Momentum Monday 20th February 2023

Back for another week of market puppetry and excitement (or we hope). I will touch on the week that was in Australia, but there was really not all that much positive from a macro sense both here and overseas.

But like the stoic adventurer, markets continued to try to push forward, though the the question has to be asked, “When will the head winds become too much?”

Before we commence this week’s report, as an FYI this Momentum Monday report has three sections:

1. Broader market sentiment

2. Stocks of Interest

3. 52 week high screen

Broader Market Sentiment week ended 17th Feb

S&P500

For all the drama filled headlines, the S&P500 hardly moved again this week.

S&P500 Weekly Chart

Sure it was the second down week in a row, but it was only by a whisker's width, and pleasingly we are still some distance from the prior downward channel.

The headlines continue to remind us that we should be worried about the US economy and how the market will hold up in the face of expected rate rises. Especially as there appears to be no end insight as the US economy is a long way away from their own 2% inflation target, given the Labor Department said the producer price index rose 0.7% last month, higher than expectations.

Reporting season will continue in the US with the most notable in my mind being Walmart. More for the strength of the US consumer rather than anything business related. The commentary there may govern short term sentiment for a while because we know that more rate rises are coming. However if their economy is going to rise through that the US consumer must continue to spend. At least we know they are employed as evidenced by the jobs figures last week.

Back to the chart. Despite the two down weeks, RSI remains above 50, and though the gap between the lines on the MACD have come closer together, the bar is still positive. So if ever you were going to have two consecutive down weeks, these are the type of indicators you want them to occur in.

But just to state the obvious, that would change if the index kept falling.

ASX200

I inferred at the commencement of this piece of the puppetry occurring recently. This was in reference to Governor Lowe sitting in front of a senate committee, not once, but twice, to say the exact same thing. He stuck to the old public servant’s line of, “Just doing our job.” Though I think it is important to remember that just because you fight fires for a living, doesn’t mean you aren’t culpable if you light one deliberately.

Of course this is a little unfair as the "great money flood of COVID" in large part was induced by government policy and our generous banks (more on that in a moment). Besides trying to keep a lid on inflation, the RBA’s other role is to make sure the country doesn’t go broke which it did during COVID (hence the printing of money), however the implications of inflated asset values, personal debt increases and inflation perhaps should have been highlighted more strongly to government - though I strongly doubt given its track recorded back then that it would have.

But as DIY investors, we knew it was coming.

For those of us who grew up with images burnt into our memories of piles of notes in post World War I Germany, we know what happens when you print too much money (or as they do today, add too many electronic zero’s to accounts.)

Ps I don't think we'll get as bad as post war Weimer Republic… I am just using it for illustrative purposes.

But is there any wonder there is inflation? Companies had been increasing prices for the past 12 months and consumers have just kept paying the higher prices. Not only that, but people have been taking on home loans so large they are unlikely to pay them off before dying, and that is with two incomes in the home. Last year, Westpac CEO Peter King warned the RBA as such when he said that Governor Lowe's biggest challenge was that the psychology of consumers and businesses had shifted, and inflation expectations will become entrenched.

Good news is as Momentum Investors, we don’t have to worry about them now. 

One last point on all this. Treasurer Chalmers is now doing his bad cop impersonation warning banks to pass on higher rates to depositors. My message to him is let the Banks compete it out (Provided they are not involved in any Cartel activity which is illegal) and they will figure out the right rate.

There is a reason why Banks were able to survive despite no one repaying a loan for a six month period (i’d like to see how the Government would do if we stopped mining for the same time period). The banks know how to look after themselves, and yes their shareholders. So Mr Chalmers there is no need to provide advice, rather focus on productivity improvements if you are serious of wanting to help the RBA control inflation. 

Though as an aside, I do hope retirees get to enjoy higher rates. They have paid their dues with anemic rates for well over a decade now and deserve a break.

Ok. Back to chart talk. Sorry for digressing.

It is of course reporting season which many may think for a momentum article is not that important. But it is very important for two reasons:

1. It allows for a rebase of price moves. Often before a company reports the price swings on hearsay and speculation. But when the report comes out (either positive or poor) the initial reaction acts like a recalibration for the price that coming structures can be built on.

2. The momentum indicator within Stockopedia uses analyst revisions as well as price and therefore the QM score that I rely on as an initial screen for this section can change removing some stocks from consideration, but also including a new range of potential additions.

The entire list of companies in my stocks of interest section below have reported and their latest financials appear in Stockopedia. .

The market this week fell for the second consecutive week, this time, by one percent. Though it felt worse than that (hint: it always does after a few positive weeks.)

Despite the fall, the structure of the weekly chart hasn't all changed that much.

S&P/ASX200 weekly chart

Investors will note that out three past pullbacks during this sideways move have all been rapid. The June, October and December pullbacks saw a consecutive collection of weeks of downward moves.

Hopefully we don't repeat, but if we do, as long as we stay above 7038 then our stepped up move remains orderly.

If we fall below that, more of the stomach churning sideways market moves we have experienced could occur. But for now despite the two week pull back, the most likely outcome remains an eventual test of 7628…. But these journeys are rarely, if ever smooth.

Stocks of interest

Tip: if you look at the list on the right hand side you will see the stocks mentioned within this week's contribution.

Author note: In line with the approach I am using with Stockopedia, I will focus the majority of my attention to stocks with a QM rating above 80 and market cap above $500M. To learn more please read the last instalment of my momentum journey here. I will discuss where their charts presently sit to provide context for potential and current investors. You can revisit the series of articles starting with Episode One here.

These stocks are considered purely for the purposes of education. Be sure to read all relevant commentary to understand the context from which a chart is presented. It’s not always positive!

ASX: WES Wesfarmers. QM Rank 99 A$51.09

We only discussed Wesfarmers (ASX:WES) towards the end of last month.

ASX:WES 1 year daily chart

We mentioned the retest of resistance and the positive indicators that supported it and pleasingly the stock has held its line and remains on a short term positive trajectory. Good results from the Kmart and Target divisions helped things along as did the increase in dividend. Once it solves the Catch business problems the business will have a clear runway.

From a chart perspective what was resistance has become support with the bounce off $49 creating a new higher low. Things look good for the WES recovery.

ASX:CAR Carsales. QM Rank 83 A$23.00

Even more recently we discussed carsales.com (ASX:CAR). At that stage we said that despite butting it's head against resistance, each pullback occurred since was with less conviction and hence it looked prime for a breakout.

ASX:CAR 1 year daily chart

Since then there has been a real tussle of sentiment with the price unable to break through resistance. However the thing that further supports the positive case for CAR was the latest report where it announced that it has increased EPS by 14% and lifted its dividend by 12%. Also the acquisition of Trade Interactive has gone smoothly and is contributing nicely to the business thus far which is to be expected given their 'try before they buy' approach.

All in all a pleasing result, though investors focused on the Momentum factor should be aware that while we saw earnings expectations upgraded slightly for 2023, 2024 earnings were downgraded. The company has time to change that perception which would help price.

ASX:SUN Suncorp Group QM Rank 84 A$12.78

When we last discussed Suncorp (ASX:SUN) in mid Jan, we talked about how the price had butted its head against resistance three times in the past year and no action was needed until there was a clean breakout.

ASX:SUN 1 year daily chart

Well since the price has gone above the recent price range, and with the company being able to hold above following its half year report, that is a positive sign.

Resistance has now become support. The pullback in late Jan was enough to create a new mini higher low and a stop from here would be around $11.50.

In the interests of disclosure, if the stock opens up or flat on Monday I will be in.

ASX:EDV Endeavour Group. QM Rank 95 A$6.78

Endeavour (ASX:EDV) was another company to report recently. And as the old saying goes, when times get tough look for refuge in 'booze and gambling'. The recent report from EDV confirmed as much with a 17% increase in Net Profit and 14% increase in dividends. The price gapped up on the day in response.

ASX:EDV 1 year daily chart

However it is important to note that from a chart perspective the stock is still in a downtrend from the peak of August 2022.

The recent pop wasn't enough to get EDV to a new higher high of $7.40. It got relative close to testing that level hitting an intra day high of $7.32, but has since retraced and in fact has already closed the gap it created on the day of the announcement.

ASX:EDV 7 trading days

So two scenarios may occur from here.

• The bull case is now that the gap is filled, the price will stabilise after its rapid pullback and will make another tilt at $7.40. Break above that and the stock will have a new short term higher high providing some confidence that the downtrend is over and that the strength of the report has taken over.
• The bear case is that the rapid pullback from the good announcement is worrying and that the price need to hold $6 23 else it will still be ensconced in a downtrend and sentiment will continue to work against it.

As the price is close to the ATR and the report was so good resulting in analyst upgrades, there may be some tempted to take a nibble at these prices given they 'won't have to wait long to know if they're wrong.' The $6.23 level discussed above would be a good stop loss level.

ASX:CSL CSL.QM Rank 90 A$298.40

CSL was discussed back in our first ever Momentum Monday. At the time we highlighted the $240 to $320 channel the stock had been stuck in for two years.

ASX:CSL 1 year chart

I am afraid to report that three months on and we are still stuck in that channel. We got close to breaching it when we hit $314 in early Feb, but failed and the pace of the retrace has picked up since the company reported and we are back below $300.

ASX:CSL 5 year weekly chart

The report itself was not too bad, and the numbers held up pretty well within Stockopedia with little change to the overall StockRank. It reaffirmed its annual guidance, grew revenues by 19% and profit by 10% to US$1.957 billion, much of that driven by the 5 month contribution of the Vifor business that the company acquired.

The issue remains whether the price is too high, given it is obvious that the stock is priced at a premium no matter what metric you look at. Whether the valuation is justified will in large part be determined by the success of the Vifor acquisition and the continued success of the blood collection business.

Until we get further colour on that, the biggest healthcare stock on our exchange will stay in the range. In the short term the price has crossed below the ATR so further choppiness may lie ahead.

ASX:TLS Telstra Limited QM Rank 92 A$4.21

If there was a stock that turns investors into punters yelling at a computer screen  it would be Telstra (ASX:TLS).

ASX:TLS 1 year chart

But it looks like the horse is in a good position on the home straight.

First let’s look at the 10 year chart (monthly intervals). It is clear and evident from the high of 2015, the price after puling back a long way has since stabilised and has returned to a general positive trajectory

ASX:TLS 10 year monthly chart

If we bring the perspective to 5 year view and you will see the the current price has return to the previous weekly higher high of $4.22

ASX:TLS 5 year weekly chart

Which brings us to today and the $4.21 level that we find now. Looking at the more granular information presented on the daily chart you will see that the higher high the company is shooting for is $4.26

If the price breaks above it that, given the look of the chart at the moment will be a good sign of a possible continuation of the trend. Given this resistance level has been close to being tested before (without being too exact), a break above this level in my view will be a strong signal.

The only word of caution is that I don’t see OBV supporting the recent run up, however this is one of the most heavily traded stocks on the market at all times so I feel I may ignore this signal for now. If the price can break above $4.26 I may be inclined to take my first position in TLS for a very very long time.

ASX:JBH JB Hi-Fi QM Rank 98 A$45.53

One of the first companies to report this earnings season was retail giant JB Hi-Fi (ASX:JBH). The told us what we were all expecting. The last half was a record profit, but the start to this financial year was a little slow.

ASX:JBH 1 year daily chart

The company saw its share price drop on the update, however pleasingly it has still not changed the direction of the short term trend. However, the reality over two and half years is that the price hasn't moved much. To be honest the recent move to a positive short term trend as only put us back into the $44 - $55 channel the stock had been stuck in until the break to the downside in May 2022.

ASX:JBH 5 year weekly chart

The company had made a recovery since the bottom and now finds itself at the $45.50 range where prior it had acted as resistance where today it is support

ASX:JBH 1 year daily chart

In my view the best chance outcome is a return to $44 - $55 range, whereas the downside risk is quite large. The stock must hold $37 or else there is very little in support until $23. With such large pullbacks possible investors would be best advised to wait for a clear direction in price before committing.

ASX IGO IGO. QM Rank A$13.54

The loss of Peter Bradford in October last year saw the passing of a man mountain in the industry. A driving force behind the emergence of IGO (ASX:IGO) as a producer of significant renown should not be underestimated.

ASX:IGO 1 year daily chart

The market had noticed it as well, with prices coming off all times which were last seen before Mr Bradford's death.

In the short term, the chart needs to hold $13.20 else the next target is $9.20. However, revenue and profit continue to rise, therefore such a deep pullback will likely be driven by commodity price moves and they will be obvious to observe (even though forecasting the right direction of commodity prices can be difficult.)

But the outlook for Nickel and Lithium looks solid, so a further pullback may indeed see IGO become a buy, as the world class assets deserve to command a premium (as they do at the moment). If sentiment could make it cheaper, all the better.

ASX:ORA Orora. QM Rank 98 A$3.43

Orora (ASX:ORA) delivered a very workman-like 7.8% growth in NPAT to $108 million with the added bonus over some commentary from the North American business. This saw the share price spike on the day of the announcement and it followed through on the Friday..

ASX:ORA 1 year daily chart

While the jump was pleasing to see, from a chart perspective there is still a bit of work to do. The stock has just made it back to the September lower high, and now has the July/August high ahead of it which was tested twice before and failed.

Should it succeed at breaching the $3.59 level, then the next target becomes $4 which was the all time high seen in May 2022.

This will be a stubborn $3.85 - $4.00 range as the company first reached the level in 2018 and has not been able to breach it. So investors should be aware that any chopiness experience is expected and the stock will likely need a retrace before generating the strength for another push through to all time highs.

Investors will hope this recent spike in price is sustainable as it had been on a downtrend prior, with downside targets of $2.20.

The gap (between $2.93 to $3.09) will be keenly watched by short term traders. The theory is gaps fill before they continue their directional move. Longer term investors won’t be too far behind as they need the price to stay above $2.85.

ASX.COH Cochlear. QM Rank 98 A$224.95

Cochlear (ASX:COH) has pretty much tracked sideways for the last 3 years, with the exception of the COVID period where it lost half its value for a short moment .

ASX:COH 5 year weekly chart

For all intents and purposes the stock looks like it is preparing for another tilt at all time highs (circa $250) following a series of short term higher highs and higher lows.

ASX:COH 1 year daily chart

The recent profit announcement was a mixed bag from the company. Though the company was able to grow sales by 9%, profit fell 10% due to increased costs resulting in a fall margins.

However short term sentiment saw this stock retain its positive momentum and actually popped on the news. The $75 million buyback helped, as did the outlook statement where the company reiterated their full year earnings guidance.

Analysts who had been downgrading their earnings expectations for the business for the past year finally found a change of heart on the back of this update.

The current price is at resistance formed from the lower high in August 22. Should the price break above that level I feel the all time high of $250 is the next target. Problem is that will be a tough level to break through (particularly at these valuations). But at least the recent report would have provided some comfort to investors that a complete capitulation is avoided.

ASX.S32 South32. QM Rank 93 A$4.53

South32 (ASX:S32) has rebounded steadily since the June low. However the stock finds itself close to a key support level now.

ASX:S32 1 year daily chart

Since January 2023 the stock has experienced a side ways movement, which suggests that any break out could be aggressive (either to the upside or downside). You can see how that worked in the sideways move from August to December last year where the break out was quite aggressive.

The recent result of the disappointing 44% drop in profits on account of falling commodity prices and rising costs, lead to the stock being sold off quite aggressively on the day. Though the announced extra $50 million to its buyback and the 6% increase in production, help shield the price from the full impact of the disappointment.

At this level the price is just above the ATR (by 1 cent) so you won't have to wait long to know if you are wrong. A stop loss of $4.14 as a parachute stood would work as it coincides with the 200 day moving average. It would also mean that the price filled the gap on the 9th Jan, but would have failed to bounce.

ASX:S32 Daily chart since start of 2023

However if the price can stay above $4.14, and break above this current sideways move at $4.80, that would be a bullish signal.

52 Week High screen

Academic Research has shown that stocks close to their 52 week highs tend to outperform.

To that end I have attached the results of a screen run within Stockpodedia showing every stock above 200 million market that is trading at least 5% from its 52 week high. (If you wish to recreate this criteria in the scanner select "Price vs 52 high" greater than -5%)

This has not considered liquidity of the stock nor does it consider its fundamental qualities. However we have included each factor score to help you.

Data is at 17 February and is sorted by the stocks closest to their 52 week high.

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The author holds interests in the following stocks mentioned in this article: IGO, SUN, WES . This position can and will change at any time without notice.