MARKETS SPECTATOR: A miner oddity

Amid plenty of white noise about the end of the mining boom, shares in the sector are rallying well. Overblown predictions of a hard Chinese landing are likely to blame.

The last week has seen some eye-catching moves in the materials sector, especially among the big miners as the improvement continues in Chinese data and more and more people realise that Chinese growth is now in a recovery phase.

Yet, at the same time we are seeing headlines left, right and centre saying the mining boom is over and projects are getting cancelled at a frenetic pace.

So why on earth is the mining sector starting to move higher when all this bad news is in play?

Basically, materials stock prices had priced in the worst case scenario of a hard landing for the Chinese economy. Now that this looks to have been avoided, prices are re-rating higher as well as being boosted by the stronger-than-expected Chinese data.

I’ve mentioned this before, but markets always overshoot to the downside and upside. In this case, everybody became too bearish and are now frantically trying to:

1) cover short positions in China-facing assets, like Australian miners.

2) increase their relative underweight positions versus their benchmarks so that they at least match their benchmark performance (this is especially important given BHP and Rio form such big weightings in the Australian benchmark 200 index).

As mentioned in a recent note from Macquarie, they said the key commodity prices relevant to the major miners – iron ore and coal – appear to have stabilised, while the Chinese economic data releases over the last month or so continue to suggest the Chinese growth outlook is stabilising.

"As highlighted by our commodities team, recent China data releases were encouraging, showing a meaningful increase in activity in the commodity-related sectors and a rebound in Chinese imports of major raw materials. The latest official PMI survey delivered an index level of 50.6, 1.4 percentage points higher than the low three months ago, taking the PMI back above the crucial 50 level.”

Another point to note is that the major miners are now looking to significantly lower their costs given the low growth environment they now find themselves in. The last few years have seen the big miners act as price takers, seemingly paying exorbitant rates to ensure they had the manpower to complete enormous pipelines of work.

Given this pipeline has shrunk and is continuing to do so, they are now looking to slash costs, with many of the mining services firms likely to bear the brunt of the reductions. However, from an opportunity point of view, share prices tend to respond favourably when management embarks on cost cutting programs.

Here are two of the big name miners that look ripe for further gains.

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Source: Iress

In the above chart of BHP, we can see that prices have broken out through key short-term resistance this week, which paves the way for further upside gains towards the $38 to $39 levels.

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Source: Iress

Not to be outdone by its bigger, more diversified peer Fortescue looks like it is readying itself for further gains too. Above we can see that Fortescue decisively broke out above the downtrend line at the beginning of the week. While it did break up above the resistance line briefly, there was some selling pressure which saw it pullback slightly.

That fact that it was a very shallow pullback indicates weak selling, indicating a sustained move through the resistance level is likely in the short-term.

Another sector to watch over the coming days is the S&P/ASX 200 Consumer Discretionary sector.

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Source: Iress

In the above chart, the sector has made a bullish breakout through both the downtrend and horizontal resistance lines, which is very encouraging indeed.

The chart below shows the six month performance of some of the sectors major constituents. Flight Centre, Myer Holdings, Crown and Tatts have been the standout performers and have accounted for the bulk of the gains.

However, of late we can see that some of the laggards have really started to move too including the likes of Tabcorp Holdings, Echo Entertainment and Fairfax Media.

Alongside the materials sector, I think it would be wise to keep an eye on these names as there are likely to be plenty of short to medium term opportunities within this sector.

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Source: Iress

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