Author: Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters. Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events. He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
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Dollar strength hurts Aussie gold stocks

China’s Yuan continues its steep descent against the US Dollar.

CNY/USD

The weakening Yuan strengthened demand for Dollars, with the Dollar Index breaking through strong resistance at 95. Expect retracement to test the new support level. Respect would confirm the long-term target at the 2016/2017 highs of 103.

Dollar Index

The strong Dollar weakened demand for Gold, with the spot price heading for $1200/ounce after breaching short-term support at $1220.

Spot Gold in USD

A long-term gold chart shows likely support levels at $1150 and $1050/ounce.

Spot Gold in USD - Quarterly

The Australian Dollar continues to range between 73.50 and 75.00 US cents, leaving local gold miners exposed to the falling Dollar price.

Australian Dollar/USD

The All Ordinaries Gold Index (XGD) is testing support at 4900. Breach is likely and penetration of the rising trendline warns of a strong decline, with a LT target of 4100.

All Ordinaries Gold Index

A sharp fall in the Aussie Dollar would soften the blow. But hope isn’t a strategy.

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Bullish US GDP numbers

The Bureau of Economic Analysis (BEA) reports that real gross domestic product (real GDP) increased at an annual rate of 4.1 percent in the second quarter of 2018. This is an advance estimate, based on incomplete data and is subject to further revision.

Real GDP for Q2 2018 Annualized

While the spurt in quarterly growth is encouraging, I find annualized quarterly figures misleading and prefer to stick to the annual rate of change from the same quarter in the preceding year. Annual growth still reflects an improving economy but came in at 2.8 percent, more in line with the estimate of actual hours worked on the chart below.

Real GDP for Q2 2018 YoY

Personal consumption figures tend to decline ahead of a recession, so an up-tick in all three consumption measures is a positive sign for the US economy. Expenditures on durable goods is especially robust, suggesting growing consumer confidence. Non-durable expenditures are holding up, while services, which had been declining since a large spike in 2015, are maintaining at still strong levels.

US Personal Consumption

There is no sign of the US economy slowing. Continued growth and positive earnings results should encourage investors.

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Bears in the East, Bulls in the West

Market fears of a trade war appear to be easing but investors in China and South Korea remain cautious.

The Shanghai Composite Index is retracing to test resistance at the former primary support level at 3000.

Shanghai Composite Index

Dow Jones – UBS Commodity Index shows a similar retracement in commodity prices.

DJ-UBS Commodity Index

While crude oil prices have found support at the LT rising trendline.

Nymex Light Crude

South Korea’s Seoul Composite Index is in a primary down-trend but retracement to test the former primary support level at 2350 is likely.

Seoul Composite Index

Japan is more isolated and the Nikkei 225 is testing resistance at 23,000. A rising Trend Index suggests that breakout is likely, which would test the January high at 24,000.

Nikkei 225 Index

India is stronger, with the Nifty breaking resistance at its January high of 11,100 to signal a primary advance with a target of 12,000. But first, expect retracement to test the new support level.

Nifty Index

Europe

Dow Jones Euro Stoxx 600 was boosted by news that the EU-US trade dispute is settled. A Trend Index trough above zero signals strong buying pressure. and another test of 400 is likely.

DJ Euro Stoxx 600 Index

A bullish saucer pattern on the Footsie suggest further gains. The Trend Index trough above zero indicates buying pressure. Breakout of the index above 7800 would signal another advance, with a target of 8200.

FTSE 100 Index

North America

The Nasdaq 100 retreated when Facebook (FB) and Twitter (TWTR) reported disappointing growth for the quarter. Bearish divergence on the Trend Index warns of selling pressure but this appears secondary and support at 7000 is likely to hold. Respect would confirm another advance.

Nasdaq 100

Friday’s retreat is also evident on the S&P 500 daily chart. Expect retracement to test new support at 2800. A strong GDP result should strengthen support.

S&P 500

Canada’s TSX 60 retraced to test the new support level at 970. Respect would signal a test of 1000 but breach is as likely, testing support at 940.

TSX 60 Index

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Iron ore bounce lifts the ASX

Iron ore spot prices bounced off support at $63/tonne. Follow-through above $68 would suggest another rally to test resistance at $80 but that seems unlikely given the current threat of a trade war.

Iron Ore Spot Price

The ASX 300 Metals & Mining index found support at 3750. Breakout above 4000 would signal another advance but reversal below 3750 and a correction to test primary support at 3400 are more likely if iron ore retreats.

ASX 300 Metals & Mining

The ASX 300 Banks index continues to consolidate in a bullish narrow band above its new support level at 8000. Follow-through above 8100 would suggest another advance, with a target of 8700. The index is still in a primary down-trend but it is evident that a bottom is forming. A higher low on the next correction, followed by a new high, would signal the start of a primary up-trend.

ASX 300 Banks Index

The banking sector faces the prospect of higher funding costs, falling credit growth and rising default risk and I remain wary.

The ASX 200 is again testing resistance at 6300. Breakout would signal a primary advance with a target of the October 2007 high at 6750.

ASX 200

Technical signals suggest a primary advance while economic indicators warn of rising headwinds and a potential bear market. I remain cautious, with more than 30% cash in the Australian Growth portfolio.

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Falling Yuan strengthens the Dollar but weakens Gold

China failed to intervene in the past few weeks, allowing the Yuan to fall to offset the impact of tariffs instead of selling foreign reserves to support the currency. Their actions risk further retaliation by the Trump administration and could spark a full-blown trade war.

CNY/USD

A weakening Yuan is likely to increase demand for US Dollars, both as investors in the Middle Kingdom seek to withdraw and as borrowers with USD-denominated loans seek to hedge or repay.

The Dollar Index continues to test strong resistance at 95. Breakout is likely and would offer a target of 2016/2017 highs at 103.

Dollar Index

Spot Gold is in a primary down-trend, consolidating in a narrow band above short-term support at $1220/ounce. Breach of support is likely and would offer a short-term target of $1200.

Spot Gold in USD

The Australian Dollar is also in a primary down-trend, consolidating above 73.50 US cents. So far, the weaker currency has cushioned local gold miners from the impact of falling spot prices.

Australian Dollar/USD

The All Ordinaries Gold Index (XGD) recovered above support at 4950. Follow-through above 5100 would indicate another test of 5400.

All Ordinaries Gold Index

But downside risk to Australian gold stocks is rising as the USD spot price falls. Gold is more volatile than the Aussie Dollar.

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Strong earnings results are from revenue gains | Bob Doll

“Strong earnings results are coming more from revenue gains than bottom-line margins. Since 2010, 90% of positive earnings surprises have come from margins. This quarter, 75% of surprises are from better revenues. This is a healthy sign for future earnings results, and hence for stock prices.”

From Bob Doll at Nuveen Asset Management
July 23, 2018

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Pro Medicus (PME)

Stock: Pro Medicus
Symbol: PME
Exchange: ASX
Financial Year-end: 30 June 2018
Latest price: $8.07
Date: July 19, 2018

Company Profile

Pro Medicus Ltd provides radiology information systems (RIS), picture archiving and communication systems (PACS), and advanced visualization solutions to hospitals, imaging centres and health care groups worldwide.

Its Visage product line comprises solutions for RIS (Radiology Information Systems) /Practice Management, Healthcare Imaging and e-health. These systems can be used either individually or in combination by radiologists and other medical imaging professionals to interpret images created by medical imaging equipment such as X-Ray and Ultrasound machines and CT and MRI Scanners and communicate the results to their referring clinicians.

The company has offices in Melbourne, Berlin and San Diego.

Competitors

About 70% of sales are in the USA where the company competes with big names like Siemens, Fuji and Phillips.

Improving margins and big name contracts such as the Mayo Clinic in the US and Primary Health and I-Med in Australia suggest that the company is able to compete effectively.

Financial performance

Margins

Operating margins declined from 2011 to 2013, along with revenues but have steadily recovered to 49.04 for the 12 months to 31 December 2017 (TTM).

PME Operating & Net Income Margin % of Revenue

Net income margin has recovered to a healthy 29% of revenue.

Revenue Growth

Revenue growth recovered, after falling 2011 – 2013, to average 14.7% compound growth since 2018. Annual growth in the range of 15% to 20% is expected.

PME Revenue & Earnings per share

From 31 Dec 2017 Directors Report: “….the Company continued to make strong inroads into the North America market winning a key $18.0m contract with Yale New Haven Health, one of the most recognised health systems in North America.”

The vast majority of the company’s contracts are now transaction-based “pay per view” which increases the appeal to smaller practices and locks in future growth for the company as revenues grow in line with client revenues.

Earnings per share

Earnings per share is expected to grow faster than revenue due to improving margins and economies of scale.

Capital structure

Cash reserves were $22.80m at 31 December 2017 and the Company remains debt free.

Weaknesses

Future growth depends on the company’s ability to maintain its competitive position.

International profits are also vulnerable to foreign exchange fluctuations.

Valuation

Price/Earnings is high at 66.5 based on expected 2018 earnings of 12.1 cents. With a gross dividend yield of 0.62% that implies revenue growth at the top of the expected range (20%) while operating costs continue to grow at 8%.

 

Technical Analysis

Price peaked at $9.00 in January 2017 and has consolidated above support at $7.00. 50-Week Twiggs Momentum is again rising after a low of 67.3% in May 2018 backed up by 50-week Trend Index holding above zero since July 2012.

PME Twiggs Momentum & Trend Index

On the daily chart, Twiggs Trend Index (21-day) flags a fresh entry point with a 0.2% upward reversal.

PME Twiggs Trend Index (21-day)

Conclusion

BUY (July 23, 2018)

Disclosure

Staff of The Patient Investor may directly or indirectly own shares in the above company.

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Gold breaches primary support

The Dollar price of gold breached support at $1240/ounce, signaling a primary down-trend. A long tail indicates active buyers and we can expect retracement to test the new resistance level at $1250.

Spot Gold in USD

The Dollar Index continues to test strong resistance at 95.

Dollar Index

But Chinese selling to support the Yuan has not materialized in sufficient magnitude to reverse Dollar strength. Dollar Index breakout above 95 is likely to spur selling of gold.

CNY/USD

The Australian Dollar has not weakened sufficiently to protect local gold miners, with the price of Gold in Australian Dollars falling sharply.

Gold Price in AUD

The All Ordinaries Gold Index (XGD) broke support at 4950. Expect a test of 4600.

All Ordinaries Gold Index

Downside risk to Australian gold stocks is rising.

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Tech stocks and small caps lead US advance

The S&P 500 continues to test resistance at 2800. Declining Volatility suggests a return to business as usual. Breakout above 2800, with follow-through above 2820, would suggest a primary advance to 3000.

S&P 500

Dow Jones Industrial Average is similarly testing resistance at 25400. Breakout would signal a fresh advance but buying pressure is modest and gains are likely to be slow.

Dow Jones Industrial Average

The Nasdaq 100 leads the charge, advancing towards a target of 7700 after respecting new support at 7000.

Nasdaq 100

Small caps are also out-performing, with the Russell 2000 iShares ETF testing resistance at 170 after breaking out above its January high of 160.

Russell 2000 Small Caps

Although this is the final stage of a bull market, there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced  International Growth portfolio exposure to multinationals that have strong sales in China.

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Banks buoy the ASX 200

The ASX 300 Banks index overcame resistance at 8000 after retracement successfully respected the new support level. Breach of the descending trendline suggests that a bottom is forming. A higher low on the next correction, followed by a new high, would signal the start of a primary up-trend.

ASX 300 Banks Index

The banking sector remains squeezed by higher funding costs, falling credit growth and rising default risk and I remain cautious.

The ASX 300 Metals & Mining index broke support at 3800, warning of a correction.

ASX 300 Metals & Mining

The ASX 200 is consolidating below resistance at 6300. Long tails for the last two weeks indicate buying pressure. Breakout is likely and would confirm the primary advance. Target is the October 2007 high at 6750.

ASX 200

Technical signals suggest a primary advance while economic indicators warn of rising headwinds and a potential bear market. So I remain cautious, with more than 30% cash in the Australian Growth portfolio.

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