Switzer on Saturday

Stocks stuck in the ‘I don’t know’ zone!

Founder and Publisher of the Switzer Report
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The US stock market wrestled its way into positive territory, despite negative economic reports and the Trump team continuing to stick it to China. This time it’s more potential bans on Huawei. You can’t help but think that the US President will try a China shakedown to offset any negative political implications from his handling of the “China virus”, as he calls it.

Despite a record 16.4% fall in retail sales when ‘only’ 12.3% was tipped by economists, on the plus side those damn optimistic Yanks came out with a better-than-expected consumer sentiment reading.

Yep, the University of Michigan’s reading of how consumers feel right now actually rose to 73.7 from 71.8 in April, when the forecasters were expecting a result around 68. Economists think the government stimulus measures have helped turn sentiment.

In case you missed it, the stock market is stuck in this sideways trade or “I don’t know” zone. This chart of the S&P/ASX 200 proves the point.

And this chart of the S&P 500 has the same message.

The only difference is that the V-like bounce-back in the US is deeper and bigger. But after you get into the 2800s in the States and the 5300s for us, the buyers drop out and sellers take control.

The Yanks are up 27% off the bottom and have only lost 16%, so they’re out of bear market territory! In contrast, we’re still down 25% and we’re having to hang out with the bears.

That’s despite a better stimulus package here and a better Coronavirus beating record. These two achievements explain our bounce. But working against us is our dependence on our banks that have a huge influence on our indexes. The US index is more diverse and includes FAANG stocks such as Facebook, Apple, Amazon, Netflix and Google (Alphabet).

Year-to-date, Amazon is higher. So is Netflix, Alphabet, Apple and Facebook, even though it depends heavily on ad revenue which has been hit by the closing down of economies.

But for the overall indexes and economies worldwide, we’re stuck with the waiting game in the “I don’t know what’s going to happen” zone.

So what are we waiting for? Try these:

  • More signs that the key economies of the world, especially the USA, are getting on top of the virus threat.
  • More cities and economies of the world are opening up and advancing towards normalcy.
  • How the above factors affect company profits and then share prices.
  • Indicators of an economic bounce-back are starting to happen.
  • Information that says second-wave infections will or won’t trump this reopening of economies.
  • Sanity continues to make a comeback and prevail with oil producers.
  • Money markets have been made safe and workable by the concerted action of central banks around the world.
  • And China-Trump antagonism won’t ignite trade war issues, which could have serious implications for our exports.

To the local story this week and the S&P/ASX 200 Index closed up 13.7 points (or 0.25%) over the five days. Friday was a relief, with the Index rising 1.4%, closing at 5404.8 points.

On a sector basis, materials were up 2.82%, communications 2.17% and healthcare put on 1.06%. Energy actually lost 2.43%, while IT lost 2.42% and financials were off 1.17%.

The big winners this week were miners such as Pilbara Minerals (up 19.51%), Resolute Mining (14.21% higher) and St Barbara (up 11.88%). Also, Southern Cross Media had a good one (up 18.52%) but its chart doesn’t raise confidence that it’s out of the woods yet.

Southern Cross Media (SXL)

For a company that has defied a lot of this Coronavirus sell off, Xero had a bad week. Its chart shows you what you would’ve hoped all your stocks could have done over this virus period.

Xero (XRO)

If there’s another leg down for stocks, as professional doomsday merchants/authors like Harry Dent predict, then this is the first company I’ll be buying. I’m even tempted now but I like to buy quality companies when everyone is ridiculously negative.

It’s the competitive advantage a long-term investor has to exploit when the occasions show up.

What I liked

  • The Westpac consumer sentiment index rose by 16.4% in May to 81.1 points – the biggest monthly lift on record (47 years). The increase in confidence follows a 17.7% decline in April – the biggest monthly fall on record. But remember, a reading below 100 points denotes pessimism, so we’re getting less pessimism!
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 0.9% to 90.3 points. Sentiment has lifted for six straight weeks and is up 38.2% since hitting record lows, which says the Government’s policies are helping boost confidence.
  • The NAB business confidence index rose from -65.4 points in March to -45.7 points in April. The long-term average is +5.3 points. I’ll take any positive at this time. Note the business conditions index fell from -22 points to -34.1 points. (The long-term average is +5.5 points).
  • This headline from CommSec: “China’s economy on the mend…” Industrial production was up 3.9% against a consensus of 1.5%. This is what Craig James noted: “In a positive development, industrial production expanded for the first time this year, fanned by government stimulus. And in a sign that China’s factories are humming again, indicators like electricity generation turned positive in April with coal consumption picking up.”
  • The transmission rate for COVID-19 remained below the key threshold of 1 in Germany, following the initial easing of lockdown measures, the Robert Koch Institute for Disease Control said Thursday.
  • Oil prices rose 7% overnight to around US$30 a barrel, which was the old price that has been a base low level for quite some time.

What I didn’t like

  • Employment fell by 594,300 in April – the biggest monthly decline in jobs on record. Full-time jobs fell by 220,500 and part-time jobs fell by 373,800. But what could we have expected? Possibly something worse but JobKeeper has helped keep the numbers down. The US jobless rate is 14.7%!
  • Just about all economic readings from the local economy. These negatives on the economy won’t mean much until we see some progress towards normalcy. Then I’ll be monitoring the rate of improvement or worsening of key indicators. Right now, they have to be bad. I must say the spike in the jobless rate was less than most expected but the numbers can’t be trusted because of the virus.
  • Euro zone GDP (gross domestic product) plunged 3.8% quarter-on-quarter across the first three months of the year, according to a flash estimate from the EU’s statistics agency on Friday.

This will make Gerry Harvey smile…

Slovenia has become the first European country to declare its domestic Coronavirus outbreak officially over. We want to see those reports escalate worldwide to help get us out of this sideways trade. I’m sure Gerry Harvey would love to hear this news as he has stores in Slovenia and his overseas earnings have been his bright spot in recent years. This chart shows that Gerry’s stock price at Harvey Norman needs some positivity. Analysts tip a 23% upside for HVN!

HVN really shows the sideways trade I’ve been talking about.

We introduced a new weekly video meeting this week called Boom! Doom! Zoom! exclusively for Switzer Report subscribers. You can join every Thursday at 12pm AEST using this link. The link to join will remain the same each week, so be sure to add it to your favourites.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Monday May 18 – Household impacts of COVID-19
Tuesday May 19 – CBA Household Spending Intentions
Tuesday May 19 – Weekly consumer confidence
Tuesday May 19 – Reserve Bank Board minutes
Tuesday May 19 – Weekly payroll jobs & wages data
Wednesday May 20 – Skilled job vacancies (April)
Wednesday May 20 – Preliminary retail trade (April)
Thursday May 21 – CBA ‘flash’ purchasing managers survey
Thursday May 21 – Detailed labour force data (April)
Thursday May 21 – Reserve Bank Governor speech

Monday May 18 – China House price index (April)
Monday May 18 – US NAHB housing index (May)
Tuesday May 19 – US Testimony by Federal Reserve chair
Tuesday May 19 – US Housing starts (April)
Wednesday May 20 – China Loan prime rate setting
Wednesday May 20 – US Federal Reserve minutes
Thursday May 21 – US Jobless claims (week to May 16)
Thursday May 21 – US Philadelphia Federal Reserve index
Thursday May 21 – US ‘Flash’ purchasing managers index
Thursday May 21 – US Leading index (April)
Thursday May 21 – US Existing home sales (April)

Food for thought:

“The entrance strategy is actually more important than the exit strategy.” – Edward Lampert

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 shows how this has changed compared to the week before.

Chart of the week:

The Westpac/Melbourne Institute survey of consumer sentiment index rose by 16.4% in May, the biggest monthly gain in the index’s 47-year history, following the its biggest fall in April with a drop of 17.7%. In the following chart, CommSec highlighted that younger Australians are more optimistic than older Australians according to the survey:

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