Market Matters Report / Market Matters Weekend Report Saturday 6th February 2016

By Market Matters 06 February 16

Market Matters Weekend Report Saturday 6th February 2016

Market Matters  Weekend Report Saturday 6th February 2016

Market Matters Weekend Report

I hope you are all having a great start to the weekend!

Overview
As a huge part of the world's population celebrates Chinese New Year this weekend we postulate what sort of changes the year of the monkey will bring following on the heels of an eventful year of the sheep (the followers).

Market Matters major call of 2016 is that we will see some major changes in trend e.g. the $US to weaken, resource stocks / emerging markets to outperform and the end of the US bull market that has been in existence since March 2009.

There is no doubt that equities are currently in a very pessimistic mood where any bad news leads to dramatic market reactions as witnessed last night with LinkedIn plunging 44% after announcing disappointing revenue and growth forecasts for 2016.

The local market is trading at the lowest valuation levels since the GFC when we compare current Earnings Per Share (EPS) and projections for the next 12 months; BUT with EPS growth so low, and basically not being believed, it's easy to understand why buying appetite only emerges into strong pullbacks.

On an individual stock level, the market is in one of the most ruthless moods any of us can recall; any mediocre / poor corporate news leads to a dramatic stock re-rating e.g. Last week Ansell -25%, Macquarie -11% and REA Group -6.5%.



The largest question we are asking ourselves at the moment is whether the US has already topped and a much more significant correction is underway, or will we see one final high in line with our December forecast? The current price action is clearly concerning.

When you stand back and look at the US stock market, technically it remains bullish although short term a test of 1800 looks very likely for the S&P500 (another ~4% lower).

The recent price action of some local stocks is very much in line with our view of trend changes for 2016. Consider the moves, identified below, of some stocks during the first week of February where the ASX200 is down only 0.3%, compared to last year's move in brackets when the ASX200 fell 14.5%:

Weak stocks of the last month:

1. Domino Pizza (DMP) $52.35 -10% (+93.4%) - We are neutral at present but the stock should be supported ~$50.

 2. Challenger Group (CGF) $7.52 -9.4% (+16.4%) - We remain technically bearish targeting the $6 region.

 3. REA Group (REA) $49.36 -6.5% (+1.7%) - We are bearish targeting the $40 region.

 

Strong stocks of the last month:

1. Oil Search +5% (-15.5%) - It remains our favourite stock in the struggling energy sector, strong outperformance may indicate more corporate activity on the horizon.

2. Telstra (TLS) +4.6% (-14.2%) - We are now neutral TLS as buying has emerged due to the companies stability in a weak economy.

 3. Fortescue (FMG) +6.5% (-25.3%) - We remain bullish targeting up to the $2.50 region.

 

Importantly, please note there are plenty of stocks / sectors that have continued last year's weakness (and occasionally strength) into 2016, in particular the banks, but what we are trying to illustrate is "don't get married to a stock / sector".

Market Matters believes that optimum returns will be generated in 2016 by investors who are more active than was required over the last decade. We must be prepared to take both losses and profits. For example, the selling into strength that we advocated in late December enabled us to recently take some resources exposure plus average our small (reduced) holding into Ansell's panic selling last week. Conversely, we wish we had also reduced our banking exposure in late December because we believe the sector is slowly presenting excellent value.

The performance from the Emerging Markets and resource based stock markets was very encouraging last night, largely ignoring the Dow falling over 200 points (1.3%) and the NASDAQ down 3.4% - again the recently stronger NASDAQ leading the decline. The Canadian S&P Composite Index was down only 0.1%, the emerging markets ETF -1.1% and BHP -22c (1.3%).

Market Matters remains positive the local resources sector but only recommends buying weakness as memories of the recent rout in the sector will remain with many.

Standout technical chart of the week

REA Group (Realestate.com) fell 6.5% last week after announcing its 3rd quarter trading update. While the numbers were fine the stock is trading on a P/E ratio of over 30x compared to the market at under 15x.

Markets around the world are telling us very clearly that to maintain these lofty valuations companies have to be knocking the numbers out of the park.

Market Matters is now bearish REA targeting a healthy pullback back under $40.

Summary

  • No major change. We are cautiously bullish the US stock market looking for fresh all time highs BUT we remain bearish medium term.
  • We are short to medium term bullish the resources sector and believe this will lead to out-performance by the Australian market – unfortunate for those many investors who have flocked to overseas markets looking for positive returns. 
  • Market Matters advocates a more active investment approach than has worked for the majority of the last decade.

 

* Watch closely for Market Matters alerts via SMS and email.

What Matters this week

The ASX200 looks likely to open down around 50 points on Monday following Friday’s 212 point fall by the Dow.

Potential Investing opportunities for the coming week

  •  Market Matters still advocates patience around current levels but is a happy buyer of resource stocks into short term weakness.
  •  We also like Westfield and Mirvac at current levels but would be sellers of Challenger and REA Group.

 

Potential Trading opportunities for the coming week

  • Market Matters is a happy buyers of resource stocks into short term weakness for a trade as well as an investment.
  •  We are trading buyers of the ASX200 if the S&P500 again tests the 1800 area i.e. ~4% lower.

 

Portfolio / Trade Holdings

The Market Matters portfolio had a week of two halves with weakness in most sectors offset by our recent exposure to the resources sector - the ASX200 was down 0.9% for the week.

  • Ansell (ANN) -25% - medium term investment.
  • ANZ Bank (ANZ) -0.5% - medium term investment.
  • Bendigo Bank (BEN) -4.4% - medium term investment.
  • BHP Billiton (BHP) +5% - short term trade.
  • Commonwealth Bank (CBA) -2.3% - long term investment.
  • Healthscope (HSO) +1.4% - medium term investment.
  • Seek (SEK) -5.5% - medium term investment.
  • Suncorp (SUN) -2.2% - medium term investment.
  • Oil Search (OSH) +3.4% - short / medium term trade.
  • Mirvac (MGR) -0.5% - short / medium term investment.
  • Fortescue (FMG) +5.8%- short / medium term investment
  • Rio Tinto (RIO) +6% - short / medium term investment

 

  • Cash position now ~7.5%.


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 German 2-year Interest Rate Monthly Chart


American Equities

The American indices have experienced a technical back flip this week and look to be following the Russell 2000 below August 2015 lows:

· The Dow is the only index that now looks 50-50 whether August low will hold as it achieved its wave symmetry target last year.

· The NASDAQ's wave symmetry target is ~3500 i.e. a massive 18% lower.

· The S&P500's technical retracement target is ~1845 i.e. 4% lower.

· The Russell 3000's technical retracement target is ~1085-1090 i.e. 3.5-4% lower.

· The Russell 2000's technical retracement target is ~1010 i.e. 3.5% lower.

· The NYSE's technical retracement target is ~8925 i.e. 6% lower.


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 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

Most European Indices have struggled over recent months, since the ECB disappointment.

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 been extremely volatile since the start of 2016 in sympathy with the recent uncertainty in Chinese stock market and weakness / devaluation of the Yuan.

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

Stocks with sustainable yield, offshore earnings and healthcare in general have been standout sectors over recent times but some resource stocks are now looking interesting. We're no longer bearish the resources sector from a risk / reward trading perspective and in fact some low risk buying opportunities may actually arise in 2016.

Chart 23 – BHP Billiton (US) Monthly Chart


Chart 24 – BHP Billiton (BHP) Monthly 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 – Barrick Gold Corp. (US) Monthly Chart


Chart 31b – Market Vectors Gold ETF Daily Chart


Chart 32a – Commonwealth Bank (CBA) Quarterly Chart


Chart 32b – Commonwealth Bank (CBA) Monthly Chart


Chart 33a – 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) Weekly Chart


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


Chart 38 – AMP Ltd (AMP) 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 55 – Crown Resorts (CWN) Monthly


Chart 56– Myer Holdings (MYR) Weekly


Chart 57– JB Hifi (JBH) Monthly


Chart 58– Harvey Norman (HVN) Monthly


Chart 59a– Australian Dollar (AUD) Monthly Chart
The $A continues to decline with major technical support down ~60c.


Chart 59b– The $US Index Monthly Chart



Commodities

Gold has recently rallied very well from multi year lows.

Copper remains in a 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 held the $US30/barrel area recently but has not managed to rally.

Iron Ore remains close to multi-year lows and like Crude Oil has so far failed to achieve any meaningful bounce.

Chart 60 – Gold Monthly Chart

Chart 61 – Copper Monthly Chart

Chart 62 – Crude Oil Monthly Chart


Chart 63 – Iron Ore Monthly Chart


This report contains factual information and does not constitute financial advice. The information is not intended to imply any recommendation or opinion about any financial product.

Have a great week, from Richard and the Market Matters team

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