Market Matters Report / Market Matters Weekend Report Sunday 3rd December 2017

By Market Matters 03 December 17

Market Matters Weekend Report Sunday 3rd December 2017

 Market Matters Weekend Report Sunday 3rd December 2017

Another weekend when writing the MM cornerstone report is very exciting, volatility is increasing rapidly and we believe a decent correction for global stocks may not be far away. On Friday night alone the Dow rallied early, then tumbled over 400-points before recovering to be only down 40-points / 0.17% - most definitely not a normal day at the office! A potentially very uncomfortable weekend for Donald Trump and is family could easily lead to further large swings into Christmas. We have a stock market facing a tax bill approaching approval but a president walking a tightrope, both likely to have very different implications for stocks.

Overall the ASX200 had a net very quiet week rallying 0.15% but even within our local market we saw some huge swings by individual stocks / sectors e.g.

  1. We sold our Aristocrat (ALL) position at $24.15 on Thursday only to see the stock plunge $3.02 in a matter of minutes after a huge line of stock was crossed at $24 – see comments below.
  2. We attempted to sell our Nanosonics (NAN) position around $2.60, also on Thursday, only to see the opportunity fail to materialise as the stock dropped 4.7% in the blink of an eye – see comments below.
  3. Also on Thursday the royal banking commission was announced leading to a 62-point aggressive drop in our market, led by the banks most of which then recovered to close positive, allowing the index to quickly recover ~30% of the losses.

Following MM alerts

MM deliberately operates in larger cap / liquid stocks but even these markets can prove very unpredictable and volatile when least expected as we witnessed last week. On the rare occasion when things go crazy following an alert we can very quickly let you know our thoughts on the stock, simply email us - please note we cannot give Personal Advice but instead, we can update what we are doing on our own portfolio in a timely way, and you can simply make a call on what is best for you.

Importantly don’t panic, MM  is here to help whenever we can, as I said above simply email us and we will respond asap.

Aristocrat (ALL) 5-minute Chart

We mentioned last week the current ability of global equities to remain firm in the face of aversity / negative headlines illustrating the underlying strength within stocks i.e. they simply have not felt ready to fall even while many pundits keep predicting their demise. We witnessed another a great example of this last on Friday night with a 310-point recovery by the Dow after the Trump-Russia news, it now feels like 2 clichés may be pulling in opposite directions: 

  • “ A market which does not fall on bad news is a strong market”.
  • “The straw that broke the camel’s back”.

Remember some of the key statistics for December since the GFC:

  1. The average gain for December since the GFC is an impressive +2.5%, with only the one negative year in 2011.
  2. However this only tells half the story, in 3 out of the 8-years we formed a low mid-month before rallying strongly over 6%.
  3. In 6 out of the 8 years the high for December was in the last few days while in 2010 it was on the 23rd, only in the unusual 2011 was the high early on the 5th.

Considering global equities feel vulnerable at present we will continue to watch these markets statistics very closely especially as the numbers show a pullback into early / mid-December would also be exciting for the bulls looking for a buying opportunity for a Christmas / window dressing rally.

MM remains bullish the ASX200 targeting a decent break over 6000 in 2017 / 2018 but a short-term correction down towards the 5900 area offers the best risk / reward buying opportunity.

Last week’s list of major winners / losers implies a one-sided affair with increasing activity as winners notched up a victory by 7 stocks to 2 i.e. nine stocks in the ASX200 moved by over 5%:

Winners : Bendigo Bank (BEN) +5.2%, BT Investment (BTT) +6.6%, Origin Energy (ORG) +5.7%, Coca Cola (CCL) +5.2%, Dexus (DXS) +5.7%, JB Hi-Fi Ltd (JHB) +5.8% and AGL Energy (AGL) +5.5%.

Losers : ALS Ltd (ALS) -5.5% and South32 Ltd (S32) -6.1%.

Today’s report will look at how MM is seeing a market top slowly evolving into Christmas and hence why subscribers should not be surprised to see our cash levels increase over the coming weeks / month.

ASX200 Daily Chart

MM’s December / January outlook for markets.

1 Global Indices look “toppy”.

We are seeing signs of a decent pullback evolving in a number of major indices:

    1. US Dow Jones – Following its 6,400-point / 36% rally since Donald Trump’s election victory a 1,200-point / 5% pullback feels relatively close at hand.
    2. US Russell 3000 – The broad US Russell 3000 Index has reached our long-term upside target area.
    3. German DAX – The German DAX looks to have commenced a 6-7% correction over the coming few weeks.
    4. Emerging Markets – The Emerging Markets Index, to which the ASX200 and especially our resource stocks exhibit a high degree of correlation, looks to be in the middle of a 9-10% correction.

When we combine these 4 powerful markets caution is the resonating call and it should come as no surprise that MM will be very fussy when buying until the above potential weakness has materialised, or been dismissed.

1 Dow Jones Monthly Chart

2 US Russell 3000 Quarterly Chart

3 German DAX Weekly Chart

4 Emerging Markets ETF Monthly Chart

2 The squaring of “shorts

We have mentioned a potential Christmas / window dressing rally in the coming weeks but there is also another market phenomenon that often surfaces as the year ends.

Traders / hedge fund managers lock in some profits on their short positions so they can relax over the festive season, plus they don’t want their shorts to get caught up in the above mentioned Christmas rally.

Last week we saw huge wave of buying hitting our retail stocks with MYR rallying 11% in 2-days along with solid gains in Harvey Norman (HVN) and JB Hi-Fi (JBH) – not surprisingly a heavily short sold sector.

We are long Independence Group (IGO) which has over 18% of its stock sold short, fingers crossed it receives some of the same treatment!

Myer Holdings (MYR) Weekly Chart

Independence Group (IGO) Weekly Chart

3 Asia is “wobbling”.

Volatility has been on the increase in many areas including high flying Hong Kong which suffered it worst week of 2017, led by heavyweight and market star Tencent which has now corrected over 12% in under 2-weeks.

Ideally from a technical perspective, similar to the US S&P500, recent volatility has just been a warning and both should ideally see fresh 2017 highs this December before we would say increase cash levels – watch this space.

Tencent (HK) Weekly Chart

Australian stocks / sectors

Resources

No change, we have been patient in adding to our IGO / NCM position within the Australian resource stocks although we have put 3% into Fortescue Metals (FMG) as a more active position following its 37% correction. However there remains no change to our overall outlook:

1. We are positive the reflation trade hence are keen on the likes of BHP, OZL and RIO into weakness but still do not plan to chase strength e.g. OZL around $8 looks attractive i.e. ~5% lower.

2. Ideally the Base Metal spot index will correct ~7% again allowing us a decent risk / reward buying opportunity.

Bloomberg’s Base Metals Spot Index Weekly Chart

OZ Minerals (OZL) Daily Chart

Energy

We remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits are targeting the $US60/barrel area NB Fridays close was close to the highest since July 2015.

  • We are comfortable with our exposure via Woodside Petroleum (WPL).

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a small paper loss of just over +1% after previously being down well over 10%.

However, if we are correct the $US has a good chance of making one final low in the relative near term to around the 90 level and MM then should be able to crystalize a profit from this position, hopefully well over $25.

US dollar Index Weekly Chart

Banks and bond yields / interest rates

We remain both positive and mildly overweight the banking sector although news of the royal bank commission has concerned some investors at least for now. Obviously as subscribers know we are bullish bond yields which should help banks profitability hence our slight portfolio skew towards the sector.

CBA is currently yielding 5.4% fully franked with its next dividend in February, we are keen to add to our position ~$77.50, or 2% lower.

US 2-year bond yields Monthly Chart

Commonwealth Bank (CBA) Daily Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher, we currently have 2 stocks on our radar in the sector 

  • Janus Henderson (JHG) $49.32 – we are keen at current levels targeting ~$55.
  • Platinum Asset Management (PTM) -$7.39 – We are keen around the $7 area, or 5% lower.

Janus Henderson (JHG) Weekly Chart

Platinum Asset (PTM) Daily Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises. Large short covering appears to be unfolding at present.

We remain net bearish Woolworths with an eventual ugly target under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly failed to follow most US sectors to fresh all-time highs last week.

However, a significant portion of Australian healthcare stocks enjoy sizeable revenue from the US leaving us mixed on the local sector in comparison.

US Healthcare Index Quarterly Chart

Global Indices

As discussed earlier we believe a short term correction is close at hand.

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s).

Since Donald Trump’s US election victory the S&P500 has rallied an impressive 27% with only one minor -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip” is approaching.

We now feel aggressive traders can sell any strong days as pullbacks are likely to become both far more common and larger.

US S&P500 Weekly Chart

We are now short-term bearish European stocks with the recent “gut feel” looking on the money. The close by the German DAX back under 12,900 has increased our confidence in this bearish view from a short-term technical perspective.

German DAX Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently only have 9.5% of the MM Platinum & 6% of the Income Portfolio in cash so buying will be small and careful :

  1. Banks – We are looking to add CBA ~$77.50.
  2. Consumer Services – We may add to our Webjet (WEB) under $9.
  3. Diversified Financials – We like Janus Henderson (JHG) at current levels and Platinum (PTM) around $7.
  4. Energy – Were now long WPL which feels enough for now.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Nanosonics (NAN) is enough for now.
  7. Resources – We are likely observers this week unless decent weakness unfolds in the week.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage.
  10. Retail – No investment buying at this stage.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

A few 2 stocks in our MM Platinum Portfolio are in striking distance of our current sell targets: 

  1. Nanosonics (NAN) ideally ~$2.70, or higher.
  2. Newcrest (NCM) and Independence Group (IGO) if / when the $US Index breaks under 91.

Standout technical chart (s) of the week

US banks have rallied strongly since September, gaining close to 20%. Obviously Australian banks have not enjoyed this strength but we conscious that US banks are now well within 5% of our target area hence being married to the theme in 2018 maybe dangerous.

US S&P500 Banking Index Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report. A summary of the most likely activity next week is:

  • NAN will be reviewed around $2.70 while Newcrest (NCM) is likely to need some panic around the Trump-Russia issue to become attractive.
  • We are potential buyers of CBA, WEB, PTM and JHG into weakness.

Trading Opportunities on our radar

Last weeks brave call on Myer was smack on with a quick 10% on offer. Today we are reiterating a position we took recently.

  • Buy Fortescue (FMG) around $4.60 targeting a move over $5 in 2017/8 i.e. 9-10%. 

Fortescue (FMG) Weekly Chart

Summary

We are becoming increasingly confident that global stocks are close to a ~5% correction hence we only intend to buy weakness and will consider selling opportunities.

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . Positions are updated each Friday.

Disclaimer

All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 1/12/2017. 4.00PM.
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