade gripes. “Human society is facing a major choice to open or close, to go forward or backward,” Xi told hundreds of investors gathered on the resort island of Hainan, in a speech that didn’t mention Trump’s name. “In today’s world, the trend of peace and cooperation is moving forward and the Cold War mentality and zero-sum-game thinking are outdated.”

This was clearly a bullish / consolatory speech – a potential olive branch and the market liked it...Trump has been quiet on trade today, with his last tweet nearly a day ago….(below)

Alumina $2.59 / 1.97%; Did exactly as we predicted this morning with the stock opening with a bang and we sent the SEL alert out – filling the MM position at $2.64 taking a nice 25% profit on the position – however it must be said that the stock didn’t last long there and sellers really took hold quickly. We failed to get many shares done across the broader portfolios we manage (through Shaw and Partners) and no doubt like many subscribers, it feels like we missed the boat today. Unfortunately that happens in markets, and today was an example of how quickly stocks can move. We’ll continue to update our views on AWC in the coming days…

Alumina (AWC) Intra Day Chart

Alumina Chart

Have a great night

James & the Market Matters Team

Disclosure

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Disclaimer


James Gerrish

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

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ASX:AWC

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