Market Matters Report / Market Matters Weekend Report 18th September 2016

By Market Matters 18 September 16

Market Matters Weekend Report 18th September 2016

Market Matters Weekend Report 18th September 2016

The ASX200 performed well under the circumstances last week only closing down 0.8% after a weak opening on Monday following the almost 400-point plunge on Wall Street. Australia's largest stock CBA helped the index closing up 1.9% while the energy sector was the major drag closing down 6.1% for the week, plus major resource stocks BHP and RIO contributed to overall index weakness both falling over 3%. Unfortunately while we remain 50-50 on the short-term direction of overseas stock markets the local market now appears to have shown its hand having made a significant top at 5611 - a close over 5375 is required to change this negative stance back to a neutral one.
ASX200 Daily Chart

Our current view is that the recent relative sector performance is likely to continue i.e. banks strong but energy, resources & quasi-bond stocks weak.
The local banks statistically trade very strongly from the September option expiry (next Thursday) until the end of October - see Fridays Morning Report. Keeping the statistics very simple and actually downplaying the potential to actually buy at a lower price, or sell at higher level intra-month, if over the last 5-years you had bought CBA on the open of the 1st trading day of October and sold on the close of the last day the average return was +6.6% with all 5-years registering a positive return, the lowest 3.4% in 2012 and the highest an impressive 10.5% in 2011. Clearly these exciting numbers are aided by August / September regularly being a poor period for equities hence the bank stocks are often recovering from a sell-off - very similar to what has just has occurred this year.
Technically we are ideally targeting a test of the 5100-5150 area for the ASX200 in coming weeks, prior to a 4-5% corrective rally, if this eventuates it should provide an ideal opportunity to gain / increase exposure to the banking sector with some juicy dividends looming in November. Sophisticated investors should then consider writing calls v their bank holdings in the last few days of October.
ASX200 Banking Index Monthly Chart

The recent increased volatility and weakness for stocks has been clearly linked to the building turbulence within the bond market as interest rates edge higher, albeit from their lowest levels in history. Interest rates rising, primarily in the US, should be of no surprise to anyone with markets factoring in an almost 20% chance of an increase next week and perhaps more importantly over a 50% chance by Christmas. Rates look set to rise in the US with the main question when will the increase (s) be and how will markets react. When we look at the US 2-year yield we can see a rally from the current 0.76% to ~3% over coming years but if these increases are gradual and controlled it can actually be supportive for equities as some of the money sitting in bond markets will potentially look for a new home - as we have discussed previously higher interest rates are good news for banks margins / profitability.
US 2-year bond yield Monthly Chart
This weekend we sat back, as we always do, and scoured the charts on different time frames looking for ideas, and obviously ways to potentially to make / save money. We combine this technical research with our own fundamental work / thoughts to formulate our decisions. The Australian dollar chart suddenly jumped out at us, looking like an almost exact replica of its corrective bounce in 2014 prior to a large and quick depreciation in September of that year! When we consider that the market is looking for interest rate increases in the US and potentially more cuts here this makes simple sense - we think the $A is close to rolling over with a target of the 60-65c area.
A number of large overseas investors / research houses have been very negative the ASX200 due to the vulnerability of the $A, it feels to us that we will not get local outperformance until the local currency is ~10% lower.
The important concern for stocks is this is highly likely to coincide with a strong $US which we have been forecasting for a number of months with our target up towards the 105 area i.e. 6-8% higher. A strong $US is bad news for commodity prices which are inversely correlated to the $US e.g. Gold has rallied over $US300/oz this year while the $US fell over 8%. If the $US rallies 6-8% a pull back in commodities and related stocks is likely.
Australian Dollar Monthly Chart

The $US Index Monthly Chart
Australian gold and oil stocks have already endured a tough 5-weeks with the energy sector down ~12% and the gold stocks like Newcrest  down over 20%, the question is do they go further? And if so how far? We are glad to have exited Woodside for a small profit last week but we are still currently holding Origin (ORG) 10% and Independence Group (IGO) 7% which are now showing paper losses after both being nicely ahead over recent weeks, we are currently deliberating whether we should increase are cash holdings short-term by realising losses in one, or both of these stocks. With ORG for example we are eventually targeting a test of $3, the question is can the stock again test over the $6 area, in a similar pattern to that back in 2014, or is it in the death rolls already - watch this space!
Recently we have saved money by not buying gold stocks which we were considering due to their momentum simply feeling wrong, we will continue to be observers here for now.
Origin Energy (ORG) Weekly Chart

Standout technical chart of the week
After last Fridays sharp fall by US stocks many commentators have been forecasting major falls but here we are at the end of choppy week by US stocks with what we believe is a 50-50 scenario. This is actually not surprising with the Fed and BOJ meetings very close on the horizon.
We are simply bullish the S&P500 on a close over 2160 and bearish under 2100. Until then just watch and wait.
US S&P500 Daily Chart

We are 50-50 on overseas equities but believe the ASX200 has formed a major top at 5611 and hence will be looking for selling opportunities accordingly. Conversely we can be buyers of banks into weakness prior to their seasonally strong October and looming dividends.
US equities have reached fresh all-time highs, our strategy remains clearly defined - we are wearing our "Sellers Hat" looking to lighten equities exposure into strength / suitable scenario's.
What Matters this week 

The ASX200's is set to open unchanged on Monday, the price action around the current 5300 level will be interesting.

Potential Investing opportunities for the coming week(s)

We are comfortable with our general asset allocation but wish our cash levels were a touch higher, we will continue to reduce index exposure as decent opportunities present themselves.

Sophisticated investors should use current high volatility to write calls over portfolios to increase yield and protect against some downside.

Potential Trading opportunities for the coming week

We remain bearish the ASX200 until further notice and would be looking for selling opportunities around the current 5300 area with stops over 5375. However on a relative basis we will like banks into any short-term weakness considering their seasonal strength in October.
* Watch out for trading alerts.
Portfolio / Trade Holdings
The Market Matters Portfolio:
We are happily overweight the banking sector and are pleased to have increased our cash position to 11%.
Australian ASX200
The ASX200 performed well last week closing down under 1% after starting off on Monday seeing the Dow down almost 400-points. Unfortunately the market has now broken down technically and would need to close over 5370 to look ok.
Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 - SPI (Share Price Index) Futures 60-min Chart

Chart 5a ASX200 Banking Index Monthly Chart

Chart 5b ASX200 Financials Index (excl. REIT's) Weekly Chart

Chart 6  Volatility (VIX) Index Weekly Chart

Interest Rates


Short-term interest rates in the US look poised to kick significantly higher.
Chart 7a – Australian 3-year bonds Weekly Chart

Chart 7b – The US 10-year Interest Rate Monthly Chart

Chart 7c – The US 2-year Interest Rate Monthly Chart

American Equities

American indices showed significant signs of cracking last Friday night when the Dow fell almost 400-points (2.1%) however this week normality appeared to return, although day-day trading was choppy. Markets recovered reasonably well with the S&P500 only 2.4% below its all-time high and the particularly resilient NASDAQ 0.4% below its equivalent milestone.
Longer-term the one day large fall still looks like no more than a blip BUT because recent fresh all-time highs in the Dow, S&P500, Russell 3000 and NASDAQ  have been achieved caution is warranted - note the NYSE Composite and Russell 2000 Indices still have not made fresh all-time highs in 2016.
The S&P500 will generate a sell signal on a break under 2100 and a buy over 2160 - Friday the index closed at 2139.
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 Index Daily Chart

Chart 10c – US S&P500 Banking Index Monthly Chart

Chart 10d – US S&P500 Healthcare Index Quarterly 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

Overall European indices are tricky and neutral, and potentially negative, at present.
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 ready for a few weeks sideways choppy style price action.
Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Weekly Chart

Chart 21a – Emerging Markets MSCI ETF Weekly Chart

Chart 22 – Japanese Nikkei 225 Index Monthly Chart

Australian Stocks

The Australian stock market remains average at present and appears to have formed a significant top at 5611.
Chart 23 – BHP Billiton ADR ($US) Monthly Chart

Chart 24 – BHP Billiton (BHP) Weekly Chart

Chart 25a – Woodside Petroleum (WPL) Monthly Chart

Chart 25b – Origin Energy (ORG) Monthly Chart

Chart 25c – Oil Search (OSH) Weekly Chart

Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart

Chart 27 – Fortescue Metals (FMG) Monthly Chart

Chart 27b – Independence Group (IGO) 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) Daily Chart

Chart 33 – ANZ Bank (ANZ) Weekly Chart

Chart 34 – Westpac Bank (WBC) Daily 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 – Sydney Airports (SYD) 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) Weekly 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 struggled since 2011 falling ~30% against the $US as markets question the strength of the Australian economy post the commodities boom. A significant part of the recent bounce from the 68c area was courtesy of a weaker $US. However the $US has regained some strength as higher rates for the US are factored in by markets, we continue to eventually targeting the ~65c region.
The $US is 50-50 just here but a kick over 102 would complete a classic advance structure, perhaps fresh signals of Fed rate hikes ahead can fuel this advance - signals remain very choppy on this front.

Chart 59b– The $US Index Monthly Chart


Gold rallied very well from multi-year lows last December but it has reached our initial target area hence short-term caution is warranted. Gold stocks are currently looking weaker than the underlying precious metal.
Copper remains in a negative downtrend on a longer term basis targeting prices over 20% lower.
We are now questioning our Crude Oil $US60/barrel target after recent weakness. Similarly to gold, oil stocks are weaker than the underlying oil price implying market optimism got ahead of itself.
Iron Ore achieved our +$US70/tonne target, technically we remain now neutral / bearish.
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 18/09/2016. 9:00AM.
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