by Angus Nicholson, IG
It has been a remarkable rally in the ASX with the index breaking above 5600 intraday yesterday. But sentiment is quite clearly starting to turn. It seems increasingly unlikely that the ASX is going to hit 5710 on this run up. Pullbacks are an inevitability in markets, and the bigger question is where the ASX may find support on a pullback. The main levels of technical support are around 5500 and 5400, but in the past two upwaves of the ASX the pullbacks have both roughly been about 300 points.
Forward P/E Ratio
Unsurprisingly, the forward price-to-earnings ratio on the ASX has been climbing again and has now reached 17.1. I suppose what is notable is given the immense post-Brexit rally that the forward P/E ratio is still lower than its peak in late-May.
Index Internals
The percentage of companies trading above a Relative Strength Index (RSI) value of 70 has hit 24.5%. RSI’s above 70 can imply that a stock is starting to become overbought and primed for a reversal. And it’s notable that this level has not been seen since March 2015.
Top 15 Winners and Losers
Programmed Maintenance has surged over the past week after it confirmed it was on track to achieve its FY 2017 EBITDA forecast of A$100-$110 million. Investors continue to pile into the relatively cheaply valued Monadelphous despite the analyst community still being very unexcited about its near-term prospects. Beach Energy has been battered by the by the collapse in the oil price.
Sectors
Materials have surged back into focus, helped in no small part by the pullback in the US dollar after disappointing US 2Q GDP. But consumer discretionary stocks have also added 2% over the past week. Healthcare and IT stocks have not fared well, likely partly seeing their overseas earnings impacted by the rally in the Aussie dollar up to US$0.76 over the past week. And no surprise that the energy sector has been hit alongside the big drop in the spot price.
Factors
Small sized companies definitely seem to be one the best performing factors of the past week and the past month.
Short Interest
National Storage REIT and Graincorp have both seen dramatic increases in short positions over the past week. Graincorp has also shot up to be the fifth most shorted stock in the index in short interest ratio terms.
Consensus Price Targets
Monadelphous is now trading at a whopping 72.9% above its consensus price target, but some of the analysts have not updated their price target on the stock for a number of months. No surprise the crazy run of gains seen by Whitehaven coal has also lifted them to 26.2% above their consensus price target.
Momentum Stock Picks
Note: These momentum stock recommendations are based off backtested results looking at a 3-5 day holding period with a 5% stop loss on every trade.
VRT – (Buy)
Virtus Health has broken through resistance at A$7.30 and looks like it has plenty of momentum behind it to break though A$8.00. Sentiment about the IVF space certainly appears to be turning up heading into earnings season.
RMD – (Buy)
ResMed has had a massive jump over the past week, and here looks to be a lot of momentum behind the stock coming into earnings season.
MND – (Buy)
Monadelphous continues to confound analyst expectations, but if Whitehaven is anything to go by this could proceed for quite a while. Its move into the clean energy space has been welcomed by investors. And a number of investors may be looking at its 2014 price levels and thinking that there could be a lot more value left in the stock.
