Market Matters Report / Market Matters Weekend Report Monday 7th October 2019

By Market Matters 07 October 19

Market Matters Weekend Report Monday 7th October 2019

Market Matters Weekend Report Monday 7th October 2019

The ASX200 experienced a bad start to October almost registering its worst week in over a year, the index finally closed the week down 199-points / 3% with two aggressive down days on Wednesday and Thursday quickly taking the index within striking distance of our short-term 6300 target. Only ~10% of the local market managed to close up on the week with the yield sensitive stocks enjoying the RBA cut to the Official Cash Rate, plus for good measure  markets are now factoring in an additional move to 0.5% in the coming months – central banks are throwing the kitchen sink in terms of monetary stimulus at their respective economies in an effort to stave off a recession. Overseas following some very poor manufacturing data mid-week and average employment numbers on Friday the US is now pricing in a rate cut by the Fed later this month.

Equity markets remain extremely rich from a valuation perspective until we consider bond yields (interest  rates), which of course we must. The puzzle remains a fascinating mosaic of economic factors and sheer market sentiment with two dominant influences from a day to day perspective:

1 – When the markets receive very poor economic date as we did on Wednesday with US manufacturing slumping to a 10-year low the “Recession” word dominates the financial headlines and equities really struggle.

2 -  Conversely when the data is only poor optimism appears to return that interest rate cuts may be enough to keep the post GFC economic expansion trundling along and stocks manage to rally aka Friday night.

The tussle between the bulls and bears continues with ASX200 basically treading water, albeit in a choppy / volatile manner, since mid-May. MM continues to believe we are in a market where we should sell strength and buy weakness but the elastic band has not yet been stretched enough in either direction to see us aggressively buy, or sell stocks.

Australian & US Official Cash Rate Chart

At MM we are maintaining a negative bias from a risk /reward perspective in the short-term with our ideal target still around the 6300 area for the ASX200 but with stock /  sector rotation dominating proceedings we’re not getting ahead of ourselves just yet. In fact on balance we are still 50-50 whether the US S&P500 can make a fresh 2019 high in October but we now don’t anticipate the local index to fully embrace such a move.

The SPI futures are calling the ASX200 to open up over 50-points this morning  following a strong bounce on Wall Street, for now we will maintain our negative bias towards the local index unless we can close back above 6675.

MM remains comfortable adopting a defensive stance around current levels.

ASX200 Chart

No major change again with US stocks, they tried to breakdown mid-week only to be saved by optimism around a Fed rate cut later this month, plus as we’ve outlined in previous reports we are in a period when a significant number of investors / fund managers are sitting on large cash balances looking to buy weakness. History tells us that its rarely that easy for the masses  - while MM expects US stocks to correct to the downside in October our main mantra at this stage is buy weakness & sell strength.

For the Russell 3000 we are sellers ~4% higher and buyers ~7% lower – remember patience is often your best ally with investing.

Some subscribers might find these market parameters too close but if we can buy / sell around 10% apart in an environment with almost 0% interest rates it’s a huge value add.

US Russell 3000 index Chart

No change with Asian indices, they remain “heavy” with the weakest index not surprisingly still the Hang Seng which cannot be enjoying the ongoing disturbing rioting and tensions on the streets of Hong Kong  – technically MM is targeting a break of Novembers low, or at least another 5% lower. This is not an index  which usually exerts a major influence on Australia although it is similar in that property prices are critical to the financial stability of Hong Kong and not surprisingly they are wobbling very badly – perhaps short-term positive for Australian asset prices as the resourceful residents of the old British colony look for a home for their funds.

MM is bearish the Hang Seng looking for another 5-7% downside.

Hong Kong’s Hang Seng Index Chart

Technically gold and  its related stocks now look good with our short-term target for the precious metal around 6% higher.

MM still likes gold stocks with our target for Newcrest (NCM) still ~$40 / over 10% higher.

Conversely the often related crude oil still looks very heavy and  we have no appetite for the sector at current prices e.g.  Woodside  (WPL) will only pop onto our buy radar over  5% lower.

Gold ($US/oz) Chart

Oil ($US/barrel) Chart

We still feel the key to equities and especially the relative sectors performance within indices is the plunging US 10-year bond yields. These relatively long-dated bonds have seen their yield more than halve over the last 12-months and they now sit a whisker away from both their 2019 low and all-time low set back in 2016. They have dropped aggressively over the last few weeks as US economic data has intensified concerns around a looming recession and hence further rate cuts by the Fed – as MM has been expecting over the last month. What we potentially  see evolving in Q4 is fascinating, especially from a  risk reward perspective:

1 – We  anticipate a break of the 1.44% low of 2019 and potentially the all-time low. We are  50-50 whether it’s a rapid drop or the next few weeks will see bonds go sideways.

2 – MM believes that a break below 1.44% will be a buying opportunity of yield / sell the underlying bonds from a risk / reward  perspective i.e. a major point of inflection for  interest rates  may be close at hand.

3 – Hence MM is looking towards the cyclical stocks as opposed to the in vogue growth names over the months ahead i.e. stocks that benefit from an uptick in the economy.

At MM we still believe US 10-year bonds will make fresh lows in 2019.

US 10-year Bond Yield Chart

1 –  The MM Platinum Portfolio

We’ve continued to follow our plan outlined over recent weeks, skewing the MM Platinum Portfolio to a defensive stance around the 6600 area looking to significantly increase our market / risk exposure around the 6300 for the ASX200 : https://www.marketmatters.com.au/new-portfolio-csv/

The major movement that caught our attention this week was an almost mass exodus from the cyclical stocks in favour of the yield sensitive plays, a clear multi-year trend that has accelerated in 2019. Hopefully we are seeing some capitulation in the classic “growth v cyclical” play because MM has its sights on a few cyclical names in Q4 of 2019. However 2 cyclical names which reside in the MM Platinum Portfolio are making us uneasy short-term:

1 –  BHP Group (BHP) $35.30  - BHP has failed miserably after spiking higher following the drone attacks on the Saudi refineries, technically a test of $30-$32 looks likely which coincides with the messy picture at best for crude oil.

2 – BlueScope Steel (BSL) $11.60 -  We have given BSL some room over recent weeks but to no avail,  a further 10% feels likely.

MM is considering closing both of our BHP and BSL positions.

BHP Group (BHP) Chart

BlueScope Steel (BSL) Chart

Conversely 2 stocks are looking very interesting to MM around current levels, we may even consider switching one or both of the above depending where markets re-open on Tuesday:

1 - New Hope Corp (NHC) $2.16 – Thermal coal producer NHC has been hammered this year but around $2, or ideally below, it will become attractive to MM especially with the stock yielding over 7% fully franked. Obviously its dependant on the demand for the underlying commodity but if we see central banks pump the global economies back to life coal prices should benefit.

2 – Sky City Entertainment (SKC) $3.67 – casino operator SKC has been treading water since its messy result in August but we like the business and its 5% unfranked yield. MM is bullish SKC targeting around 15% upside.

New Hope Corp (NHC)  Chart

Sky City Entertainment (SKC) Chart

2 MM Income Portfolio

No change, MM made a number of changes / tweaks on the 18th of September as we gave the portfolio a classic “Spring Clean”, our cash position remains at a modest 3% : https://www.marketmatters.com.au/new-income-portfolio-csv/ 

Bond yields have continued with their downtrend after bouncing in September, until we see any indication that bond yields have bottomed MM sees no reason to significantly reduce our market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The below chart illustrates how attractive CBA shares look from a yield perspective when compared to bond yields and the RBA Cash Rate i.e. effectively term deposits.

Bond yields & Interest Rates Chart

3 –  International Equites Portfolio

Sorry, still no change, our defensive stance towards global equities still feels correct and on Wednesday / Thursday I thought we would soon be pressing some buy buttons in earnest but alas at least for now US stocks have recovered. The MM International Portfolio is currently holding 72% in cash, 15% in stocks, 8% short the US index plus 5% in a US gold stock (Barrick Gold) : https://www.marketmatters.com.au/new-international-portfolio/

As we mentioned earlier the Hang Seng remains under tremendous pressure while the rest of Asia is far from bullish. Hence MM is still poised to buy into stocks related to  the region at lower levels e.g. start accumulating Alibaba (BABA) ~$US140.

Alibaba (BABA) Chart

4 - MM Global Macro ETF Portfolio

Again no change from last week with MM’s new Global Macro ETF Portfolio continuing to hold 4 positions, long the $A, silver and gold, plus we have a short US equities position leaving us holding 69.5% in cash after recently increasing our $A position into market weakness: https://www.marketmatters.com.au/new-global-portfolio/

Construction of this portfolio, similar to our International Portfolio, has been slow but opportunities are starting to present themselves with an updated slight mix of last week’s 2 outlined ideas:

1 - MM feels the huge outperformance by US stocks over Emerging markets is very close to its conclusion, were looking to initiate a spread trade accordingly:

Buy the Emerging Markets ETF (EEM US) https://www.ishares.com/us/products/239637/ishares-msci-emerging-markets-etf and add to our ProShares Short S&P500 ETF (SH US).

*Watch for alerts.

US S&P500 v Emerging Markets ETF Chart

Conclusion

We have structured or portfolios with a more conservative bias with the ASX200 in the 6600 area, we have been expecting a decent correction to the index and last week it threatened to unwind as the local index endured 2 major +100-point down days. The cyclical stocks bore the brunt of the selling as global bond yields plunged.

We feel the cyclicals might now bear the brunt of any short-term weakness but net MM feels it should present a decent buying opportunity in a number of related stocks / sectors.

*Watch for alerts.

Chart of the week.

Previous market darling Challenger (CGF) has endured an awful couple of years basically halving in price. Technically the stocks falling in pretty good rhythm with the last 2 bounces $1.45 and $1.46 respectively. If the last week’s sharp decline is ongoing MM will be an interested buyer around the $6 area.

MM likes CGF around $6.

Challenger Ltd (CGF) Chart

Investment of the week.

Another previous market favourite Washington H Soul Patts (SOL) has fallen over 30% from its 2019 high but we feel it’s now moved towards an attractive area from a risk / reward  perspective.

MM likes SOL into fresh 2019 lows.

Washington H Soul Patts (SOL) Chart

Trade of the week.

Oil and gas producer STO has rejected its fresh 2019 aggressively – similar to BHP. We are now bearish STO which has added weight to our concern with MM’s Platinum Portfolio holding in the BHP Group.

MM is neutral / bearish STO with a technical target under $6.

Santos (STO) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

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