A shoulder (or two) to lean on
The signs are good for some resources and property stocks
Commodities have run hard. The question is whether any upside remains for investors. The charts say yes, and indicate that for patient investors there is still potential in stocks such as Anglo, Kumba, Glencore and Assore, as well as the platinum and gold miners.
Here I look at Anglo, which is typical of our larger resource counters. It has a share price target of 40%-50% higher and further potential beyond that. The difficulty is riding out the inevitable wild gyrations as disbelief recedes and the alternating greed and fear take over. I have come to the conclusion that the only way to handle resources is with smaller positions and wide stops.
Similarly suffering from disbelief are our local property stocks. They have been much maligned, with dire predictions of an imminent implosion. The charts tell a different story as the prospect of interest rate rises recedes and the worldwide hunt for yield intensifies. But investors should not stray beyond the large, quality counters such as Growthpoint and Hyprop, as B-grade properties are unlikely to benefit from foreign flows. Anglo American During the resources boom of 2008 Anglo reached R556. In January 2016 it fell to R53.30. That’s an astonishing decline of 90%. At the time of writing it is trading at R158.46. Though this is a recovery of almost 200%, it remains a long way from its best.
Anglo’s recovery constructed a reliable reversal pattern, known as a reverse head and shoulders (H&S). It’s indicated on the chart as S-H-S. In the turbulent post-Brexit market it performed well, remaining solidly above the 200-day moving average and the neckline (in red).
It has now broken through the next resistance level of R150, forming a larger cupping pattern (in orange).
There are two targets out of these patterns:
• The first target is R220 — the height of the reverse H&S projected up.
• The second target is R243 — the height of the full pattern projected up.
A return to the super-cycle high of +R500 cannot be contemplated, but it is reasonable to expect that it will, over time, revisit the 2014 high of R290.
In the shorter term R150 is an important level for Anglo. It may stay there a while as it builds up steam for the next move up. It could retrace as far as R143 without disturbing the pattern.
Stop is a daily close below R138. Longer-term investors can use a weekly close below R115.
Growthpoint is our largest real estate investment trust (Reit) and one of the largest in emerging markets. It has excellent management and superb assets.
There is currently a worldwide resurgence of interest in Reits.
Growthpoint is on a generous forward yield of 7% and it can be expected to once again attract foreign interest. At the time of writing it is trading at R26.25.
Similar to Anglo, Growthpoint has formed a reverse H&S. The head was caused by the Nenegate debacle. While this was traumatic at the time, it laid the foundation for a strong move up.
It has simultaneously broken through the neckline (in red) and the 200-week moving average. Such a double dose is powerful.
There are two targets out of this pattern:
• The first target is R28.00 — the height of the right shoulder projected up.
• The second target is R30.40 — the previous record high. While the full target is R31.50, it is unlikely to immediately break through the prior high. It will probably consolidate for some time just below it or even suffer a setback once that level is touched.
If it does eventually break through to a new high it will set up the three-year consolidation range as a base for a new target of R38. But this is speculation.
Stop is a weekly close below R24.