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Australian resource stocks look promising

Lesley Beath  |  17 Jan 2012Text size  Decrease  Increase  |  

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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

 

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.


Overview

 

There were some interesting developments last week. The most notable for the Australian market was the strength in the base metals, which had a positive flow-on effect to the ASX Materials sector.

That sector was the best performer in Australia over the week, gaining 4.3 per cent. The ASX Small Resources advanced by 3.7 per cent, but many of the smaller resource stocks posted double-digit percentage gains.

The best performers within the All Ordinaries were Alliance Resources (AGS) (+49 per cent), White Energy (WEC) (+43 per cent), South Boulder Mines (STB) (+33 per cent), Equatorial Resources (EQX) (+33 per cent) and Carnarvon Petroleum (CVN) (+30 per cent).

There are a significant number of small resource stocks that exhibit a constructive profile, and for the first time in quite a while they show potential to outperform the broader market over the medium term.

The same applies to the ASX 200 Materials. The latter tested the September/October lows at the end of December and it appears that those lows will hold over the short to medium term.

Resistance sits approximately 6 per cent above current levels for this index, but the ASX 100 Resources and the ASX Small Resources are in close proximity to the resistance of the 2011 downtrend.

This will act as a barrier and we need to see that overcome before adopting a positive bias, but there has been an encouraging improvement in a large number of the small resource stocks over the past couple of weeks – including gold, energy and diversified companies – and it appears they can push higher over the next month or so.

 

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Many of these smaller companies show encouraging "market depth," that is, the buyers and sellers are either relatively evenly matched, or the buyers outnumber the sellers. This is not the case with the larger resource stocks.

And indeed, this lack of buying power has been a concern for the broader market over the past several months. These smaller stocks can pull back in the near term, but they just might be giving some early notice that the resource side of the market may be moving into a more positive mode.

The relative-performance profile of the Materials and Resources is interesting here.

If we look at the ASX 100 Resources compared to the ASX 100 Industrials, which forms part of the Feature chart, we can see the ratio is bouncing from a zone of support which dates back to the early part of 2010.