Momentum Monday 21st August

Welcome to Momentum Monday. And China is on the airwaves again for all the wrong reasons causing a bit of jitteriness. Excluding any perceived reason for the weakness, pullbacks are healthy, it’s just that the narrative can make things a little scary when we see sizable pullbacks the likes of what we saw last week.

It's been particularly hard for mining stocks because remember, if your revenue is down because commodity prices are down, and yet your expenses are going up, you are going to be in for a tough ride.

It's also the busiest week of the reporting season for quality companies next week. So make sure you don’t miss a beat with our reporting season calendar that you can access here.

And a reminder, on Friday we sent you our newsletter which included the entire strategy map series, consolidated into an ebook. You can access it here.

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The content for this week's edition is as always:

• Broader market sentiment

• Member corner

• Stocks in the “Shine Zone” (including changes)

• 52 week high screen (including changes)

A reminder that you don’t have to read all this contribution. Simply scroll to the area of interest.

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Broader Market Sentiment

We look at the direction of both the US and ASX markets to gain an understanding of the broader sentiment at the minute. It is important to stress here that I DO NOT use this to time my entry or exit out of stocks. I prefer to use the individual charts of stocks to do that. However I find it useful in helping us determine how aggressive/cautious traders should be in their trading. In short the more positive the broader market is the more risks you can take and vice versa.

US / S&P500

Last week’s negative move for the S&P500 has resulted in the first triple down week since February. As we have talked about numerous times, the longer a run continues, the more important that a pullback occurs, lest we become too stretched. Perhaps we are seeing that now.

S&P500 Weekly chart

The 2.1% pullback for the week has been attributed to a number of this - but macro commentary aside - for as long as the index stays above the short term support at 4124 there is no need to change our view on global equities. It is important to remember that the S&P500 is around 9.31% off its record high and has rallied about 14% this year.

After the comical downgrades of the US economy and US Regional Banks last week, the major focus from a macro level for traders were the minutes of the meeting from the latest Federal Reserve meeting. Init is refers to Federal Reserve officials remaining worried that inflation could rise again, which would necessitate more interest rate hikes.

While a statement filled with assumptions, its impact on treasury markets was relatively immediate with the yield on 10 year US Treasury Bonds rising. The US market is hoping for a pause in rate rises following the last one in July. Though these statements have started to change some opinion.

It is important to note that 10 year rates are still below the Central Banks range therefore still implying that over time rates will normalise down from their current elevated levels.

Another interesting thing to consider is that August is a notoriously slow month for investors where volumes are lighter as both Europe and many Wall Street executives go on extended holidays.

That said, since 1928, the S&P500 has returned on average 0.7% for the month of August so by no means is it a “bad month” historically, but the recent sell off has seen us underperform it thus far.

We remain exposed to shares globally.

AUS S&P/ASX200

Last week’s reprieve was a stop gap with the S%P200 falling 2.6% driven in large part by the miners (more on that in a moment.)

S&P/ASX Weekly chart

The aggressive downward move has pushed us back into the symmetrical triangle we say form from the high at the end of January. The good news is for the moment we remain above the short term support in the range of 6995 and 7038.

The RSI has turned below 50, and the MACD moving average lines are now touching on what would appear to be an imminent crossover.

Long story short, we are going sideways. And just like a hungry cat watching a fish casually swim in an aquarium, this market behaviour is enough to drive any red blooded investor bonkers. After all, we are now back where we were at the start of July and as per the Stockopedia Sentiment Score that we take at our Friday “Lunch ‘n Learn” webinars, many investors/traders were feeling more confident. This latest move will come as a kick in the guts. But it’s a reminder why Ed refers to Momentum Investing in the Strategy Map document as the “strategy for the ruthless” for a reason. Ultimately we have to “trade the trade” to either protect our downside, increase the likelihood of upside potential or grind our teeth when it goes sideways.

Speaking of which, it is unsurprising to see both the ‘Shine Zone’ and “5% from 52 week highs” lists see more exclusions than inclusions this week on account of the broader weakness. Changes in this list can often reflect overall market bullishness.

The big macro news domestically which saw Materials as the worst performing sector of the S&P/ASX200 for both the past week and month is actually emerging from. China. Last week I spoke of deflation. This week we have seen the Chinese economy come under increasing scrutiny as the regulators have stopped reporting on youth unemployment (which is predicted to be over 20%) and have also cut interest rates in an attempt to stimulate spending.

But there are real cracks starting to emerge. The property sector which is said to fuel about 20% - 30% of GDP is mired with lots of bad debts and bad assets. It's a sector which has been spread too thin and can't be relied upon to get the economy out of a hole. The Chinese government knows this (though they won't admit it). The closest they have come to acknowledging the challenges was the recent 5% GDP growth target it set itself, which despite being lower than previous targets, to be honest looks increasingly challenged given the problems that exist in the property sector.

A recent example with once healthy major property developer Country Garden said to be on the brink of collapse missing coupon payments on its debt, and the troubles extend beyond that sector with wealth firm Zhongrong International Trust reportedly also missing bond payments. And on Friday, China’s heavily indebted property giant Evergrande Group filed for Chapter 15 bankruptcy protection as it seeks to restructure its debts. Something it did back in 2021 as well. These risks discussed in isolation are not a problem. However as they may incite contagion fears in an already deflationary environment, then plans for 5% growth in the world's second largest economy look a stretch

The Yuan has hit a 16 year low against the Greenback and Chinese officials know that it needs to expand domestic demand and boost internal consumption. Recently it was announced that they would implement 20 measures to support tourism, as well as spur consumption of electric cars and so-called smart appliances, whilst also trying to support the property sector. Further these China issues and expected reduction in demand for our commodities has seen our dollar has fallen against the greenback, which means imports generally become more expensive, which will not help with our current inflation issues.

Last week I mentioned investors will be hoping for a quick turnaround in the fortunes of the world‘s second largest economy. Last week's reaction news and our market’s reaction seems to signify it may take longer than many hoped.

Excluding all the above. As mentioned in these contributions many times before, pullbacks are healthy for a market and the broader sentiment suggests we still remain exposed to equities.

However always refer to stock specific charts, especially for stocks subject to the risks above as they need to be monitored.

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Member corner

In this section we will provide a detailed chart assessment, on a maximum of ten stocks weekly, on companies from those of you in the Gallery.

If no one asks for a stock to be analysed, this section will remain blank.

Also please note, that while we may receive a number more queries than ten per week, we retain the right to save a stock for another week, or ignore it all together.

To learn of the methods used to analyse companies in this section, refer to my Momentum Journey series that I articulate here in three parts.

Episode 1

Episode 2

Episode 3

They will help provide context on what I am writing about and the editorial angle of this report.

If you have a stock you would like analysed from a momentum perspective, please write it into the comments section below or email us at support@stockopedia.com.au

ASX:JBH - JB Hi-Fi

• StockRank 98

• Momentum Rank 89

• QM Rank 97

• VM Rank 97

• A$$46.04

The multichannel electronics and appliance retailer JB Hi-Fi (ASX:JBH) returned what can only be described as a resilient result.

ASX:JBH 1 year Daily chart

Total sales grew by 4.3% to $9.6 billion, however net profit after tax fell 3.7% to $524.6 million on rising costs. The company said that the start of the year had seen a decline in each business unit, though this was inline with its expectations because it was cycling the elevated period of sales from last year.

From a chart perspective, I have for some time found JBH’s chart a little messy. No better evidenced by the pop on its report which took it above the previous lower high (this is a good thing) but then has fallen off rapidly since. As a big market cap stock, prices tend to move in ranges and at this point we are in the middle of the range.

Support is between $41.55 - $41.82. It needs to get above $49.31 to show it can have a chance of getting back to all time highs of $55.85 from March 2022. But when we look at a weekly chart of the stock we can see a clear triangle form which if the text books are correct tell us moves on the breakout could be aggressive either way, and perhaps may prove that patience is best advised.

ASX:JBH 5 year Weekly chart

But from a Stockopedia perspective the latest numbers it remains high quality, is of reasonable value and momentum wise it has held up incredibly well. Fact of the matter is, any negative moves if they occur, will likely be for reasons out of their control.

Operationally and from an investment perspective it continues to be the premium retailer on our market and a great success story (I live about 4km from their first ever store in East Keilor that until a few years ago they kept open irrespective of the fact it was smaller than my garage.)

ASX:IPG - IPD

• StockRank 76

• Momentum Rank 99

• QM Rank 92

• VM Rank 73

• A$4.25

I last spoke of IPD (ASX:IPG) when I wrote a dedicated article about it in January this year under the idea that the company was set to benefit from the electrification of everything. It has been a great ride from circa $2.80 to a peak of $4.80 last month.

ASX:IPG 1 year Daily chart

I still believe in this business, but as I bought in using charts, I will sell based on charts. Given I have held it for much of the ride, I will set my stop at $3.98 which coincides with the higher low at the end of June 2023.

Hopefully the company can hang on until the report and shoot the lights out (no guarantees and no pun intended) which will come on Friday 25th. If it's good then this retrace has been healthy and prepare for another leg/step up. If it isn’t they at least it’s been fun.

ASX:GNC - Graincorp

• StockRank 99

• Momentum Rank 83

• QM Rank 95

• VM Rank 97

• A$7.94

Some may argue that Graincorp (ASX:GNC) is the definition of a cyclical business, which makes charts quite effective.

ASX:GNC 1 year Daily chart

I last spoke of GNC from a momentum perspective in February. I said at the time if price can’t hold $7.25 then the next target would be $6.60. In March it hit that level. Then curiously for the next few weeks price bubbled along $6.60 until it hit it out of the ball park with their half year result which obviously shocked the market.

Fast forward to today and you can see a nice upward shape from a series of short-term higher highs and higher lows. This retrace we have witnessed is healthy and if it can hold $7.68 and bounce then I may be tempted to take some myself. For those new to this column just to let you know, I like to buy near points of support because, ”I won’t have to wait long to know if I am wrong.”

GNC is a stock that has been covered at length from a fundamental perspective given its inclusion with the Australian and New Zealand NAPS portfolio. If ever you wish to read any previous commentary on a stock, click on the “Discussions” area.

ASX:RPL - Regal Partners

• StockRank 74

• Momentum Rank 74

• QM Rank 87

• VM Rank 58

• A$2.45

Stocks that closed at all time lows a week ago as Regal Partners (ASX:RPL) have traditionally don’t get a run for a momentum perspective.

ASX:RPL 1 year Daily chart

In fact since listing, the stock has been putrid hitting a high of $15.99 pre COVID and falling ever since. Though to be fair since 2022, when Regal Funds Management merged with VGI Partners. To be brutally frank, when I read the numbers thrown around by medicare businesses such as these I feel sick in the stomach and represent everything wrong about the industry I work in. It's a hedge fund manager that rips massive amounts of performance fees (about 90% of revenue) from investors not smart enough to know that the benchmarks set on their funds are often nonsensical and on an after tax basis they are probably losing money (except if they are an SMSF).

Personal biases aside (I would never invest in this business - no matter how strong a trend) the company made an audacious bid for Perpetual but ultimately failed because the break fee that would have to pay Pendal was quite large., Currently it is in a battle with QGQ to acquire another fund manager in Pacific Current Group.

RPL is trying to grow through acquisition to grow by scale and that is dilutive to shareholders and reflected in the price unfortunately.

A price that needs to raise above $2.70 before it could ever be considered and still it would have a lot of work to do.

ASX:CU6 - Clarity Pharmaceuticals

• StockRank 58

• Momentum Rank 89

• QM Rank 78

• VM Rank 59

• A$1.02

Before I start, with Clarity Pharmaceuticals (ASX:CU6) this is still in the testing phase so charts whilst useful on no news will be totally useless when a major development happens. In recent times it has looked positive - but make sure your stops are tight (unless of course you are a true believer and willing to take the risk.)

ASX:CU6 1 year Daily chart

Without going too much into the science, the idea about CU6 is to use copper isotopes (which are more accessible, cheaper and require less expertise) to find and localise tumours for more effective radio-pharma treatments, at this stage predominantly focused on prostate cancer.)

This in contrast to current treatments involving nuclear technology which are more expensive and harmful to the human body. The company is flagging better identification of tumours to a very small cohort at this stage, and just last week the company announced that given the positive results from Cohort 2 and the low toxicity, the will be moving to a larger Cohort 3 with increased dosage.

While the potential is big if successful (eg like TLX or NEU) investors should be cognisant of the risks if the trial is unsuccessful or delivers similar results to current practices.

From a chart perspective the price has now hit 52 week highs which is a good sign and given the rapid rise since July will eventually take a breath. Provided that breath keeps the price above $0.865 I will be comfortable.

But remember - it can take just one announcement for things to move aggressively either way (and it's not always positive eg. MSB, NYR, OSL)

ASX:NXT - NextDC

• StockRank 63

• Momentum Rank 97

• QM Rank 86

• VM Rank 60

• A$12.91

Iam yet to find a single person that can convince me the internet and ‘cloud technology’ will be less relied upon in the future. If likewise you feel that we will rely on it more then NEXTDC (ASX:NXT) is a way to invest in that thematic.

ASX:NXT 1 year Daily Chart

Of course analysts will do their thing around valuations, margins etc etc. But the fact of the matter remains we are going to need their services more and more into the future and their potential is only limited by the amount of buildings they can construct (which admittedly are not cheap to build or run.)

I last discussed the stock in April acknowledging the rebound it had experienced then. I even mentioned more conservative investors may want to wait until price broke above $12, and then wait for the subsequent consolidation to confirm that the pace of the prior correction had eased, which it had done.

Now $12 becomes support in my view, and we can clearly see that after the level was tested again twice in June before it started its steady run. With it now in the Shine Zone, at close to 52 week highs and a pullback from the recent high of $13.30 positivity abounds.

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Stocks in the Shine Zone

To learn about the Shine Zone and how to use it, you can read it here.

The rules for inclusion in this list are based on those I like to see in a stock before considering a trade in it:

• QM Rank above 80

• Price is above the 2.5x ATR

• 50d MA is above the 200d MA

• Price is greater than the 200d MA

• Market cap greater than $200M

This is a very important point: the “Shine Zone” are rules for possible buying. They are not for holding and/or selling. If a stock falls out of the shine zone, use support levels to set your stops, or instigate a parachute stop if necessary. With markets moving sideways, one expects frequent changes in these lists.

Read the “how to” article above to learn more

Data is at 18 August and is sorted by the stock code.

Changes from last week

Shine Zone list as at 18 August

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52 week high screen

In this section we identify stocks within 5% of their 52 week intraday high based on the idea, supported by academic studies, that stocks close to their 52 week highs tend to outperform. Weekly changes to the list will also be noted.

If you wish to recreate this screen in the screener select "Price vs 52 high" greater than -5% and Mkt Cap greater than $200M

A stock coming onto the list is NOT an automatic buy, just as a stock that leaves the list is NOT an automatic sell. As with the shine list, assess every chart on its merits. However movements on this list may alert you to interesting charts so be sure to look at Stockopedia and the chart first.

Data is at 18 August and is sorted by the stocks closest to their 52 week intraday high.

And remember, past performance is no guarantee of future performance.

Changes from last week

Stocks within 5% of their 52 week high as at August 18, 2023

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