Resources Rally: Boom or Bust?

Marcus Today

October 2024

The resources sector is up 17.96% in 17 days and is now well overbought on a daily chart with an RSI of 74. This is the moment we have been waiting for, the moment to make a lot of money in a short period of time trading the bottom of the resources sector as it comes out of an oversold sentiment hole. We have taken a few trades, as you know, but have 'kept it in our pants' from a Strategy (Portfolio) point of view. The resources sector has rocketed.

Big Moves in Key Stocks

BHP is up 20.3% since the low on September 6, fulfilling the first half of Henry's mantra--"Buy at $40, sell at $50". It is now at $45.96. FMG is up 36.7% since bottoming on September 10 at $15.88, now at $20.68. MIN has surged 76.3% in 15 days and is up 48.3% in six days. PLS is up 41.5% in 15 days and 19% in six days. And that's just some of them.

A Time for Caution

I am never one to stand back and wag a finger at people making money, and I hope, like everyone else, that this is a "big" pivot point, not just a short-term rally. The good news is that this rally shows up on the long-term charts and has some of the anatomical signs of being a major low (a short sharp start). However, I am sceptical. These Chinese announcements are, in my humble opinion, more desperate than effective, more hopeful than guaranteed, and the timing, just ahead of the Golden Week holiday, leaves everybody a bit vulnerable as the Chinese markets, PBoC activity, economic indicators, and commodity markets, including the iron ore price, go dead for a week.

Watching the Herd

This is one of those moments when you have to watch the herd. The herd has lost its head. It is justified in the short term. Sentiment has changed, and sentiment is important to share prices, but believing these measures will meaningfully change China's economic trajectory is a gamble. These measures are a bit like throwing rocks at an oil tanker.

The Bubble is Here

We have seen the "Rocket", but I think we have a "Bang" coming. This short-term rally will deflate at some point. Possibly rapidly. If making money in the stock market is about spotting stocks that have dropped into a sentiment hole, then it is also about spotting stocks that have found themselves in a sentiment bubble.Short-term, we are now in a sentiment bubble. And for the superstitious, you might also like to know that I am going on holiday next week, and you know what that means!

What's Ahead for Resources?

The jury is still out on the medium term. Keep watching the herd. Traders, take your profits when the herd stumbles.

Author: Marcus Padley

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Chris Gosselin, CEO of Australian Fund Monitors, speaks to Nichols Chaplin, Director and Portfolio Manager at Seed Funds Management. Nicholas shares insights on APRA's plan to phase out additional tier one bonds, which could destabilise the banking sector and impact retail investors.

The Seed Funds Management Hybrid Income Fund has a track record of 9 years and has outperformed the Solactive Australian Hybrid Securities (Net) benchmark since inception in October 2015, providing investors with an annualised return of 6.39% compared with the benchmark's return of 4.86% over the same period.

Funds operated by this manager: Seed Funds Management Hybrid Income Fund

Hedge Clippings | 18 October 2024

Most economists are now convinced that yesterday's monthly labour force numbers released by the ABS have ruled out any chance of a rate cut this side of Christmas. For the record, for the past six months the unemployment rate has stayed steady around 4.1%, with 64,000 people joining the workforce in September, and the number of unemployed falling by 9,000.

As the ABS pointed out, employment has risen by 3.1% in the past year, faster than the civilian population growth of 2.5%, taking the employment-to-population ratio to a new historical high of 64.4%. Even so, there are now 616,000 unemployed people, 90,000 more than there were in September last year, although that number is 93,000 fewer than there were pre-Covid when unemployment was at 5.2%. If those numbers sound confusing to you, join the club, but the ABS seemed to be able to make sense of them, as we suppose real economists do, which is what matters.

Of course, behind the numbers were more details which caused a slanging match between the Treasurer Jim Chalmers and the opposition employment spokes-person, Michaelia Cash, who pointed to the fact that the majority of jobs growth in the past year - around 70% - has been in the government or "non-market" sectors of health, education and public service, leading to claims that the government was simply increasing the size of the bureaucracy to create jobs. Drilling down further, about 90% of the increase in hours worked was also in the non-market, and presumably lower-paid, sector.

If you're one of those who are now employed the argument is academic (like so much of what goes down in Canberra) - a job is a job, and wages are wages - but it does emphasise another aspect of the current two speed nature of the economy. Private sector jobs are more likely to be higher paid, and one would think they in turn lead to additional flow on economic (jobs) growth. Meanwhile, back to the RBA, who had forecast that unemployment would be rising to 4.3% by the end of the year, which barring any unforeseen surprises, now seems unlikely.

Hence the view from economists that the RBA will lag their overseas counterparts who have already started to cut rates in line with easing inflation. A speech this week from Sarah Hunter, RBA Assistant Governor (Economic) was entitled "Inflation Expectations - Why They Matter and How They Are Formed" and gave an inkling into the RBA's thought process. We're neither going to try to summarise it here (you can follow the link yourself if you'd like to) - nor claim to fully understand it all, but possibly the old saying that "perception is reality" sums it up: If everyone's perception is that inflation is high (and the media and one side or other of politics would suggest that it is) then that is the reality. As a result, it affects people's and businesses' economic decisions.

However, Hunter finished her speech with the conclusion (amongst others) that it's a good news story with respect to expectations: Short-term expectations appear to be converging towards long-term ones, and recently they have been working to bring price expectations down faster.

So maybe the RBA will deliver the experts (and borrowers) a surprise before Christmas after all?

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