Market Matters Report / Market Matters Weekend Report 7th August 2016

By Market Matters 06 August 16

Market Matters Weekend Report 7th August 2016

Market Matters Weekend Report 7th August 201


Last week stocks had a well-deserved breather after the strong gains since late June. The ASX200 closed down 73-points (-1.2%) overall a stellar effort considering the 11% gain over the previous 5-6 weeks. The ASX200 corrected 146-points from its Monday high and the SPI futures 154-points - almost identical in magnitude to the 153-point pullback at the start of July. For the traders last week we saw a great example of the 1st trading day of a month which is statistically very strong playing out as expected and it was not surprising that it proved to be the high of the week. In the last Weekend Report we said:
"We remain bullish the ASX200 while the 5400 support area remains intact and will look to buy a ~125-point retracement" - Market Matters 31/7/2016.
The ASX200 now looks set to open around the 5535 level on Monday, up ~40 points, well above our identified buy area for the overall market which was achieved in the middle of last week. August is suddenly setting itself to be a replica of July i.e. a pullback early in the month followed by a strong rally ignited by strong US employment data, which is released on the first Friday of every month. In July after strong US employment data, the ASX200 surged almost 100-points on Monday, breaking over the 5300 resistance area. Technically we believe while the ASX200 can hold over 5500 next week it should advance strongly towards the 5650 area during August - yet again proving those who are negative the market wrong (for now) at least.  
ASX200 Daily Chart
The NASDAQ is very often the leading index for US stocks which is hardly surprising considering its made up of stocks like Google, Apple, Microsoft, Facebook, and Amazon. Last night the Tech. Index rallied 1% to close at fresh all-time highs, but other US indices like the NYSE Composite and Russell 2000 remain ~5% below their equivalent targets. Hence while the risk / reward slowly diminishes for the buyers with every strong positive day, we remain still bullish US stocks targeting a further 5-6% upside.
US NYSE Composite Index Monthly Chart
In our opinion stocks are in the utopian position at present BUT it will not last forever, hence we are still wearing our sellers hat looking to slowly reduce market exposure into strength. Remember, we are 91% invested in this market enjoying the upside however our main focus remains identifying our ideal selling areas. Globally central banks are embarking on yet more coordinated economic stimulus (QE) to try and awaken the sleeping giants - inflation and growth. Last week we had the RBA cut interest rates to an all-time low of 1.5% and the UK cut rates to 0.25% plus added QE measures, Japan expanded its QE at the end of July and importantly the US is not raising interest rates although its economy is improving. It should be remembered that the Fed raised rates last December and were then targeting 4 further increases in 2016 but the markets are now saying one at most for the entire year!
The current strength in world stock markets is not a reflection of strong economic activity but one of central banks flushing the system with "free money", leading those investors who look at equity valuations on old matrices to sit on record levels of cash as they miss out on this artificial appreciation in asset prices.  Our medium term view remains that once stocks have finished this last leg of the bull market since 2009 they will endure a painful 20-25% fall.
US S&P500 Monthly Chart
Interest rates feel close to / at their nadir.  Talk of interest rate hikes is rare locally and we now see most analysts predicting one more cut next year – however it seems to us that perhaps 1.5% is it. We simply cannot believe negative interest rates are anything but the fuelling of an interest rate / bond bubble e.g. you lend the Swiss Govt. 1000 Swiss Francs today they will kindly give you back less than 970 in 30 years time, with similar numbers applying to most of Europe and Japan.
The obvious question we should be asking is where would interest rates be if central banks were not aggressively buying bonds? We believe this "financial engineering" is creating a great blow off top for stocks but the music will stop relatively soon and investors will need all the help they can get! A quote of bond legend Bill Gross sums up perfectly how we feel about interest rates:
“Global yields at their lowest in 500 years of recorded history and $10 trillion of negative rate bonds. This is a supernova that will explode one day.” - Bill Gross.
At Market Matters we have strong views on what sectors will do the heavy lifting for this final advance for stocks: We like - Insurance, resource and energy stocks, plus financials and banks (CBA needs to perform this week).
We don't like - The defensive stocks that have had a great 5 years e.g. Telco's & Healthcare and stocks sensitive to interest rates rising e.g. Real Estate Stocks.
This does not mean that the Healthcare sector will not advance further but we do feel it will underperform the overall market
In the resources sector we are currently long IGO haven recently taken profit in South32. We believe it's actually time to focus on the recent dawdlers with BHP and RIO catching our eyes for short term / trading opportunities. Historically the resource sector enjoys this current style of recovery only once in a decade and it usually lasts 9-12 months hence we are likely to have 1-2 quarters left which ties in with our overall short term view for stocks.
Independence Group (IGO) Weekly Chart
Standout technical chart of the week
Friday nights strong employment numbers has reignited confidence in the US economy, and the $US as investors bring forward their estimates for the next rate rise in the US. All this is bad news for gold that has enjoyed an excellent 2016 to date. While we are bullish gold on a medium term basis we now believe the profit takers will hit the sector hard over coming weeks with up to 10% downside looking likely. Hence we are likely to remain on the sidelines when it comes to buying Regis Resources (RRL) and Newcrest Mining (NCM) until this correction unfolds.
Gold ETF Daily Chart
  • No change for now; we remain bullish equities, short term the ASX200 should now hold 5500.
  • Taking into account our positive view on US stocks 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 3-6 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" slowly lightening equities exposure into strength but no hurry yet.
What Matters this week
The ASX200's was set to open up ~40 points on Monday, acceleration up would not surprise after strong employment data in the US.

Potential Investing opportunities for the coming week(s)

  • We are happily ~91% committed to stocks and expect to be relatively patient in reducing this position.
  • We are also looking out for good risk / reward short term opportunities in the resources sector, even after recent strong gains, with RIO / BHP currently looking the best value.
  • We will consider selling our IGO holding if the stock rallies through $4.50 next week.

* Watch out for trading alerts.

Potential Trading opportunities for the coming week

Remain long the ASX200 with stops now under 5500.
Portfolio / Trade Holdings
The Market Matters Portfolio:
We are sitting on 9% cash after we took profit last week in S32 -  overall we are still wearing our "sellers hat" and may look to sell IGO early In the week around $4.50. ANZ gives a trading update on 
Tuesday and CBA reports on Wednesday which will set the tone for our market next week (post a good rally on Monday)
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. A break to new highs for the month, over 5611, would strongly indicate a test of the 5700 area.
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 with a number of them making fresh all-time highs last night after the positive employment data. We are still bullish for the next few months / quarters, seeing ~5-6% more upside for the S&P500.
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 has almost turned bullish.
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
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 next week is likely to be very important  for the next few weeks / months.
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) 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 struggled as markets factor in further potential rate cuts for Australia. A large degree of the recent bounce from the 68c 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 relative strength may continue and frustrate the RBA.
Chart 59b– The $US Index Monthly Chart
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 the $US strength resumes. Ideal buying is any "ABC" style retracement towards $US1200/oz.
Copper remains in a negative downtrend on a longer term basis.
Crude Oil made a false break below $40 before rallying well last week. We still expect US$60 to be achieved
Iron Ore exploded achieved our +$US70/tonne target, technically we are now neutral but a bounce over $US80/tonne would not surprise before rolling over the and retesting prior lows.
Chart 60 – Gold Monthly Chart
Chart 61 – Copper Monthly Chart
Chart 62 – Crude Oil Monthly Chart

Chart 63 – Iron Ore Monthly Chart

The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000

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