Market Matters Report / Market Matters Weekend Report 8th May 2016

By Market Matters 08 May 16

Market Matters Weekend Report 8th May 2016

Market Matters Weekend  Report 8th May 2016


Last week the ASX200 gained 0.8% while the S&P500 fell 0.4%. The local outperformance was spurred by the surprise RBA interest rate cut to 1.75%, another one now being forecasted later in the year and our banking stocks free of any major skeletons when they reported this week. Term deposits are now paying between 2-3% unfranked compared to NAB yielding over 10% fully franked for investors who buy stock in the next few days, to gain 3 dividends over the next 12 months. This is an extremely compelling story for local investors who can benefit from the franking story BUT it feels that most retail investors are already very over exposed to the local banking sector and unfortunately in many cases are losing money. Lets quickly look at the big four banks, where they were trading last April / May, the level they raised money in 2015 and where they are today:

  • ANZ $25.14 - reached $37.25 and raised capital at $26.50.
  • Commonwealth Bank (CBA) $74.35 - reached $96.28 and raised at $71.50.
  • National Australia Bank (NAB) $28.19 - reached $37.91 and raised at $28.50.
  • Westpac (WBC) $30.80 - reached $39.85 and raised at $25.50.
The banking sector is still 24.9% below the highs of 2015 and only shares issued by Westpac and CBA last year are showing a profit but the stock is still down 22.7% from its highs of 2015. Toughening bank Regulations look likely to force the local banks to engage in another set of equity raisings to further strengthen balance sheets just when investors are becoming concerned with rising bad debts and as we all read numerous times each week, the Australian property market – which according to some is a ticking time bomb. While we are short term bullish our banks two factors make us cautious on both entry and target levels.
  • With many investors are losing money in the banks any further capital raisings are likely to be tougher to fill and a larger price discount may be required.
  • We remain of the view that CBA will continue to absorb last year's capital raising and consolidate its gains since 2011 for ~another 18 months - see chart 1.

In summary the banks still look good short and long term but medium term further consolidation is likely for ~18 months hence accumulation / buying should only be implemented on weakness. We practiced this with ANZ during the week, however we had clearly jumped the gun on Westpac a few days earlier. The US banking sector remains bullish and supportive of this view with the index targeting a break of their 2015 highs which is hard to comprehend at present - see chart 2.
Commonwealth Bank (CBA) Monthly Chart
The US S&P500 Banking Index Monthly Chart

The resources sector unfolded exactly as we cautioned last week with BHP -10.7% and RIO-7.4%, technically we are now bearish targeting a break of 2016 lows for both iron ore and copper - see chart 3. Subsequently we are now in "sit back and wait" mode for this sector ideally targeting further weakness prior to considering any purchases. Most analysts are now bullish the sector advocating buying into any weakness so if we do continue to fall some panic selling is easy to envisage.
Iron Ore Monthly Chart
When we come back to basics and look at valuations the ASX200 last week poked its head into the dangerous +16x region on a 12 month forward PE basis (PE = Price to earnings). Markets do often spend time overbought and oversold before being rerated, but over the last 25 years selling the market over 16x and buying it under 12x has proven successful. Current low interest rates are clearly supportive of stocks on a comparative yield basis as discussed above but not if the rate cuts fail to stimulate a struggling economy and companies profits wane. Combing both the valuation risk with the seasonal  influences (chart 4) explains why we are currently holding aggressive amounts of our portfolio in cash ~40%. We are not looking to buy the index at current levels just considering individual situations.
ASX200 Monthly Daily Chart

Standout technical chart (s) of the week

The US S&P500 is correcting the strong 16.6% rally since mid February with another 1-2 weeks choppy trading expected. If the market does grind down towards the 2000 area without accelerating it will provide an excellent springboard to rally to all time highs for US equities and we will become more aggressive buyers.
We are still looking for a reasonable 4-5% correction from US equities in May but fresh 2016 highs look a strong possibility afterwards. Locally we continue to believe that resource stocks will underperform as we anticipate a bounce in the $US after its 5.6% decline in 2016. Technically the banks look poised for further gains but with ANZ, NAB and WBC all going ex dividend shortly its likely to require offshore appetite to push the sector significantly higher - hedge funds are short the sector.

* Watch closely for Market Matters alerts via SMS and email.
What Matters this week
The ASX200's should open on Monday basically unchanged according to the futures but with BHP looking to open up over 2% this feels a little pessimistic.

Potential Investing opportunities for the coming week

We are looking at Seek again very closely, we like the company fundamentally and technically its now offering another solid risk / reward opportunity. We took profit back at the start of March around $16 but the stocks has now generated a buy signal with stops under $16.40.

* Watch out for trading alerts.

Potential Trading opportunities for the coming week

From a trading perspective markets are likely to be choppy next week and trading size should be set accordingly. We are buyers of the ASX200 early in the week around 5150 and sellers over 5320.
Portfolio / Trade Holdings
The Market Matters Portfolio:
Cash position remains at ~40% after we realised profits in Regis Resources (RRL).

Australian ASX200
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, a break under 17,450 required to turn this view negative / neutral short term.

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 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

Chart 14b – The Canadian Composite Index Daily Chart

European Indices

European Indices continue to struggle compared to their American counterparts - perhaps the potential exit of the UK from Europe is causing understandable concern.

Chart 15 – Euro Stoxx 50 Index Weekly 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

Asian indices have regained some stability and ok recent strength with other world indices. The Emerging Markets Index reached our target area and has commenced a pullback at least.
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

Resource stocks strong counter-trend rally is close to failure. Banks rallied last week after reporting with no significant surprises, led by the heavily sold NAN and ANZ.

Chart 23 – BHP Billiton (US) Monthly Chart

Chart 24 – BHP Billiton (BHP) Weekly Chart

Chart 25a – Woodside Petroleum (WPL) Monthly Chart

Chart 25b – Santos (STO) 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) Weekly Chart 

Chart 38b – Henderson Group (HGG) Daily 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 Hifi (JBH) Monthly Chart

Chart 58– Harvey Norman (HVN) Monthly Chart

Chart 59a– Australian Dollar (AUD) Monthly Chart
The $A continued to fall on Friday as the $US rallied and markets factored in two rate cuts for Australia.

Chart 59b– The $US Index Monthly Chart


Gold has recently rallied very well from multi year lows but has now hit our initial target area hence caution is warranted.

Copper remains in a negative downtrend on a longer term basis which is a very similar chart pattern to Newcrest Mining (NCM) and, unfortunately, we have all seen what happened there.

Crude Oil has looks set to continue with recent strength towards the $US60/barrel resistance area.

Iron Ore exploded recently achieving +$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

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

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