Market Matters Report / Market Matters Weekend Report 9th October 2016

By Market Matters 09 October 16

Market Matters Weekend Report 9th October 2016

Market Matters Weekend Report 9th October 2016

Overview
 
The ASX200 was again choppy last week trading in an extremely tight 57-point range but it managed to close up 0.6% while US stocks were down less than 0.5%. The internals of the market were not as quiet with the Banking sector +1.4%, Financials +2%, Energy +4.6% but Real Estate was -4.1%, Telco's -6.3% and gold stocks were hammered. The market simply embraced with a vengeance the higher interest rate environment moving forward that we have been preaching. We continue to believe this market rotation due to anticipated higher interest rates has much further to play out and still like banks plus the energy stocks at current levels.
 
Friday night saw the US employment data come in close to expectations which was probably a relief to Janet Yellen, and the Fed, who we are sure would like to keep in the background ahead of the US election on the 8th of November - we continue to believe Hilary Clinton will win the race for the Whitehouse which is likely to be a relief to equity markets. It's actually hard to see a catalyst for US stocks to move significantly from current levels until after the election. This fits the statistic we mentioned in a morning report last week i.e. in a tight election race US stocks usually trade sideways into the vote before rallying ~4% in November whoever wins. Next week the US earning season starts on Tuesday with the market trading expensively on a P/E of 17x compared to a historical average of only 15x but this is offset by overall low expectations for company earnings, probably net neutral for the market but expect some individual stock volatility.
 
When we switch our attention to the local market the two statistics we have been quoting are; on average the index gains 0.8% in October but CBA gains 6.6%. So far this October the ASX200 is up 0.6% and CBA is +2.7%. While the market has been choppy for a few weeks it is slowly evolving as anticipated. We remain bullish into Christmas with a potential target of ~5700-5800 i.e. initial resistance at 5725, or a 4th swing high 200-points above the previous.
 
ASX200 Weekly Chart
 

 
 
Another encouraging sign for the local market is the position of the highly correlated Emerging Markets Index, it looks ready for a ~5% advance which bodes well for the ASX200.
 
Emerging Markets ETF Weekly Chart
 

 
 
The aged care sector has been slammed over the last few months given fears that changing government regulation will impact future earnings.  We cannot forget that Australia is not flush with cash at present (in terms of government) and although there are plenty of reasons to like the space commencing with an ageing population, it’s hard to see a generous government short-term. This of course is speculation and we, like the companies themselves don’t know what the Government will do and it’s this ‘fear of the unknown’ that is causing severe weakness in share prices. We are inclined to remain neutral at present.
 
Technically EHE would be interesting as an aggressive buy around $2 and Japara Healthcare (JHC) around $1.35, in both cases looking for false breaks to new lows . Regis Healthcare (REG) is giving no signals at present.
 
Estia Health (EHE) Weekly Chart
 

 
 
Japara Healthcare Weekly Chart
 

 
 
Our portfolio has enjoyed a great few weeks except one very disappointing story - Vocus Communications (VOC).
 
We underestimated how the market would dump VOC shares following some issues within the sector and specifically within VOC over the past few weeks. It’s worth recalling that VOC raised $652m at $7.55 per share only a few months ago in a deal that was oversubscribed.  The stock is now over 25% below this raising price. We have been looking to exit the stock for the last few weeks but have been wrong in our expectations of how far it could fall. Major rival TPG has also collapsed 33% in the last month, which is actually more than VOC.
 
The market suddenly became very concerned around; 1. Margins following the downgraded guidance from competitor TPG. 2. The integration of recent acquisitions of M2 Group and Amcom, plus more recently Nextgen & 3. The potential for an earnings downgrade on the back of points 1 & 2.
VOC shares are now priced for a messy and poor outcome trading on 15.3 times consensus earnings for 2017 and just 13 times 2018. Put simply, the market does not believe they will achieve the earnings they have guided to.  
 
Our view is the market is being too harsh, and this view is supported by Director Anthony Grist who bought 250,000 shares on the market last week. An investment of $1.57m at about $6.30 a share. A sign of confidence.
 
If we had no position we would buy VOC as an aggressive play targeting $6.50-$7 area hence we are not going to panic and will look to exit our position in this region. We provided more detail on VOC’s woes in this report during the week
 
Vocus Communications (VOC) Weekly Chart
 

 
 
Standout technical chart (s) of the week
 
Not a great deal standing out this week that we have not covered previously hence we are covering a stock which has hurt most Australian investors at one time over the last 9-years - QBE. Prior to the GFC QBE was one of the local glory stocks that performed fantastically following a sharp selloff in 2001, the stock advanced from under $4 to over $35 without any noticeable pullbacks, a great run. The trouble this caused was investors then commenced a journey of bottom picking as the stock fell from $35.49 to the recent $9.24 low, continuing to fall as management continually disappointed and macro circumstances presented major headwinds despite global stock markets moving higher.
 
Rising US interest rates and a weakening $A, both of which we are forecasting moving forward, increase QBE's profitability. While we are not a great fan of the company at present nor is the market, meaning that surprises could easily be to the upside.
 
We believe QBE has bottomed at $9.24, hence buy under $10 initially targeting $12 and potentially $15 with stops at $9.20.
 
QBE Insurance (QBE) Monthly Chart
 

 
 
Summary
 
No change, equities continue to "climb the wall of worry" with US stocks less than 2% below their all-time high. Our view is this will continue for the next 3-6 months and investors should become more active than usual taking decent profits when they present themselves and considering stocks when they get hit hard.
 
US equities have reached  fresh all-time highs, our strategy remains clearly defined - we are wearing our "Sellers Hat" looking to slowly lighten equities exposure into strength.
 
 
What Matters this week
 
The ASX200's is set to open basically unchanged on Monday, we remain bullish but short-term is tricky.

Potential Investing opportunities for the coming week(s)

No change, we are comfortable with our general asset allocation and will continue to reduce overall index exposure as decent opportunities present themselves.

Potential Trading opportunities for the coming week

Refer to standout chart of the week - We believe QBE has bottomed at $9.24, hence buy under $10 initially targeting $12 and potentially $15 with stops at $9.20.
 
 
** Watch out for trading alerts**
 
Portfolio / Trade Holdings
 
The Market Matters Portfolio:
 
https://www.marketmatters.com.au/blog/post/market-matters-stock-positions-7th-october-2016/

We are happily overweight the banking sector and have recently purchased the Mantra Group (MTR) reducing our cash position to 6%. VOC is a concern and a position that we need to manage our way out of.
 
Australian ASX200
 
The ASX200 again performed well last week again closing in striking distance of 5500 resistance area. A close over 5500 would be very bullish technically and considering the bullish seasonality for the banks in October it feels close at hand. Short-term the ASX200 feels a bit tougher and another test of 5400 would not surprise.
                                                                                                                  
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 ready to move significantly higher but we may see a few more weeks sideways action first.
 
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 remain bullish medium term targeting ~6% higher prices, the S&P500 ideally will now hold the 2140 area. The NASDAQ, usually the "leading" US Index tested all-time highs last week again implying higher prices across other US indexes.
 
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, the UK FTSE continues to stand out as the bullish index as it benefits from a weaker pound post BREXIT but it has now reached major resistance.
 
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 Hang Seng and China indices look ready for a few more weeks sideways choppy style price action. The Emerging Markets still look set to pop 4-5% higher and the Japanese Nikkei feels ready to "pop" to the upside.
 
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 had another choppy but net neutral week with  the Energy and Financial sectors strong but Telco, Gold and Real Estate stocks lower. We remain net bullish as banks enjoy their seasonally strongest month of the year.
 
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) Weekly 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) Weekly Chart


Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart


Chart 38a – AMP Ltd (AMP) Monthly Chart 

 

Chart 38b – Henderson Group (HGG) Weekly Chart 


Chart 39a – Sydney Airports (SYD) Monthly Chart

 


Chart 39b – Mantra Group (MTR) Daily 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 (REA) 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 56b– Blackmore's (BKL) Monthly 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 is very trickly at present, we continue to eventually target the ~65c region but short-term we "just" favour ongoing strength for the $A over the psychological 80c area.
 
The $US is 50-50 just here technically although we have a "Gut feel" positive bias, a kick over 102 would complete a classic advance structure, currently the market is giving us no clues.
 

 
Chart 59b– The $US Index Monthly Chart
 
 
 
Commodities
 
Large cracks appeared in gold last week as it fell ~US60/oz and  a pullback towards $US1200/oz support now feels a strong possibility.
 
Copper remains in a negative downtrend on a longer-term basis targeting prices over 20% lower.
 
Our target for Crude Oil of +$US60/barrel again looks on track after recent OPEC meeting.
 
Iron Ore has achieved our +$US70/tonne target, technically we remain now neutral / bearish until further development.
 
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 9/10/2016. 9:00AM.
 
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