Market Matters Report / Market Matters Weekend Report 10th July 2016

By Market Matters 10 July 16

Market Matters Weekend Report 10th July 2016

Market Matters Weekend Report 10th July 2016

 

Overview
 
This week's report is simple but brings a powerful message - hold on tight, we believe there is a very high chance that equities explode to the upside this week! On Friday night the US employment data showed their economy is much stronger than many feared, creating 287,000 new jobs in June compared to an estimated 180,000, with the unemployment rate sitting at 4.9%. Interestingly, the US 2-year bond yield rose only marginally to 0.605% as the futures markets price in just a 21% probability of a rate rise by December. Therefore, no perceived major headwinds for stocks from rising interest rates at this stage – which is understandable given the global macro uncertainty coming from the UK/Europe and still benign outlook for inflation in the States.  
 
After 16 successive weeks of capital outflows from equity funds the S&P500 remains only 0.2% below its all-time high but fund managers are now sitting on record levels of cash. We continue to believe the "path of most pain" remains up for the majority of fund managers / investors,  especially with little value in bonds at current levels.
 
A rally in the S&P500 through 2135 will simply force some of this cash to reallocate into stocks due to mandates and of course FOMO (Fear of Missing Out), but who is now left to sell?......we can easily see US stocks 3-4% higher in July alone. If stocks are making all-time highs many fund managers will rapidly become VERY uncomfortable sitting on bonds yielding almost zero and in some cases negative - it's not the style of returns that pays a big bonus.
 
On Friday night US 10-year bond yields fell to 1.3579% and 30-years to 2.0983% while as we said 2-years rose to 0.605% which implies lower rates for longer, perhaps at least until BREXIT becomes clear which may be years away. Historically when the yield curve inverts, longer term rates falling under short dated ones, e.g.  30-year rates falling under 10-year rates, its regarded as a strong sign of a pending recession. Rates are not currently at that point but we are watching this correlation carefully. These are unprecedented economic circumstances with Central Banks around the world buying bonds sending yields to their lowest levels in history as they attempt to stimulate growth - there is an amazing $US10 trillion worth of bonds with negative yield! We believe stocks are far more attractive than bonds at current levels BUT the weight of money is in bonds which can easily create the explosive rally from stocks that we are forecasting.
 
Remember our bigger picture forecast which is illustrated on the S&P500 monthly chart  - After making all time highs, perhaps 10% higher, we are forecasting a significant correction to the whole bull market advance from the 667 low in March 2009. Currently attempting to put numbers on this big picture view is tricky / guess work but if the S&P500 reaches the 2300 area we will then be targeting a minimum fall of ~600 points / 25% - which is very significant. We know this seems to be a big call, however markets do go through phases and they often do things that seem implausible at the time they’re being pondered.
 
US S&P500 Monthly Chart
 
Now importantly let's move onto our own ASX200 and start by remembering the DOT Theory that we watch carefully:
 
"80% of the time a market will form the high, or low, of any timeframe in the first 20% of that respective timeframe".
 
Lets now combine that theory and some very simple statistics to the ASX200 for the remainder of July. Over the last 10 months, since the 770-point fall back in August 2015, the local market has traded with an average range of 363 points, with a noticeably low deviation. Hence if the ASX200 makes a fresh monthly high next week, over 5282 as we expect, there is a 80% probability that 5148 will be the low for this month of July. Subsequently the upside target if July is an average month will be 5511 and ~5400 if July has a very low monthly range.
 
A rally towards 5500 over the next few weeks would not surprise us as a break of 5430, a 10-month high, will bring all the "Trend Followers" out of the woodwork and into local stocks. Clearly for the ASX200 to become very bullish the banks need to rally – given the sector is down 21% for the year a strong bounce is easy to envisage.
 
ASX200 Monthly Chart 
 
As mentioned above the banks remain the key to significant performance from the ASX200 due to their heavy index weighting. From all the negative press it's easy to feel that it's just the Australian banks that have experienced a tough time since early 2015 but that's not the case. The Australian Banking Index is currently down 30% from its panic, yield chasing, highs of March 2015 but the American banks have also corrected 20% and the European banks have fallen a massive 45%.
 
Banks globally are under significant scrutiny and are being hit with higher capital requirements, more onerous/expensive regulation after the chaos they were instrumental in causing - the Financial Crisis. Overall a relatively unjust outcome for Australian banks who sailed through the GFC in reasonably good shape e.g. In the US 465 banks failed between 2008 & 2012 compared to only 10 failing in the 5 years prior to 2008.
 
Today the Australian banks are having the "kitchen sink" thrown at them e.g. being forced to raise capital by the regulators with talk of another $20bn required, record low interest rates putting pressure on margins, many concerned that Australian property will fall leading to an increase in bad debts and a substantial uptick in general compliance costs to overcome the sins of the past. There's probably a sigh of relief within the banking community that it appears that the Liberals will form the next Australian Government reducing the chances of a major / costly full blown enquiry. Furthermore, we saw last week the ratings agency S&P put Australia's AAA rating on negative watch which would in turn put yet more pressure on Australian banks.
 
S&P500 Banking Index Monthly Chart 
 
With the extent of negativity towards the banks at present we have to ask ourselves, is this a buying opportunity? Over a year ago we said CBA would trade sideways for over 2 years which has certainly played out,  although it does feel weaker while trading well under $80. Compared to the broader market banks are now cheap as analysts forecast significant headwinds for the sector ahead  e.g. CBA is on a p/e of 13.20x and pays a 5.8% fully franked divided whereas BHP is on a p/e well over double and Woolworths is on a p/e of ~16x. Banks are not the only sector/stock with headwinds. BHP has China and Woolworths has ALDI!

We believe the banks are just in the "eye of the storm" of negativity and worth accumulating at current prices.
 
Commonwealth Bank (CBA) Monthly Chart 
 
 
Standout technical chart of the week
 
If the Dow breaks over 18,200 next week we are forecasting an explosive rally towards 19,000 while stops can be worked at 17,900 - excellent risk / reward.
 
Dow Jones Monthly Chart 
 
 
Summary
 
No major change from our views published last week. We remain bullish, especially the US market. Taking into account our positive view on the US and some Asian Indices we do NOT believe it's time to sell stocks, just remain prudent on exposure. However once US equities have punched through to fresh all time highs, which we believe is imminent our strategy becomes clearly defined - we will be wearing our "Sellers Hat" lightening equities exposure into strength.
 
At Market Matters our portfolio is sitting on ~11% cash having purchased Vocus Communications (VOC) last week. Importantly assuming we are correct and equities do punch higher over coming weeks / months we will then be selling stocks/reducing our exposure to the market into strength. We still believe 2017 will be one of those years where cash and / or excellent stock selection will be required to produce satisfactory returns for investors.
 

 
What Matters this week
 
The ASX200's was set to open up 60-points on Monday and we feel early strength will continue.


Potential Investing opportunities for the coming week(s)

We are happily ~90% committed to stocks and are expecting to be patient in reducing this position..

** Watch out for trading alerts**

Potential Trading opportunities for the coming week
 
Simply BUY the market as it seems poised for higher levels near term! We are bullish the ASX200 if it breaks 5290 with stops under 5240.
 
Portfolio / Trade Holdings
 
The Market Matters Portfolio:
 
https://www.marketmatters.com.au/blog/post/market-matters-stock-positions-friday-8th-july-2016/
 
We are sitting on 11% cash after purchasing Vocus (VOC).
 
Australian ASX200
 
A break over 5285 for the ASX200 should see a test of 5400 in July. This is now our preferred scenario!
                                                                                                                  
Chart 1 – ASX200 Monthly Chart
 
 
Chart 2 – ASX200 Weekly Chart
 
 
Chart 3 – ASX200 Daily Chart
 
 
Chart 4 - SPI (Share Price Index) Futures 60 mins Chart
 
 
Chart 5a ASX200 Banking Index Monthly Chart
 
 
Chart 5b ASX200 Financials Index (excl. REIT's) Weekly Chart
 
 
Chart 6  Volatility Index / VIX Weekly Chart
 
 
Chart 7a – The US 10-year Interest Rate Monthly Chart
 
 
Chart 7b – The US 2-year Interest Rate Daily Chart
 
 
American Equities
 
The American indices remain bullish targeting fresh all-time highs in 2016 even after BREXT. The recent correction looks to be over leading us to be very bullish for the next few months. The Dow is now only 1.1% below it's all time high!
 
Chart 8 – Dow Jones Index Monthly Chart
 
 
Chart 9 – Russell 3000 Weekly Chart
 
 
Chart 10a – US S&P500 Index Monthly Chart
 
 

Chart 10b – US S&P500 Weekly Chart
 
 
Chart 10c – US S&P500 Banking Index Monthly Chart
 
 
Chart 11 – NYSE Composite Index Monthly Chart
 
 

Chart 12 – Russell 2000 Index Monthly Chart
 
 
Chart 13 – US NASDAQ Index Monthly Chart
 
 
Chart 14 – The Canadian Composite Index Monthly Chart
 
 
European Indices
 
European Indices have lost some of their BREXIT panic and looking "ok" at current levels. The UK FTSE is very strong making fresh highs since August 2015, assisted by a weak Pound.
 
Chart 15 – Euro Stoxx 50 Index Monthly Chart
 
 
Chart 16 – UK FTSE Index Weekly Chart
 
 
Chart 17 – Spanish IBEX Index Monthly Chart
                    
 
Chart 18 – German DAX Index Monthly Chart
 
 
 
Asian & Emerging Markets Indices
 
The Asian indices look to have shaken off the BREXIT surprise and are bullish led by the Hang Seng which is targeting further 10% gains. The Japanese Nikkei is the laggard appearing to require further economic stimulus to rally from current levels.
 
Chart 19 – Hang Seng Weekly Chart
 
 
Chart 20 – China Shanghai Composite Index Monthly Chart
 
 
Chart 21a – Emerging Markets MSCI ETF Weekly Chart
 
 
Chart 22 – Japanese Nikkei 225 Index Monthly Chart
 
 
 
Australian Stocks
 
For the Australian stock market to make decent gains the Banks require a bid tone but that is still not apparent at present.
 
Chart 23 – BHP Billiton (US) Monthly Chart
 
 
Chart 24 – BHP Billiton (BHP) Weekly Chart
 
 
Chart 25a – Woodside Petroleum (WPL) Monthly Chart
 
 
Chart 25b – Origin Energy (ORG) Weekly Chart
 
 
Chart 25c – Oil Search (OSH) Weekly Chart
 
 
Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart
 
 
Chart 27 – Fortescue Metals (FMG) Weekly Chart
 
 
Chart 28 – Newcrest Mining (NCM) Monthly Chart
 
 
Chart 29 – Regis Resources (RRL) Weekly Chart
 
 
Chart 30 – Northern Star Resources (NST) Weekly Chart
 
 
Chart 31 – Market Vectors Gold ETF Daily Chart
 
 
Chart 32a – Commonwealth Bank (CBA) Quarterly Chart
 
 
Chart 32b – Commonwealth Bank (CBA) Monthly Chart
 
 
Chart 33 – ANZ Bank (ANZ) Monthly Chart
  
 
Chart 34 – Westpac Bank (WBC) Weekly Chart
 
 
Chart 35 – National Australia Bank (NAB) Weekly Chart
 
 
Chart 36 – Macquarie Group (MQG) Monthly Chart
 
 
Chart 37a – Bank of Queensland (BOQ) Monthly Chart
 
 
Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart
 
 
Chart 38a – AMP Ltd (AMP) Monthly Chart 
 
 
Chart 38b – Henderson Group (HGG) Weekly Chart 
 
 
Chart 39 – Challenger Financial (CGF) Monthly Chart
 
 

Chart 40 – Suncorp Group (SUN) Monthly Chart
 
 
Chart 41 – Insurance Australia (IAG) Monthly Chart
 
 
Chart 42 – QBE Insurance (QBE) Monthly Chart
 
 
Chart 43 – Wesfarmers Ltd (WES) Weekly Chart
 
 
Chart 44 – Woolworths Ltd (WOW) Quarterly Chart
 
 
Chart 45a – Seek Ltd (SEK) Monthly Chart
 
 
Chart 45b – REA Group Quarterly Chart
 
 
Chart 46 – Telstra Corp. (TLS) Monthly Chart
 
 
Chart 47 – Vocus Communications (VOC) Weekly Chart
 
 
Chart 48 – TPG Telecom (TPM) Monthly Chart
 
 
Chart 49 – Westfield Corp. (WFD) Monthly Chart
 
 
Chart 50– CSL Ltd (CSL) Monthly Chart
 
 
Chart 51 Ramsay Healthcare (RHC) Monthly Chart
 
 
Chart 52– Healthscope (HSO) Weekly Chart
 
 
Chart 53 - Ansell (ANN) Monthly Chart 
 
 
Chart 54 – Amcor Ltd (AMC) Monthly Chart
 
 
Chart 55 – Crown Resorts (CWN) Monthly Chart
 
 
Chart 56– Bellamys (BAL) Weekly Chart
 
 
Chart 57– JB Hi-Fi (JBH) Monthly Chart
 
 
Chart 58– Harvey Norman (HVN) Monthly Chart
 
 
Chart 59a– Australian Dollar (AUD) Monthly Chart
 
The $A has continued to struggle as markets factor in one / maybe two rate cuts for Australia. A large degree of the recent bounce from the 6580c area has been courtesy of a weaker $US. We are eventually targeting the ~65c region BUT with the $A ignoring recent S&P downgrade warnings the short term strength looks likely to continue.
 
 
Chart 59b– The $US Index Monthly Chart
 
 
 
Commodities
 
Gold has  rallied very well from multi-year lows last December but has now reached our initial target area hence short term caution is warranted, especially if BREXIT concerns subside. Ideal buying is any "abc" style retracement.
 
Copper remains in a negative downtrend on a longer term basis.
 
Crude Oil has looks set to continue with recent strength towards the $US60/barrel resistance area after current consolidation.
 
Iron Ore exploded recently achieving our +$US70/tonne target, we are now neutral / negative. The technical target is fresh lows under $US38/tonne.
 
Chart 60 – Gold Monthly Chart
 
 
Chart 61 – Copper Monthly Chart
 
 
Chart 62 – Crude Oil Monthly Chart
 
 
Chart 63 – Iron Ore Monthly Chart

 
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 10/07/2016. 9:00PM.
 
Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.
 
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