Market Matters Report / Market Matters Weekend Report 31st July 2016

By Market Matters 30 July 16

Market Matters Weekend Report 31st July 2016

Market Matters Weekend Report 31st July 2016

 

Overview
 
Last week global equities remained firm but again with diminishing momentum - the ASX200 advanced 64-points (1.2%) while the S&P500 was more or less unchanged. After the explosive nature of the rally since late June we will consider a few days / weeks consolidation as a positive. When we look at the ASX200 on a weekly basis a test of 5600 would not surprise especially on Monday / Tuesday - the first day of the month is statistically a strong day for Australian stocks and the market is expecting an interest rate cut from the RBA on Tuesday – taking the official cash rate to 1.5% - remember we have relatively high interest rates compared to almost all of the developed world plus the $A rallying to 76c will be making the RBA uncomfortable. A rate cut decision may become a classic "buy on rumour sell on fact" event and no cut would likely disappoint the market hence around the 5600 area the short term risk / reward is no longer bullish. Remember everyone expects the market to soar on a rate cut but the below quote so often proves correct in the stock market:
 
"If you can find something everyone agrees on, it's wrong." -  Mo Udall
 
We remain bullish the ASX200 while the 5400 support area remains intact and will look to buy a ~125-point retracement
 
ASX200 Weekly Chart
 
 
Equity markets continue to rally yet the press remains full of negative stories. We agree to some extent and think this artificially fuelled rally will end in tears BUT not yet! Fund managers are sitting on record levels of cash and slowly they are being forced to deploy some of this money to work in stocks. Central banks have only just started again injecting yet more liquidity and this is being reflected by the rally in assets including stocks – importantly, we believe they have further to go with these measures!
 
Our major goal for the rest of 2016 / early 2017 is to identify when we believe this impressive but mature bull market will run out of steam and it becomes time to get off the merry-go-round. Our favoured 3 charts currently to watch for this top and the important triggers we are waiting for are below:
 
1. US S&P500 Healthcare sector - We are targeting the 925 area for a top i.e. ~6.5% higher.
2. US Russell 2000 index - we are targeting fresh highs, around 1350 for this index i.e. 10% higher.
3. Suncorp (SUN) - SUN reports next week which obviously may change everything very quickly but the SUN chart is technically very strong targeting over $15.50 prior to a significant correction i.e. 14% higher!
 
Other stocks that technically should see fresh highs in 2016 prior to correcting are Vocus (VOC), Independence Group (IGO), Wesfarmers (WES), Real Estate Group (REA) and Fortescue Metals (FMG).
 
1. US S&P500 Healthcare sector Quarterly Chart
 
 
2. US Russell 2000 Monthly Chart
 
 
3. Suncorp (SUN) Monthly Chart
 
 
 
Our current focus remains identifying stocks that may provide a "quick" 10-15% return, with good risk / reward, as we slowly reduce our overall stock market exposure - IGO was a good example of this last week. While we are currently in "sell mode" we reiterate the feeling that patience is warranted before mass selling  but increasing our cash position back towards 10% would be nice for investing flexibility.
 
We have been long Westpac since April when we bought the stock around $31.50 looking for a "free" 94c fully franked dividend, any strength above our entry level will be considered seriously next week for a number of reasons; 1. to take a small profit 2. reduce our large bank position 3. satisfy the reason for the investment and 4. Importantly, bolster our cash position back over 10%.
 
Last week the Emerging Markets Index again closed at fresh 2016 highs, our preferred scenario remains it extends for another ~10%. Australia and especially our resource stocks have a strong correlation to the Emerging Markets hence our view that local resource stocks like S32 and IGO have further upside as investors search for value in a relatively expensive market.
 
We continue to watch the gold sector and Fortescue Metals (FMG) for good risk / reward entry levels.
 
Emerging Markets ETF Weekly Chart
 
 
We were fortunate to have sold our Graincorp (GNC) holding before it plunged ~8% last Wednesday when the news emerged that Archer Daniels Midland were trying to sell their $400m stake in the company. The news they could not get a satisfactory bid for all / part of their 19.99% holding in the company was particularly negative, and now there’s this overhang of stock with no major buyers between $8.50 and $9. I.e why would an institution buy a large line of GNC on market when they know there’s a big seller happy to offload below market prices….
 
The news has now just emerged, after Fridays close, that Shell has labelled its 13.6% stake in Woodside (WPL) as an asset for sale. There is no guarantee the $3bn worth of stock will hit the market anytime soon but Shell's CFO said last night "there was not a long-term strategic intent to hold". Whatever eventuates short term it remains an overhang for WPL and to a lesser extent the whole sector - it's a very large holding. The oil price is approaching our correction target area hence any aggressive selling in the sector over coming weeks may prove attractive to us.
 
Woodside Petroleum (WPL) Monthly Chart
 
 
 
Standout technical chart of the week
 
Over recent weeks we have been fortunate (hopefully) to have our target entry levels for two stocks handed to us on a plate courtesy of capital raisings. In both cases the stocks were on our "buy radar" and the raisings took the stocks into our previously identified ideal buy regions. This demonstrates the importance of planning trades / investments, hence enabling quick reactions to news / opportunities:
 
Independence Group (IGO)  $4.02- Last week IGO raised $280m to strengthen its balance sheet. In our opinion a smart / opportunistic move after the strength in its share price during 2016. Interestingly the placement was fully underwritten at $3.75 demonstrating healthy appetite from fund managers at this level. The knee jerk sell off from the stock enabled us to buy close to $3.80 which is currently showing a healthy ~5% profit. We are bullish IGO, a diversified miner, targeting the $4.70 region.
 
Vocus Communications (VOC) $8.93 - VOC bought Nextgen in late June for $809m, they issued capital at $7.55 per share, this enabled us to get long when the stock spiked lower on reopen, touching $8.20 per share - we are showing a healthy 7% profit based on Fridays close. We believe the market got it wrong early with the sell off and it seems a sensible acquisition, we are bullish VOC targeting close to $10.
 
After capital raisings it often takes a few weeks to wash out the short term profit takers from the placing of "cheap stock" but as we are witnessing from VOC if the company is good quality and its trading an attractive price the buyers return.
 
Independence Group (IGO) Weekly Chart
 
 
 
Vocus Communications (VOC) Weekly Chart
 
 
Summary
 
No change from prior weeks, we remain bullish, especially the US / Emerging Markets. Taking into account our positive view on the S&P, US Healthcare Sector and Emerging Markets we do NOT believe it's time to sell stocks aggressively, just remain prudent on exposure. Stocks that have had a relatively tough 6/7 years are likely to perform well over the next 6 months.
 
Now US equities have punched through to fresh all time highs, our strategy has become clearly defined - we will be wearing our "Sellers Hat" lightening equities exposure into strength but no hurry yet.
 
 
What Matters this week
 
The ASX200's was set to open up ~10 points on Monday, some consolidation would not surprise after Tuesdays RBA interest rate decision.

Potential Investing opportunities for the coming week(s)

We are happily ~98% committed to stocks and expect to be patient in reducing this position. We are also looking out for good risk / reward opportunities in the resources / gold spaces, even after recent strong gains.

We will consider selling our Westpac holding if the stock rallies through $31.50 next week.
 
* Watch out for trading alerts.

Potential Trading opportunities for the coming week

Remain long the ASX200 with stops under 5400, buy any "abc" style pullbacks and or a retracement over 100-points.
 
Portfolio / Trade Holdings
 
The Market Matters Portfolio:
 
https://www.marketmatters.com.au/blog/post/market-matters-stock-positions-friday-29th-july-2016/
 
We are sitting on only 2% cash after our last week's purchase of Independence Group (IGO) - we are now wearing our "sellers hat".
 
Australian ASX200
 
The break over 5400 for the ASX200 has now transformed the resistance level of 5400 into clear support with the 5700 area as next resistance.
                                                                                                                  
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 having made fresh all-time highs even after BREXIT. We are still bullish for the next few months / quarters, seeing up to 10% more upside.
 
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 Banking Index Monthly Chart
 
 
Chart 10c – 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
 
European Indices have lost their BREXIT panic and are looking "ok" at current levels. The UK FTSE is very strong making fresh highs since August 2015, assisted by a weak Pound, but needs to hold the 6400 area. The German DAX is beginning to look constructive.
 
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 have shaken off the BREXIT surprise and are bullish led by the Hang Seng which is targeting further 5% gains.
 
The Emerging Markets Index is also looking excellent targeting a further +10% advance minimum.
 
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 is starting to make some decent gains but the Banks must continue to rally - CBA's report in August is likely to be very important  for the rest of 2016.
 
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) 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) 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 and perhaps two rate cuts for Australia. A large degree of the recent bounce from the 68c area was 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 may 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 good support around $40 and if held, should push to the $US60/barrel resistance area after what looks like an "abc" style pullback..
 
Iron Ore exploded achieving our +$US70/tonne target, technically we are now neutral but a bounce over $US80/tonne would not surprise at some point. Previously we have called a re-test of the $38 low in Iron Ore however when we overlay our bullish views on emerging markets it becomes difficult to see that play out. Now it seems a break of the previous ($70) seems more plausible.
 
Chart 60 – Gold Monthly Chart
 
 
Chart 61 – Copper Monthly Chart
 
 
Chart 62 – Crude Oil Monthly Chart
 
 
Chart 63 – Iron Ore Monthly Chart

 

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000
 
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 31/07/2016. 7:00PM.
 
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