Momentum Swings Now Maketh The Market

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 18 2020

Dear time-poor investor: as investor enthusiasm has temporarily run out of breath, not every ASX-listed stock is treated equally

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Momentum Swings Now Maketh The Market

By Rudi Filapek-Vandyck, Editor FNArena

There are times when earnings forecasts and dividend estimates are the most important driver for equities, while at other times they are largely being ignored.

Where are we at now?

Depends which side of the market we choose to focus on. When it comes to quality, such as reliable performers Woolworths ((WOW)), a2 Milk ((A2M) and Appen ((APX)), investors think they have a reasonable idea what growth looks like this year and next.

This immediately puts a restraint on how high these share prices can rise, unless investors suspect upside surprise, which might apply to, for example, Appen.

In the absence of such positive surprise potential, a lack of investor enthusiasm has kicked in over the weeks past, as witnessed by share prices for Woolworths and a2 Milk drifting lower.

The same has happened for Fisher & Paykel Healthcare ((FPH)), Coles ((COL)) and a few dozen others investors sought out during the early recovery phase in March/April.

Where Forecasts Don’t Matter (As Much)

It’s not that there’s anything wrong with the above mentioned companies. They most likely will continue to chug along, doing what they do best, which is growing the business and servicing more customers. In a relative sense, though, these stocks now seem “boring” and “uneventful”.

Elsewhere, taking on more risk can reap rewards of 20%, 40%, or even 60% in a single day. In the share market, it’s not always what the company itself can achieve that is most important; sometimes it’s the fact that higher returns can be had elsewhere.

But what exactly are the prospects for, say, Flight Centre ((FLT)), Sydney Airport ((SYD)), Pilbara Minerals ((PLS)), Clinuvel Pharmaceuticals ((CUV)) and the like?

Nobody knows, really. It’s all dependent on variable scenarios, and how this translates into bottom lines in FY21, but there are so many possibilities and questions, it really is up in the air, whichever way the wind blows.

Hence for this second group of companies, whatever is available in terms of forecasts is taken with more than just a grain of salt. Here ongoing liquidity and positive news flow are much more important.

So, if you view the stock market through the prism of two polarised groups of stocks, you would have witnessed the momentum switch out of the first group and into the second, at least until risk on has taken things too far, which immediately swings the pendulum back to Woolworths & Co.

This Is Normal Share Market Behaviour

Note there is nothing unusual about this market behaviour. Eighteen months ago, when share markets recovered from five months of downward spiralling in late 2018 until the Federal Reserve changed its policy, the best performing stocks were banks and other cyclicals, while CSL ((CSL)), ResMed ((RMD)), Cochlear ((COH)) and the like could not keep up with the newly found market momentum.

In 2019 it lasted until about mid-year. Then the wheels fell off for oil and gas companies, industrial cyclicals and banks, with many announcing dividend cuts in August and beyond.

This in itself makes the current situation different. By now, we’ve had the profit warnings, the fresh equity raisings, the dividend cancellations, reductions and deferrals, and the lay-offs, closures and restructure announcements.

Stockbroking analysts are still busy reducing forecasts for many ASX-listed companies, but that part has turned significantly less one-way-direction.

As pointed out in our weekly update on ratings, targets and forecasts published on Monday morning ( https://www.fnarena.com/index.php/2020/06/15/weekly-ratings-targets-forecast-changes-12-06-20/ ) many companies are by now enjoying a positive trend in forecasts.

Most importantly, the downtrend in price targets and valuations has stopped. Price targets and valuations are back in an uptrend.

With more than 50% of all recommendations for ASX-listed stocks now Buy or an equivalent of Buy, there seem to be plenty of opportunities out there to put money into undervalued stocks.

Contrary to what many an investor might think, instinctively, total Buy recommendations lifting above 50% is quite a rare event. It only happens during bear markets. The second factor in play is the extreme bifurcation in appreciation and daily momentum.

This is not your grandfather’s share market.


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