Category: Stock Markets

Analysis of major stock markets around the world.

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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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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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Time to sell Gold stocks

Stocks: Evolution Mining, Northern Star Resources, Regis Resources, St Barbara
Symbols: EVN, NST, RRL, SBM
Exchange: ASX
Date: July 19, 2018

The Dollar price of gold has broken support at $1240/ounce, signaling a primary down-trend.

Spot Gold in USD

The Dollar Index continues to test resistance, consolidating in a narrow band below 95, a bullish sign. Chinese selling of the Dollar, to support the Yuan, has not materialized in sufficient magnitude to reverse Dollar strength. Breakout above 95 would spur selling of gold.

Dollar Index

The Australian Dollar has not weakened sufficiently to protect local gold miners. The All Ordinaries Gold Index (XGD) is heading for a test of support at 4900/4950. Given the circumstances, support is unlikely to hold.

All Ordinaries Gold Index

Bearish divergence on 21-day Twiggs Money Flow warns of selling pressure across all four gold stocks in the Australian Growth portfolio.

Evolution (EVN) is the weakest, having broken primary support at $3.10.

Evolution (EVN)

Northern Star (NST) broke medium-term support at $7.00 but is still in an up-trend. LT bearish divergence on Money Flow warns of selling pressure.

Northern Star (NST)

Regis Resources (RRL) respected medium-term support at $4.90 but Money Flow peaks below zero warn of strong selling pressure.

Regis Resources (RRL)

St Barbara (SBM) respected its rising trendline but Money Flow also warns of selling pressure.

St Barbara (SBM)

Conclusion

I don’t like the idea of holding gold stocks long-term when the USD price of gold is in a primary down-trend. Now is a good time to lock in profits from the last 6 months.

SELL (July 19, 2018)

Disclosure

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

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CPI rises but US stocks rally

June consumer price index (CPI) jumped to 2.8% but forward estimates of inflation, represented by the 5-Year breakeven rate (5-year Treasury yield minus TIPS) remain subdued at 2.06%.

CPI and 5-Year Breakeven

Core CPI (excluding food and energy) is at 2.2% while average hourly earnings (total private: production and non-supervisory employees) annual growth, representing underlying inflationary pressure, is higher at 2.7%.

Core CPI and Average Hourly Earnings: Production and Nonsupervisory

Credit and broad money supply (MZM plus time deposits) growth remain steady, tracking nominal GDP growth at around 5.0%. A spike in credit growth often precedes a similar spike in broad money supply by several quarters.

Credit and Broad Money Supply Growth

And a surge in broad money supply growth, ahead of nominal GDP, flagged rising inflationary pressures ahead of the last two recessions, prompting the Fed to step on the brakes.

Nominal GDP and Broad Money Supply Growth

Overall, the inflation outlook appears subdued, with little urgency to hike interest rates at present.

The market is also getting more comfortable with the idea of trade tariffs. The S&P 500 is testing resistance at 2800. Breakout is likely and would suggest a primary advance to 3000.

S&P 500

The Nasdaq 100 followed through above 7300, confirming the primary advance, with a target of 7700.

Nasdaq 100

This is the final stage of a bull market but there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced exposure to multinationals that make a sizable percentage of their sales in China.

Financial markets are supposed to swing like a pendulum: They may fluctuate wildly in response to exogenous shocks, but eventually they are supposed to come to rest at an equilibrium point…. Instead, as I told Congress, financial markets behaved more like a wrecking ball, swinging from country to country and knocking over the weaker ones. It is difficult to escape the conclusion that the international financial system itself constituted the main ingredient in the meltdown process.

~ George Soros on the 1997 Asian Financial Crisis and the need for greater regulation of global financial markets

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ASX 200 hesitates

The ASX 300 Banks index broke resistance at 8000 and is retracing to test the new support level. The index remains in a primary down-trend and only a higher low on the next correction, followed by a new high, would reverse that.

ASX 300 Banks Index

A weaker Australian Dollar has made the banks, with their high dividend yields, more attractive to offshore investors. But the sector remains squeezed by higher funding costs, falling credit growth and rising default risk.

With retracing banks and weaker prospects for miners, the ASX 200 hesitated. Expect another retracement to test 6150, but respect 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 close to 30% cash in the Australian Growth portfolio.

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