The XJO has formed a “lower high” pattern within the existing Algo Engine buy signal structure.
The market has rallied 6% from the recent buy signal but we’re now mindful of the recent break of the “higher low” structure, as circled on the chart below.
5941 is resistance for the XJO and whilst the market remains below this level, some caution is required.
Names that remain supported within today’s broad market sell off include, AGL, CTX, GPT, WES, SCG, TCL, HSO & WOW. We remain cautious on the banks and select resource names .
Both AMC and TCL have been under recent selling pressure as bond yields in the US have moved higher.
The defensive nature of both businesses has seen their share price trade as a proxy to bonds.
With TCL and AMC both scheduled to have their AGM tomorrow, we believe there could be a rally in the share price as investors gain more clarity on future earnings growth.
We’re mindful that Algo Engine sell signals are displayed, however we’re willing to commit to Amcor as our preferred opportunity, of the two names.
Shares of TCL have dropped about 10% over the last month since announcing a $4.8 billion capital raising related to the WestConnex project.
The share price suggested has been $10.80, which is just 10 cents below last Thursday’s intra-day low.
From a broader perspective, we believe the 25.5% ownership of the WestConnex project will underscore TCL’s status as Australia’s dominate toll road operator, support future cash flow and secure their dividend growth.
We don’t currently have an ALGO buy signal for TCL, but would not be surprised to see one soon.
Our medium-term target for TCL is in the $13.00 area.
Shares of Transurban have been holding above the $12.00 mark since the ACCC approved the company’s bid on Sydney’s WestConnex tollway. Shares are currently in a trading halt.
The green light from the regulator clears the way for TCL to acquire other domestic assets to build on its future growth in earnings.
TCL currently own 15 of the 19 toll roads in Australia. This gives TCL an advantage over other bidders since many tollways feed into other strategic motorways.
The company plans to do a capital raising for $4.8 billion to fund the acquisition. $4.2 billion of this will be in the form of offering shares at $10.80.
We don’t have a current ALGO buy signal on TCL and would look for lower levels to enter long.
Our ALGO engine triggered a sell signal on GPT on June 21st at $5.36.
This “lower high” pattern is referenced to the high of $5.49 posted earlier this year on January 5th.
It’s worth noting that two other yield sensitive names, TCL and SYD also triggered ALGO sell signals last week. Furthermore, all three of these stocks will go ex-dividend on Thursday, June 28th.
As illustrated in the charts below, all three of these stocks have been in an uptrend since March. We expect this pull back into their dividend should allow for better entry points for medium-term investors.
We see initial support for GPT at $4.70, with a stronger chart point at $4.50.
Our ALGO engine triggered a sell signal on both SYD and TCL into yesterday’s ASX close at $7.47 and $12.20, respectfully.
We suggest either taking profits on the stock or using the option strategy outlined below.
With both of these names going ex-dividend on June 28th, we suggest selling a call option above the market to increase cash flow and enhance the return.
For TCL, we are looking to sell the October $12.50 call for around 24 cents and collect the 28 cent dividend.
For SYD, we will sell the October $7.75 call for around 12 cents, which will keep investors in the stock to collect the 18.5 cent dividend.
Transurban has recently entered into a number of significant transactions, including the $4billion Westgate Tunnel Project, which will help underpin earnings growth of 10% over the next 3 years.
The EBIT growth will flow through to DPS growth of 10% and we see the FY18 DPS of $0.56 increasing to $0.70 in FY21, placing the stock on an attractive forward yield of 6%.
We recommend investors enhance the yield further, by selling a covered call option. A combination of the dividend and the option premium is generating 12% annualised cash flow.
Even though the US Stock market has stabilized over the last week, the US Treasury curve continues to flatten.
As illustrated in the chart below, the difference between the US two and 10-yr bonds has now dropped to 46 basis points (2.36% vs 2.82%).
This is the first time since 2007 that this spread has narrowed below 50 basis points, and, in the past, has been a level which has foreshadowed recessionary pressure.
It’s our base case that the bulk of the curve flattening has been a result the two-yr yields rising quickly and the longer dated yields trading sideways to lower.
In this respect, we would expect some of the local yield names to find some buying support this week.
Some of the stocks we prefer include; TCL, SYD, WFD, AMC and GPT.
For more information about how to trade the US yield curve, call our offices on 1-300-614 002
2-yr versus 10-yr yield spread
While much of the financial media has been pointing to the threat of a trade war as the source of recent market volatility, we have also noticed rising stress in the inter-bank funding market.
As illustrated in the chart below, the LIBOR-OIS spread has spiked from 22 basis points to almost 60 basis points over the last 5 weeks.
The LIBOR-OIS spread reflects the amount of premium one bank requires from another bank to loan them money.
In simple terms, when banks start to question the financial health of other banks, the spread widens.
Rising funding costs are a headwind to global equity markets, which in turn acts to dampen bond yields; especially in the longer end of the curve.
The practical impact of this dynamic has been seen in the recent firming in some of the local interest sensitive names.
At these levels, we prefer the long side of SYD, TCL, SCG and WFD
Our Algo Engine triggered a recent buy signal in Transurban, and with the stock now trading $11.10, we consider it a buying opportunity.
TCL goes ex div $0.265 on the 29th June.