Great week for stocks! Can it last?

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What a week! The best in six months, with the S&P/ASX 200 index up nearly 39 points (or 0.76%) to finish at 5157.5. The gain for the week was 220 points (or 4.5%) and the likes of BHP was up 19% whilst Rio added around 11%.

It’s music to my ears and eyes but can this optimism last?

A few weeks ago, I wrote about what had to happen to turn around the persistent negativity on our market and also global stock markets. I looked at what might help us bust out of the trading range that has run around 4700 to 5200. I also pondered how CMC’s Michael McCarthy’s 5900-call could happen this year. And in recent weeks, surprisingly, a lot of what I said would have to happen has actually followed the script. I thought Macca’s call might be more fiction than reality but life can be stranger than fiction!

Let’s recap on what I hoped for and see what has happened to try and work out if this nice run for stocks can last. Here goes:

Janet Yellen gets her chat to the market on rates right – tick.
US economic data, such as the jobs report, KO’s recession talk – tick.
China’s economic news is better than expected – tick.
The European Central Bank and the Eurozone give the market reason to believe in Mario Draghi and his plans to stimulate Europe – tick!
US company earnings have to come with better outlook statements, even if earnings were tipped to be down around 8%. This is not only a tick for the outlook, even earnings for the first quarter of 2016 have to be in the better-than-expected region, even though it’s still early days.
Oil stays away from the $US25 low we saw earlier in the year and the current price is around US$40. That’s a tick!
The talks in Doha, Qatar, with OPEC and non-OPEC oil producers ending up achieving an oil production freeze, or at least something to keep oil prices up. No tick yet but the talk on the talks has oscillated between “maybe a deal” to “a ‘noa’ at Doha!” This get together of ‘oilies’ is tomorrow, so Monday’s market action should be a response to what press release comes out of Doha.

A look at the charts for the S&P/ASX 200 shows the index is trying to break out of the persistent trading range I mentioned above. What happens in Doha could be a ‘make or break’ moment for markets. Certainly, since the Doha meeting was put on the table, the oil price and stocks have headed up, so you can’t be dismissive of this pow-wow. Sure, demand is up as supply has eased, with many US oil rigs closed down due to the persistent unprofitable price of oil. On April 8, Baker Hughes told us that 55.2% of rigs have been shut down, which is huge. “Rig count is again at the lowest level since Baker Hughes started counting rigs in 1949,” the rig counting group reported. “It is likely the lowest back to around 1860 or 1900, if only rotary drilling rigs are counted.”

I also suggested that the Oz dollar needed to stay closer to 70US cents, rather than the current 77.2US cents level it is this morning. I never expected iron ore prices to keep trending higher, however, when commodity prices recover, it drives our dollar higher.

As you can see, despite this crazy world of financial markets, stressed out economies and policymakers, just about all of what I hoped for has come to pass. Even my calls that the Oz economy was better than what doomsday merchants kept predicting has resulted in our latest growth number coming in at 3%, while unemployment has dropped to 5.7%. According to too many economists, this was supposed to be around 6.3% by now.

The one big disappointment has been Malcolm Turnbull and his impact on political as well as consumer confidence. I hope the Budget in 17 days’ time can turn around the current Turnbull turn-off we’ve seen in the polls. I think the local consumer is crazy to be negative, with the jobless rate falling, interest rates where they are and how the economy has been performing. I guess the bad start to the stock market this year and the cooling housing market explains some of the recent negativity but I still think they’re mad if the current environment worries them.

Can this market turnaround last? I think Sunday’s meeting in Doha is symbolically important. If it hurts oil prices, then this week’s optimism will be tested by hedge fund managers and their short-seller buddies. If economic and earnings data keeps to the current trend (which I think is highly possible) and the oil producers don’t behave like the madmen they’ve often imitated, then this positive market has legs.

What I liked

The small sell off on Wall Street overnight – we’re in a buying mood nowadays.
BHP-Billiton at $19.28 at the close yesterday – this is a nice sign and a rewarding one for those who got on board in February.
ANZ’s weekly rise from a low of $22.11 to its close at $23.85 – I’ve been harping on about the banks looking oversold.
Westpac up 8.4% for the week, ANZ up 7.1%, NAB up 6.5% and CBA up 6%.
It’s been a great week for financials, worldwide.
The unemployment rate at 5.7% – the lowest levels in 2½ years – might help consumers get real.
China’s first quarter GDP expanded by 6.7% on-year, in line with forecasts, and this was not a good report for the doomsday dramatists!
The 0.75% rise in the stock market after the numbers was a good omen. We were the only Asian market up on Friday and I reckon foreigners are reassessing our market.
Chinese retail rose at a 10.5% annual rate in the year to March, which beat forecasts. Industrial production was up 6.8% on an annual rate basis in March, which was the fastest rate in nine months. The forecast average was 5.9% and beat the 5.4% growth for the year to February.
In the US, new claims for unemployment insurance fell by 13,000 to 253,000 in the latest week, with the forecast being a higher 270,000.
The US Beige Book indicated that most Federal Reserve districts posted modest to moderate growth; several districts reported difficulty in filling some low and high-skilled jobs; and wages increased in all but one district.
JP Morgan earnings beat forecasts, which is a kick in the pants for bank haters around the finance world at the moment.
The NAB business conditions index rose from +8.2 to +12.3 points in March – an 8-year high. And the business confidence index rose from +3.4 points to +6.1 points.
Total new loans (personal, business, housing & leasing) rose by 3.5% in February.
The China trade surplus narrowed from US$32.59 billion to US$29.86 billion in March. Exports were up 11.5% over the year against a forecast of +2.5%, while imports were down by -7.6% against a forecast of -10.1%.

What I didn’t like

The Westpac/Melbourne Institute index of consumer confidence fell by 4% in April to 95.1 – a 7-month low. A reading of 100 is the dividing line separating optimism from pessimism.
Dwelling starts fell by 5.1% in the December quarter, after lifting by a revised 2.3% in the September quarter. (Against this, work started on a record 220,845 new dwellings over the year to December, well above the decade average of 164,317 dwellings.)

Can it last?

I think Doha is more important for market sentiment, as oil prices are more important than I thought. If earnings, economic data and central bank actions remain positive, we can go up from here. Sure, Donald Trump and Brexit are curve balls out there but I think they’re manageable. Macca’s call for 2016 looks a real possibility!

Top stocks – how they fared

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The week in review

(click the blue text to read more)

I gave you some tough love and explained why it’s not the market that’s the problem – it’s you!
James Dunn told you why floats are back in vogue and tipped WAM Leaders Limited, NB Monthly Income Trust and Tegel Foods as three substantial companies set to list on the ASX.
Paul Rickard gave his verdict on the first unleveraged warrants over the ASX listed securities by Citi.
The brokers put Evolution Mining in the good books and Aristocrat Leisure and Webjet in the not-so-good books. In our second broker report, BT Investment made it on the good books but Alumina got the thumbs down.
Macquarie Group and Link found favour with our Super Stock Selectors.
Charlie Aitken explained why the worst could be over for resources.
Tony Featherstone gave you three tech stocks to consider – MYOB Group, Trade Me Group and Vista Group International.
Melanie Dunn explained the changes coming to the age pension assets test and what it means for you.
And this week’s Professional Pick was Spark Infrastructure by Jason Teh of Investors Mutual, who likes the company’s ability to pay sustainable dividends.

What moved the market

Reports of an oil output deal between Saudi Arabia and Russia helped lift global markets.
Chinese trade data supported the mining and energy sectors and helped the local market crack 5,000.
Wall Street rallied on the back of earnings results, with JPMorgan’s quarterly results beating expectations.
And Bellamy’s and Blackmores shares were rattled after Chinese regulatory changes dented investor sentiment.

The week ahead

Australia

Monday April 18 – New motor vehicle sales (March)
Tuesday April 19 – Weekly consumer confidence
Tuesday April 19 – Speech by RBA Governor
Tuesday April 19 – Reserve Bank Board Minutes
Thursday April 21 – NAB Business Confidence (March Qtr.)
Thursday April 21 – Detailed labour market data (March)

Overseas

Monday April 18 – NAHB Housing market index (April)
Tuesday April 19 – US Housing starts (March)
Tuesday April 19 – US Building permits (March)
Wednesday April 20 – US Existing home sales (March)
Thursday April 21 – US Philadelphia Fed Index (April)
Thursday April 21 – US House prices (February)
Thursday April 21 – US Leading index (March)
Friday April 22 – “Flash” Manufacturing (April)

Calls of the week

The IMF forecasts the global economy to grow by 3.2% this year, compared to a previous forecast of 3.4%. They tip 3.5% growth in 2017.
My mate Paul Rickard called for Clive Palmer to resign in this week’s Mad About Money and PM Turnbull also called for Palmer to “put his money up” to help the workers sacked from the Queensland Nickel Refinery.
ATO commissioner, Chris Jordan, called a meeting in Paris to propose an international investigation (with experts from 28 countries) to hunt down tax evaders revealed in the Panama Paper leaks.
And in this week’s Switzer Super Report, Charlie Aitken said the turning point for resources could be upon us and that BHP has further to run. Did I mention he said I was right on calling BHP a buy at around $15? You’re alright, Charlie.

Food for thought

The stock market is designed to transfer money from the active to the patient

– Warren Buffett, US businessman and investor.

Last week’s TV roundup

Paul Rickard joins the show to discuss the performance of the banks and calls for a royal commission into the banking sector.
Paul Dale of Capital Economics talks about how exposed the housing sector is to debt and what that means for the banks’ balance sheets.
Aitken Investment Management’s Charlie Aitken explains how he’s investing right now on Super TV. And in Part Two of the interview, Charlie talks about the record short positions in US equities.
Morgans’ Broker Raymond Chan joins the show to talk about China’s regulatory changes and their impacts on Blackmores and Bellamy’s.

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table also shows how this has changed compared to the week before.

This week Bellamy’s Australia was, not surprisingly, one of the biggest movers. It’s short position increased by 2.66 percentage points to 7.71%.

Source: ASIC

My favourite charts

NAB business conditions hit 8-year high

Source: NAB

The NAB Business Survey revealed business conditions hit +12 points in March, an equal high since early 2008 and above the long-term average of +5 points. The business confidence reading also surged from 3.4 to 6.1 – top news for the economy and Malcolm.

Nothing new in IMF’s call

Source: AMP Capital

AMP’s Shane Oliver explained why the latest downgrade to the IMF’s global growth outlook is no reason to be concerned. As the chart shows, its business as usual for them, with the trend over the past five years or so showing forecasts are generally revised from levels around 4% to 3%.

Recent Switzer Super Reports

Thursday, 14 April, 2016: Bulls and permabears
Monday, 11 April, 2016: Don’t blame the markets

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