Inside the market

Consumer Discretionary showing it’s not all doom and gloom

The All Ordinaries index continued its advance during the week ending 26 July 2019 adding another +1.37% for the week. The index is now more than 10% above its 200 DMA. Approximately 63% and 64% of constituent stocks are above their 200 DMA and 100 DMA respectively. 

During the week 67% of stocks advanced. The week ended with two hundred and seventy-nine shares within 20% of their 52-week highs. 111 of those were within 5% of 52-week highs. As we’ve said in the past, more stocks making new highs is an excellent sign of the strength of the market as a whole.

Consumer Discretionary breaking to new highs

The Consumer Discretionary sector broke out to new highs during the week. The sector index finally rose above levels last seen at the end of August 2018. The sector has shown strong performance since the beginning of 2019 despite the gloomy local economic landscape. Interest rate reductions, tax cuts and an improving housing market (if it can be called that) are playing a role in the revival of the fortunes of the sector. However, these are all short term measures, and stock prices reflect long-term expectations. 

When given a choice, we tend to trust the ‘predictive’ power of the stock market over that of the experts. The stock market leads the economy. The experts have predicted the decline and fall of retail in Australia for some time. However, this is not currently showing up in stock prices. 

Retail heavyweights

The charts of the Aussie retail heavyweights provides a critical counterpoint to the doom and gloom scenario so often reported.

Wesfarmers (WES), Harvey Norman (HVN) and JB Hi-Fi (JBH) have all broken to new highs with remarkably similar patterns. None of these stocks is showing signs of being destroyed by Amazon or the economy. 

Other retail leaders

Other companies in the sector defying the doom and gloom narrative include Breville (BRG), Lovisa (LOV) and Collins Foods (CKF). Unlike the heavyweights, which appear to move in tandem with the sector average, these stocks are each on a unique growth trajectory. Each one offers investors significant upside should their potential be realised.

Both Breville and Lovisa are expanding globally, and both global expansion opportunities are vast in comparison to their home markets. They’re both category leaders locally and looking to export this product leadership to much larger global markets.

Collins Foods, on the other hand, is predominantly a local growth story driven by the introduction of the Taco Bell brand to Australia as well as the continued strength of the KFC brand in Australia.  

There‚Äôs currently significant uncertainty as to how successful each of these companies will be in executing their growth strategies. Each has a tremendous opportunity; however, how they ultimately can manage these opportunities is currently mostly unknown and very difficult to predict. 

Trends driven by uncertainty

The market price of a company’s securities reflects the market-clearing consensus opinion of how the future is going to look for that company.  Significant uncertainty surrounding the future earnings of a company will result in a widely dispersed distribution of opinion. This wide dispersion of opinion means that stock prices are not tightly bound to a common consensus view. Instead, they’re likely to exhibit trends as opinions change in one direction or the other. 

We like stocks like these for this exact reason. The market’s not able to accurately price their potential future because it’s extraordinarily uncertain. This uncertainty leaves open the opportunity for trends to develop as the company travels from an unknown future to current reality. As this happens, the wide dispersion of opinion gives way to tightly bound consensus at which point real trends are much less likely to occur. 

Information Technology on the move again  

The Information Technology sector looks set to move to new highs after spending the last 14 weeks in a trading range. The old resistance level appears to have held as support. The usual suspects have all begun fresh advances to new highs. Wisetech (WTC), Altium (ALU), Appen (APX) and Xero (XRO) are all once again on the move. Afterpay (APT) is the only one of the WAAAX stocks still within its trading range having failed to break to new highs last week. 

Other stocks in the sector that are showing considerable strength include Dicker Data (DDR), Iress (IRE), Megaport (MP1) and EML Payments (EML).

By Danny Sandler

Founder of Ocean Asset Management.