Since when did markets make any sense? The ASX 200 surged more than 1% yesterday, even though the iron ore price (which basically props up the Aussie economy) fell further. Yesterday in Asian trade, it fell again, and is now at $68.50/tonne. That China rate cut certainly didn’t do too much.
Just how BHP and Rio’s share prices are managing to hold up in such circumstances is anyone’s guess. If the iron ore price stays around current levels, future profits will be much lower than the market currently anticipates.
My guess is that the valuation models have a price of around $85/tonne embedded in them. When it becomes apparent that this is way too optimistic, watch the downgrades flow in.
That probably won’t happen until early next year, when the analysts come back from their holidays and realise the price isn’t going to bounce back.
As my colleague and Quant Trader Jason McIntosh wrote last week, ‘considerably lower levels are a distinct possibility in both stocks.’
Jason was providing some technical analysis for subscribers of Sound Money. Sound Investments. Both Rio and BHP are on my list of stocks to ‘short sell’, and have been for some time, along with Fortescue Metals.
From a fundamental perspective, these stocks look vulnerable to profit downgrades. I asked Jason, a trading veteran and technical guru, for his thoughts on the share price action as shown in the charts and his view confirms my analysis.
That is, you’re likely to see much lower levels for these stocks in the months ahead. Unless you’re an index following fund manager, there’s no need to own BHP and Rio right now.
By the way, we’ve just launched Jason’s new Quant Trader algorithmic trading service. We’ve had an overwhelming response, and in the first few weeks of the system being ‘live’, it’s thrown off plenty of buy and sell signals.
The system drills down into the thousands of stocks on the ASX and throws off signals based on those that have the greatest likelihood of making a big move — up or down.
It’s early days but the feedback we’ve had has been great.
For The Daily Reckoning Australia