What Mattered Today; Stocks rebound from early lows – short term bullish!

James Gerrish

A better day for the market overall however some decent volatility throughout the session particularly at 11.30am where a big portfolio unwind happened – looked like a computer hitting stocks hard and causing the market to drop around -20pts in the few minutes. We sighted an overseas seller putting pressure on stocks earlier in the week – tongue in cheek saying it’s the typical excuse used when traders aren’t sure but today’s action supports it. Once that volume was flushed through, stocks picked themselves up off the mat and rallied into the close as the intra-day chart highlights below. That selling could be related to the MSCI rebalance at end of month, but that’s only speculation. Anyway, intra-day volatility will probably continue till next Friday.

The technical picture today is actually a strong one – with the bar / candle on the daily looking good + we’ve seen price action in Australia be a reasonable leading indicator for overseas markets – right now, FUTURES in the US are slightly lower – Dow down around -59pts – not inspiring but not a big drag either.

Volumes were big today given stock option expiry plus was also saw some decent stock moves on either earnings upgrades or broker moves. Aristocrat (ALL) was good on better earnings in Nth America + it seems more ‘punters’ are enjoying online gaming...What’s wrong with the world!! Metcash was also good today after JP Morgan went from bear to bull on MTS in one swoop while Ords also talked up Metcash’s’ prospects.

A couple of stocks we own had moves – A2 Milk (A2M) the biggest of them adding +5.7% to close at $9.83 – the consistent selling pressure we’ve seen in the last 2 days seems to have gone, however I’d wait for confirm tomorrow before being more confident of that assumption while Orocobre (ORE) came out with a resource upgrade, but the market reaction was a little ho-hum – the stock down 1.64% to $6.01. We saw the same sort of reaction from Kidman when they had a resource upgrade recently, the mkt sort of takes it in its stride. I simply think that the quantum of resource is not the real issue now – monetising it is! We remain keen on ORE with a target in the $7’s.

Genworth (GMA) was down today (-1.92%), a stock we own in the Income Portfolio and we had a few questions across the desk. They currently have a $98m buy back in place and they’ve done about $2m to date – so the buyback hasn’t been a big driven of the recent rally in share price. The stock has rallied for the last 7 days putting on 5.7% as at yesterday – the run was broken today but we remain reasonably happy holders for now.

Overall, the ASX 200 added +4 points today, although that was +26pts from the daily low and just 2 points from the high.

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Gold – an interesting take on the Federal Research minutes overnight and chart from Bloomberg highlighting the relationship of 10 year treasury yields and the price of Gold. Gold has been under pressure thanks to a rallying $US + strong US interest rates, but rates fell overnight, while the $US still rose. Some conflicting factors I know but the chart below is hard to ignore. Assume the market is now too bullish on US interest rates, and they won’t rise as quickly as consensus is positioned for, then bond yields come back, and GOLD rallies + the other interesting aspect in this take is we’re seeing the defensive sectors like Real Estate do well recently – perhaps GOLD is the next one to pop. Stocks in the sector were mixed today , but more bullish than bearish - EVN +2.85%, RRL +3.32% while NST & NCM were down less than 1%.

Broker Moves; Metcash was the biggest winner on the index today thanks to an upgrade from JP Morgan, MTS the second best in the top 200 adding 7.69%. The market has hung its hat on the call and as Harry rightly pointed out today, the bullish about-turn seems a bit late - the analyst not having a BUY on the stock for past 18 months where it rallied ~70% - flipping from SELL to BUY today. The argument is that food inflation is finally picking up, and Aldi’s growth is showing signs of slowing which should support Metcash’s IGA operations – can’t fault the theory but the saying ‘falling on one’s sword’ springs to mind...

Elsewhere….

  • Air NZ (AIR NZ): Cut to Underperform at First NZ Capital; PT NZ$2.98
  • Cimic (CIM AU): Upgraded to Hold at Morningstar
  • Fonterra (FSF AU): Cut to Underperform at First NZ Capital; PT NZ$5.09
  • Metcash (MTS AU): Upgraded to Overweight at JPMorgan; PT A$3.75
  • Nine Entertainment (NEC AU): Upgraded to Hold at Morningstar
  • Rio Tinto (RIO AU): Downgraded to Hold at HSBC; PT 47 Pounds
  • Smiles Inclusive (SIL AU): Rated New Add at Morgans Financial; PT A$1.40

Aristocrat (ALL) $30.04 / +8.02%; released their half year result this morning and the market liked them, with EBITDA jumping 29% in the year allowing the dividend to substantially beat analysts’ expectations at 19c vs 17c estimated. Much of the growth has been driven by Aristocrat’s push into the online gaming whilst the pokie giant continues to dominate the market across Australia & the US. Another important outcome of the result was the 3% fall in Aristocrat’s effective tax as the US tax cuts come into place. A good result, and on track for record double digit NPAT growth for the full year helped ALL close at all-time highs today.

Aristocrat (ALL) Chart

Have a great night

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Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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.

Expertise

ASX:ALL ASX:MTS ASX:NCM ASX:ORE asx:gma

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