Weekly Wrap

ASX 200 (XJO) Update

Calendar Icon   Friday, 27th November 2020

XJO Chart

This week the XJO registered a high at 6,710 points. However, the market has declined nearly 100 points since then. We can see on the above daily chart that the XJO is still registering overbought readings for the RSI and Stochastics.

A notable feature of the market over the past 2 months is the fall in trading volume. From an average of 16bn in total volume traded for July, August and September, we have seen October and November register less than 15bn of volume traded.

There is a large amount of optimism built into the market, despite the economy surviving on government funding.

This time of year is seasonally positive for share markets as the ‘Christmas rally’ starts to gather momentum. With the easing of restrictions on gatherings and border crossings opening, the public is ready to spend some money. Apparently, the short term accommodation market is fully booked on the Gold Coast until the end of January.

On the surface, this would be good news for the industries that rely on discretionary spending. There may be a sting in the tail if conditions deteriorate when the economy is back to “normal”.

There will be a time when the government and banks will withdraw support for people. Reports that the JobKeeper program cost $56bn to support 700,000 jobs illustrates the largesse shown at the start of an economic downturn. It remains to be seen how long the government will keep borrowing to underwrite the economy.

Reports out of England about the Astra Zeneca vaccine being more effective if a half dose was given initially has caused the science world to doubt the efficacy of their vaccine. The respondents who were given a half dose were in a young age group and if these numbers are taken out their vaccine numbers fall to about 64% effectiveness.

‘Revenge of the old economy’: Is this the start of the next commodity supercycle?

The above headline is from a Goldman Sachs report from their energy desk suggesting that the next big move in financial markets with be a boom in commodities. Their argument relies on the belief that central banks will accommodate expansionary policies and let their economies run “hot” after a long period of stagnation.

Commodities have fallen about 60% since the pre-GFC glory days and it is not surprising that the rise of electric vehicles has coincided with a massive glut of oil around the world. It would appear doubtful that the world will suddenly embark on a massive increase in manufacturing supported by expansive debt policies.

With climate change policies being embraced by the incoming American president, the emphasis will be about reducing consumption of finite resources in favour of renewable energy.

When a market is approaching a top, there are a few clear signs to watch out for. Apart from the fact that the majority of the big tech stocks are overvalued, there is always a standout stock that reflects how crazy the market can get.

Bloomberg estimates that the median price of the S&P 500 constituents is about 21 times blended forward 12 months earnings. The newest addition to the index, Tesla, has a P/E ratio of 247 on this years earnings and 147 on 2021 figures.

With the stock attracting cult-like status, especially amongst the newest members of the share holding class, Tesla is giving us a glimpse of the future. Either the stock increases its earnings by an astronomical amount or the share price returns to earth.

Another measure of how optimistic market participants are is the release of figures for the National Association of Active Investment Managers exposure index. These managers are normally a conservative bunch, however, they are not just fully invested in the market. They have a 106% exposure in direct shares, compared to March this year when they only had 10% in shares.

It is a time when optimism is extreme, valuations are off the charts and debt is exploding around the world. A time of reckoning is due but this can take some time to eventuate.

PPK Ltd Market Update

PPK announced a $15 million capital raising today with the funds to be used to accelerate “the research, development and commercialisation of previously announced BNNT application projects, fund further technology investment opportunities and to facilitate the separation of the mining business as previously announced”.

The share price has fallen back in response to this announcement from a high of $6.90 on the 18th of November to currently $5.70 at time of writing.

We re-iterate our trade idea to Buy PPK.

PPK Chart