All Ords Report 02 August 2018

US corporate earnings season is giving the US market a much needed lift – the Dow Jones (DJI) jumped by around 1.6 per cent last week, well above important resistance at 25,400 points, however, caution is required as the (DJI) is still trading sideways. Mixed sentiment globally is providing good opportunities for investors locally.

The RBA’s decision to leave rates on hold and improving sentiment about Australian stocks is seeing more cash move into stocks and further upside is likely for the market in the second half of the year, as Australia moves into another round of corporate earnings reports in August.

Fundamental data indicates that growth in Australia will continue, but that it is likely to be subdued. What’s interesting is, recently we’re hearing the same message about Australian companies that was being reported more than two years ago and our market has appreciated nicely since.

The Financials sector (XFJ) has been one of the poorest performing sectors, holding our market back since 2015, but bank stocks won’t go down forever and I believe they will survive reporting season. That said, as the medium to long-term trends across Australian banks have been mostly down, patience and a good knowledge of trend lines is important for getting your timing into these stocks right over the coming months. Commonwealth Bank (CBA) and Bendigo and Adelaide Bank (BEN) appear to have moved off important lows and are looking interesting.

It’s the Materials (XMJ) and Energy Sectors that offer the best opportunities in 2018, however, these areas of the market are likely to settle down to a more steady pace over the next twelve months. That said, both sectors have performed well in the previous quarter to 30 June and currently the analysis indicates further upside is afoot this year for many stocks in the sector such as BHP Billiton (BHP), OZL Minerals (OZL) and Monadelphous (MND).

Telstra dominates the Telecommunications sector (XTJ) and it’s no secret that this business has struggled for three years. You may not be aware that Telstra is trading at around 69 per cent below it’s all-time high price of $9.20 (adjusted data) in 1999. After speaking with many Telstra customers, the issue can no longer be blamed on the NBN. So far, Telstra’s decision to cut at least 800 jobs and news of the new T22 Strategy hasn’t aided the stock price, as it teeters just above it’s all-time low price of $2.55. While there may be short-term opportunities for skilled traders, the trend is still down over the medium term. The stock is currently trading at around $2.75.

Why is this so important?

The first thing to understand about buying stocks for your portfolio is that one size definitely doesn’t fit all, so to speak. This means you need the knowledge to determine the right set of rules to extract the best, safest return from each stock, and create a trading plan that suits your trading time frame. The Short Course in Share Trading will teach you exactly how.

What do we expect in the market?

The Australia market closed up at 6,377.40 points on 20 July 2018, and at the time it was the highest weekly close since January 2018. Following this rise, the All Ordinaries Index (XAO) dipped slightly to 6,310.5 points on Thursday, as some buyers appeared to head for the hills, before renewed interest on Friday demonstrated interest from buyers in Australian equities remained strong. The Australian market closed higher on Friday at 6,391.5 points.

Remember, never assume the market is going to fall just because it dips mid-week. That said, it is reasonable to expect the XAO will take a short breather as it has been rising for eight weeks from the last short-term low, which occurred on 30 May 2018, and sixteen weeks from the more significant April 2018 low.

Negative sentiment may rise in reporting season and could bring the market back temporarily in August, however, I believe it won’t be long before the market trades into the short-term resistance zone between 6,450/6500 and 6,600 points. Currently, the Australian market is still trading around 8 per cent below the all-time high.

Moving forward, the Australian market is likely to continue to rise through the all-time high at 6,873.2 points in the final quarter of 2018. The sectors to keep an eye on are; Energy (XEJ), Materials (XMJ), Utilities (XUJ), Telecommunication (XTJ) and Financials (XFJ).

Interest rates are likely to have an impact on our market in the second half of 2019, however, I believe that any increases will be gradual. Uncertainty in global markets is positive for the local market as investors will run for safety at home.

Global news

The Dow Jones Index (DJI) traded up in July from 24,307 to 24,519 points. This has been largely attributed to the performance of industrial stocks lead by Caterpillar (NYSE: CAT), Boeing (NYSE: BA) and 3M (NYSE: MMM). The market also benefited from a rebound in technology stocks, recovering from the fallout as a result of last week’s disappointing earnings reports from companies in this sector.

Facebook (NASDAQ: FB) reported an expected slowdown in earnings by high single digits and a decline in active users, which resulted in the share price falling over 20 per cent from US$217.50 to US$174.97 a share. This wiped US$119 billion off Facebook’s market capitalisation and represents the largest ever drop in a single day for any US company. With reporting season well and truly underway, it will be interesting to see how the market reacts to this round of updates.

Taking a look at commodities, the Iron ore price (62 per cent ore) has continued to rise, trading at US$67.67/ton this week. The Chinese Government crackdown on pollution has been the main contributor to the rise, as demand for higher quality ore improves. Crude oil has this week traded back above US$70 a barrel.

Happy trading!

Dale Gillham is Chief Analyst at Wealth Within