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All Ords may find headway elusive
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The views expressed in this report are those of Lesley Beath and may differ from Morningstar's views.
Reviewed this week
- Overview
All Ords may find headway elusive. More... - Bank of Queensland (BOQ)
Superior to the larger banks. More... - IOOF Holdings (IFL)
A 'rounding bottom'? More... - Seven West Media (SWM)
Wait for the breakout. More... - Sims Metal Management (SGM)
An improving profile. More... - Western Areas (WSA)
A bounce from the 2008 uptrend. More... - Discovery Metals (DML)
A new upleg unfolding. More...
Please note: before making an investment decision, Morningstar recommends you read the fundamental research available on these stocks.
Disclaimer: To the extent that any content in this report constitutes advice, it is general advice that has been prepared by Lesley Beath without taking into account the particular investment objectives, financial situation and particular needs of any individual investors. If necessary, you should consult with a licensed investment adviser or dealer in securities such as a stockbroker before making an investment decision. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.
Last week was a good one for the resource sector. As discussed in the previous report, a large number of small resource stocks had shown a solid improvement in price structure, and the expectation was for continued outperformance. At the time, both the ASX Small Resources and the ASX 100 Resources were in close proximity to the 2011 downtrend, and last week's strength resulted in a topside break in both indices. The break is marginal at this stage, and over the past 12 months there have been many instances when topside breaks were quickly aborted, so let's hope that this isn't one of those occasions.
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The All Ords and the ASX 200 index gained just over 1% on the week, but the Small Resources (+4%), Materials (+3%), Energy (+3%), and Resources (+3%) were far stronger. Small resource stocks were once again some of the top performers in the All Ords, posting gains of 10-20%. In contrast, the Banks were relatively flat. Going forward I think we can expect more of the same. The ASX Midcap 50 and the ASX Small Ordinaries should outperform the market, and the ASX 20 Leaders is likely to underperform.
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The strength in the resources was in conjunction with solid gains in China, where the Shanghai 'A' Shares index rose by 3.3%. This index has fallen relentlessly since last April and at this stage, the gains of the past couple of weeks appear no different to the short-term countertrend rallies that occurred last year in June/July and October/November. But this time the improvement is occurring as the Australian resources have registered, what appears to be, a medium-term low. It can be argued that recent strength is similar to that in October/November, and I can't guarantee that it is not. But this time 'feels' better. Base metal prices are stronger and precious metals appear less vulnerable. Unfortunately for our market, the Chinese market will be closed this week for Chinese New Year, so we won't get a lead from there until next week.
Another positive for commodity prices and in turn, Australian resource stocks, is the action in the US Dollar index. It tested significant resistance last week and pulled back sharply, falling by 1.7%. This is a good sign.
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As noted last week, 'if it (the US Dollar index) shows a decisive downward move, we could see the 'risk-on' trade gather momentum'. We got that move and although the CRB index did not break topside in response, I do think that risk in equity and commodity markets has shifted over the past week. This does not necessarily mean that we are on the verge of a strong rally, and with the US equity markets still overbought and with the Australian banks appearing lacklustre, the All Ords may struggle to make much headway; but for the resource side of our market, the situation has improved.
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