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Digression between technicals and fundamentals | Greg Canavan

Here’s an excerpt from Greg Canavan’s latest piece for The Insider.

***

A quick follow up on last week’s Insider. I posed the question: Will the short squeeze push markets higher?

I reasoned that the recent sharp rally on the back of better-than-expected US inflation numbers was likely driven by short covering.

Well, I was wrong….

Traders’ speculative net short positioning in the S&P 500 peaked at 434,000 contracts on 30 May (and reported on 2 June). By 4 July, shorts had covered more than half of that position to 207,000 contracts. It was my contention that this short covering would continue.

But it didn’t…I was wrong!

The latest release, which reports on positioning as at 18 July, saw net speculative shorts jumping to 263,700 contracts.

Now, one data point in isolation doesn’t mean much. But the fact that the short sellers aren’t continuing to cover as the market goes higher suggests there may be more fuel in the tank.

After all, the US market has certainly built up a head of steam over the past few months.

The CNN Fear and Greed Index is STILL in ‘extreme greed’ mode, and has been since early June. The narrative is now coming around to ‘there won’t be a US recession’, and investor sentiment is surging.

Here’s an excerpt from the latest AAII Sentiment Survey:

‘Bullish sentiment — expectations that stock prices will rise over the next six months — jumped 10.4 percentage points to 51.4%. This marks the seventh consecutive week that bullish sentiment is above its historical average of 37.5%. This has been the longest above-average streak since a 13-week stretch from February to May 2021. Bullish sentiment was last higher on April 22, 2021 (52.7%) and is currently at an unusually high level.

‘Bearish sentiment — expectations that stock prices will fall over the next six months — decreased 4.4 percentage points to 21.5%. At seven consecutive weeks, this is the longest pessimism has been below average since a 23-week streak from February to July 2021. Bearish sentiment is at its lowest level since June 10, 2021 (20.7%) and is nearing the bottom of its typical range.

‘The bull-bear spread (bullish minus bearish sentiment) shot up 14.7 percentage points to 29.9%. The bull-bear spread has reached an unusually high level.’

Increasingly bullish sentiment and short sellers increasing their bets is a potent combination.

It paints a very murky short-term picture.

Consumer discretionary stocks cop broker downgrades

Consumer discretionary stocks continue to feel no love.

Brokerage CLSA today issued some downgrades heavily featuring discretionary stocks:

  • Accent Group cut to sell with a price target of $1.50
  • Myer classed as reduced with a price target of 65 cents
  • Harvey Norman cut to sell with a price target of $3.30
  • Breville cut to sell with a price target of $18.50
  • JB Hi-Fi cut to reduce with a price target of $45
  • Premier Investments cut to sell with a price target of $19

Douugh still believes in BNPL

Tiny fintech Douugh [ASX:DOU] rolled out a ‘pay later’ feature in defiance of the buy now, pay later sector’s general malaise.

Is Douugh two to three years too late?

DOU said ‘customers can now request Douugh to spot them up to $500 into a connected account in order to help smooth cashflow.’

Customers will repay the BNPL loan over four weeks.

Actually, Douugh said ‘repayments are made via 4x weekly instalments at a fixed cost of $1.99 per repayment.’

Does that mean customers pay four instalments per week or one instalment per week for four weeks?

Nasdaq’s special rebalance

The gravitational pull of the top Nasdaq stocks on the wider index will weaken following a ‘special rebalance’ aimed to curb the index’s huge weighting towards the top ten stocks.

Impedimed June quarterly

Medtech firm Impedimed [ASX:IPD] is up in late Monday trade after releasing its June quarterly.

Impedimed continued to burn cash but investors heeded the top line result more given the growth trajectory of the stock.

IPD reported core business revenue growth of 38% YoY to $2.4 million in the June quarter, with total revenue up 12% to $3 million.

Quarter on quarter, however, Impedimed’s core revenue actually fell 1% on a constant currency basis.

Customer receipts were $2.7 million for the quarter, ‘lumpy due to timing of international sales, but in line with annual forecast for FY23.’

 

Ioneer down on June quarterly

Lithium developer Ioneer [ASX:INR] is down 6%, following peers like Core Lithium [ASX:CXO] lower.

Year to date (12 months), Ioneer has totalled over US$40 million in free cash outflows, ending with US$52.8 million in cash and cash equivalents.

That means Ioneer has about 7 quarters of funding available.

 

Core Lithium: NT royalties excluded from cost guidance

Another factor weighing on Core Lithium’s shares is the fact royalties owed to the Northern Territory government were not included in the cost guidance.

Core must pay royalties to the NT based on the net value of resources extracted.

CXO said the royalty payable is calculated as 20% of the net value from production in any given year.

Core expects FY24 royalties to be between 8-10% of gross revenue.

But there’s more…

CXO will also pay a 2.5% royalty (of gross revenue) to Lithium Royalty Corp.

So, potentially, Core Lithium is set to pay 12.5% of its gross revenue in royalty payments.

Core Lithium sinks despite achieving first production

Newly minted lithium producer Core Lithium [ASX:CXO] is down 10% despite achieving ‘first production in under five years’.

In the June quarter, Core produced 14,685 tonnes of spodumene at a C1 unit cost of $902/t.

CXO recorded sprodumene sales of 5,423 dry metric tonnes at an average grade of 5.35% Li20.

All quite positive. Why the slide?

Core Lithium announced FY24 guidance today, with spodumene sales expected between 90,000 to 100,000 tonnes on production of 80,000 to 90,000 tonnes.

That’s lower than CXO’s previous estimates ‘due mainly to lower recoveries, mine plan adjustments and mining rates’ at a C1 cost of $1,165 to $1,250 per tonne.

But that’s not all.

Overall production in FY25 is expected to be below FY24 due to an ‘anticipated three-month gap in ore supply from the mine and processing plant capacity constraints’.

The ‘Goldilocks’ trade: Ryan Dinse

Interestingly enough, despite the broader market gains, the small-cap market has been fairly lacklustre this year.

Check out this chart of the ASX Small Ordinaries, an index of small-cap stocks in Australia, for example:

Fat Tail Investment Research

Source: Market Index

As you can see, small caps have basically done nothing over the past 12 months.

And despite all the big-picture drama, an optimist like me would say it seems to have found a bottom.

If that’s the case, it could mean it’s time to start diving back into a few well-chosen, small-cap stocks.

Of course, if markets have taught us anything, it’s to expect the unexpected.

You need to be alive to the fact some piece of bad news could come out of nowhere and derail things.

Plus, with broader markets up so strongly over the past few months, it’ll only take one chink in sentiment for things to fall back down fast as people lock in profits.

My gut, for whatever that’s worth, says this will happen soon.

But that’s the advantage you have as a small investor over the big funds.

You don’t need to make big predictions.

You can stay nimble and get in and out of stocks a lot easier than a big fund can. Which means if you get it wrong, you can get always back out again without too much damage.

But the following is my ideal scenario…

My Goldilocks scenario

As I said at the start, the pain trade for much of 2023 was markets going higher.

But as ‘good news’ is starting to outweigh ‘bad news’, we’re seeing some bears start to capitulate and move back into the market.

Tha’s a sign to be wary about.

And it’s why I think the next pain trade will be rapid falls — either due to an external shock, like a problem with refinancing in a higher interest rate environment, or simply a pause for breath as people work out how the start of 2024 is going to look.

My colleague Greg Canavan has noted many times that monetary policy works with a lag, and it’s now about 14 months since the RBA started raising rates in the most rapid tightening in history.

That’s bound to start having some effect on things.

Anyway, my base case is that we’ll probably start to see some profit taking soon and the market will shift lower over the next month or two.

If that happens, I think this will set you up for the ideal buying opportunity.

As I noted before, my pro trader colleague Murray Dawes has a time-tested system for gauging such things, so look out for his upcoming presentation.

But even simple rule of thumbs can work.

When the bears start to crawl out again and call for Armageddon, that’s when you should start to make your moves.

And I think the juiciest opportunities will come from the small-cap sector.

Let’s see how this pans out…

What’s Not Priced In?

In case you missed it, here is the latest episode of What’s Not Priced In.

Greg Canavan chatted to Katana Asset Management’s Romano Sala Tenna about whether Aussie stocks are cheap, the outlook for commodities, overlooked investment themes, and valuation principles.

Brainchip down 4% on June quarterly

Brainchip [ASX:BRN] is down 4% after releasing its June quarterly.

Brainchip received less than a $1 million from customers in the quarter, leading to cash outflows from operating activities of $4.1 million for the quarter and $10.3 million year to date.

Brainchip spent more on marketing ($1.2 million) than it earned from customer receipts ($828,000) during the June quarter.

Were it not for $8.3 million raised from the issue of equity, Brainchip would have ended the quarter with ~$13 million cash in the bank.

In a first for a quarterly report (for me, at least), Brainchip thought to dedicate a paragraph to its podcasting efforts:

‘In early May, the Company released the first of its Quarterly Investor Podcasts featuring an interview between BrainChip CEO Sean Hehir and Director of Global Investor Relations Tony Dawe. The podcast addresses the more frequently asked questions asked by investors. The next Quarterly Investor Podcast will feature BrainChip Chairman Antonio J. Viana and will be released on the Company website and through social media channels in August. In addition to the Quarterly Investor Podcast, the Company continues to deliver its series of “This is Our Mission” podcasts to address the broader thematics within the AI sector and gain the perspectives of leading figures across the technology sector. In the previous quarter, the podcasts introduced USC Professor Dr. Gaurav Sukhatme on the theme of “AI and robotics”, and leading technology innovator Geoffrey Moore on the theme of “Embracing Disruptive Innovations with technology”.’

Do these podcast ventures instill Brainchip shareholders with optimism and confidence?

ASX lithium stocks fall

Lake Resources isn’t the only lithium stock to fall today. The whole sector is down bad.

Source: CommSec

Lake Resources hits new 52-week low

Once a retail favourite, Lake Resources [ASX:LKE] is now a retail dud.

The lithium developer is down ~5% in early trade on Monday, sinking to a fresh 52-week low.

LKE is now down ~85% from its 52-week high.

At one point valued over $1 billion … with a catastrophic stint in the ASX 200 … Lake Resources is now worth around $360 million.

ASX 200 opens flat … as Australia retains the Ashes

Good morning, investors.

The Ashes have been retained after nature’s intervention.

Not everyone was happy with how the series was clinched.

As for markets, the ASX 200 inched higher at the open, currently up 0.10%.

Lithium stocks are ones to watch today as a slew of them released quarterlies.

Core Lithium is currently down 11%.

Allkem is down 4%.

Lake Resources is down 4%.

And Pilbara Minerals is down 3%.

Kiryll Prakapenka

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