Market Matters Report / Market Matters Weekend Report Sunday 10th December 2017

By Market Matters 10 December 17

Market Matters Weekend Report Sunday 10th December 2017

Market Matters Weekend Report Sunday 10th December 2017

A quiet week for the local market with the ASX200 trading in a tight 74-point / 1.2% range with any weakness met by solid buying. Next week will see the middle of December and herald the seasonally strongest fortnight for Australian stocks – its no coincidence this timing corresponds with ANZ, NAB and Westpac paying their substantial dividends i.e. between the 13th and 22nd of December. If we assume just a small portion of this huge pool of money being received by shareholders is reinvested back into a fairly illiquid Christmas Australian market it’s very easy to picture why local stocks love this time of year.

So far the ASX200 has oscillated between 5938 and 6012 this month - since the GFC the average range for a December is 282-points, with the lowest range still 188-points in 2012. Hence if 5938 remains the low for this December, with the top-side of 6012 likely to be tested on Monday morning, we have some simple logical targets:

  • An average December since the GFC targets ~6220 for the ASX200, while the quietest still has an objective of 6125.
  • The average gain for December since the GFC is +2.5% which coincidentally has 6120 as the likely conclusion for this month.

Remember 3 other characteristics for the month of December since the GFC:

  1. The average gain for December since the GFC is an impressive +2.5%, with only the one negative year in 2011.
  2. However this only tells half the story, in 3 out of the 8-years we formed a low mid-month before rallying strongly over 6%.
  3. In 6 out of the 8 years the high for December was in the last few days while in 2010 it was on the 23rd, only in the unusual 2011 was the high early on the 5th.

Hence MM remains bullish the ASX200 targeting a decent break over 6000 in 2017 / 2018 but the short-term correction towards the 5900 area for a trading buy opportunity is now feeling unlikely.

Considering we believe global equities feel vulnerable into 2018 MM will continues to watch these markets statistics very closely with a view to increasing our cash levels over the coming weeks, in both the Platinum and Income Portfolios.

Last week’s list of major winners / losers from the ASX200 shows a balanced market which only gained +0.1% but with increasing activity “under the hood” as winners notched up a victory by 7 stocks to 5 i.e. twelve stocks in the ASX200 moved by 5%, or more:

Winners : Magellan (MFG) +6.2%, Coca-Cola Amatil (CCL) +5.1%, Orica (ORI) +9.8%, Fairfax (FXJ) +5.7%, JB HI-FI (JBH) +6.6%, TPG Telecom (TPM) +6.4% and Telstra (TLS) +7.9%.

Losers : Downer (DOW) -5%, QANTAS (QAN) -6.5%, OZ Minerals (OZL) -5%, Vocus (VOC) -6.1% and APA Group (APA) -5.6%.

Today’s report will continue to look at how we’re  expecting the market to evolve into Christmas / 2018 and hence why subscribers should not be surprised to see our cash levels increase over the coming weeks / month.

ASX200 Daily Chart

MM’s December / January outlook for markets.

1 December is the time for the “changing of the guard” re performance.

Last week we saw Telstra (TLS) as a standout performer, gaining +7.9% although it’s still down -27.6% for 2017 before dividends. This is classic price action for December as many traders “square their books” before the Christmas break. This has also been very noticeable in the US where the high flying NASDAQ tech stocks have had some wild swings as profit taking appeared to aggressively kick into play.

We took profit on 50% of our TLS position as planned at $3.65 with a target of $3.85 on the balance i.e. 4.3% higher. TLS has guided to yield 6% fully franked basis Fridays close. At MM we now believe TLS is a trading / active play with the prize these dividends.

Telstra (TLS) Weekly Chart

The banks are also a sector that has not particularly enjoyed 2017 i.e. while the ASX200 has gained +5.8% CBA is -3.4% and ANZ -6.3% - these numbers are year to-date and do not include dividends. Our view at MM is the Australia banks are poised to rally strongly over the next few weeks and play some performance catch-up.

We are bullish CBA from Fridays close targeting the $82/3 area, or 3.5% higher.

Commonwealth Bank (CBA) Daily Chart

2 Watch the “placement” stocks

We are long 2 stocks that have experienced large placements in late 2017 which led to decent share price declines and we believe buying opportunities:

    1. Woodside Petroleum (WPL) – Shell sold its entire stake in WPL at $31.10 ($2.2bn) in mid-November allowing us to get long at $31.29.
    2. IOOF Holdings (IFL) – IFL raised $461m to purchase “ANZ Wealth Management” at $10.60, enabling us to go long at $10.91.

With fund mangers obviously long both of these stocks a classic “window dressing” rally would not surprise which if it eventuates may create the opportunity to take some profit.

Woodside Petroleum (WPL) Weekly Chart

IOOF Holdings (IFL) Weekly Chart

3 Global Indices still look “toppy”.

We are slowly seeing signs of a reasonable top evolving in global equities although investors should remember that tops usually take 2/3 times longer to unfold that bottoms.

US stocks have now reached our targeted area of the last 2-years and although we expect a 5-7% warning pullback first we do anticipate generally holding higher cash levels in 2018/9 than over the last 2-years.

Sceptics that cannot see a decent correction should simply stand back and look at the 3 main pullbacks since 2007 i.e. 58%, 23% and 17%, we’ve now experienced no meaningful correction for almost 2-years.

Another 20% pullback in 2018/9 would simply be in rhythm with the current bull market since, and including the GFC.

US Russell 3000 Quarterly Chart

MSCI World Index Quarterly Chart

The emerging markets have corrected ~6% in the last few weeks. We are now 50-50 whether this is roughly half way, or fresh 2017 highs await for an excellent selling opportunity.

Emerging Markets ETF Monthly Chart

4 Asia is “wobbling”.

Volatility has been on the increase in many areas including the high flying Hong Kong which has just suffered its worst few weeks of 2017. However, following the 2065-point / 6.8% correction our preferred scenario is an end of year rally up towards the 31,000 region before a good selling opportunity presents itself.

Hong Kong’s Hang Seng Weekly Chart

Australian stocks / sectors

Resources

No change, we have been relatively patient with adding to our IGO / NCM position within the Australian resource stocks but following the ~7% correction by the Base Metals Spot Index we have purchased both Fortescue Metals (FMG) and OZ Minerals (OZL).

Now its time to stand back and see if the likes of copper and nickel can recover some of their recent losses.

Bloomberg’s Base Metals Spot Index Weekly Chart

OZ Minerals (OZL) Daily Chart

Energy

We remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits are targeting the $US60/barrel area. 

  • We remain comfortable with our exposure via Woodside Petroleum (WPL).

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a paper loss of just over -3%, after previously being down well over 10%.

If we are correct and the $US has a good chance of making one final low in the relative near term to around the 90 level then MM should be able to crystalize a profit from this position, hopefully well over $25.

However, we are bullish global interest rates which is not good news for gold, hence we are likely to exit this position over the coming weeks / months.

US dollar Index Weekly Chart

Banks and bond yields / interest rates

We remain both positive and mildly overweight the banking sector although news of the royal bank commission has concerned some investors at least for now. Obviously as subscribers know we are bullish bond yields which should help banks profitability hence our slight portfolio skew towards the sector i.e. 30% of the Platinum Portfolio is in banks.

CBA is currently yielding 5.4% fully franked with its next dividend in February, we are considering adding to our position under $80.

CYB where we hold 5% of the MM Platinum Portfolio surged to fresh all-time highs in London on Friday night, we expect to enjoy this ride a bit longer.

CYBG Plc London Weekly Chart

Commonwealth Bank (CBA) Daily Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher, we had 2 stocks on our radar in the sector last week:

  • Janus Henderson (JHG) $48.42 – we went long on Friday at $48.28 and are currently targeting ~$55.
  • Platinum Asset Management (PTM) -$7.31 – We were keen around the $7 level but Thursdays spike to $7.05 lasted less than 5-minutes making buying impossible. However we like the chart pattern for a rally over $8 which may coincide with a market turn.

Janus Henderson (JHG) Weekly Chart

Platinum Asset (PTM) Daily Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises. Large short covering appears to be still unfolding at present.

We remain net bearish Woolworths with an eventual ugly target under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly again failed to follow most US sectors to fresh all-time highs last week.

However, a significant portion of Australian healthcare stocks enjoy sizeable revenue from the US leaving us mixed on the local sector in comparison.

US Healthcare Index Quarterly Chart

Global Indices

As discussed touched on earlier we believe a short term correction is close at hand, ideally at the end of December.

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s).

Since Donald Trump’s US election victory the S&P500 has rallied an impressive 27% with only one minor -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip” is approaching.

We now feel aggressive traders can sell any strong days to fresh highs as pullbacks are likely to become both far more common and larger.

US S&P500 Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently only have 13.5% of the MM Platinum & 2.5% of the Income Portfolio in cash so buying will be small and careful : 

  1. Banks – We are considering adding to our CBA under $80.
  2. Consumer Services – We may add to our Webjet (WEB) under $9.
  3. Diversified Financials – We are comfortable with our position having purchased JHG.
  4. Energy – We are now long WPL which feels enough for now.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels correct.
  7. Resources – Having purchased OZL and FMG over recent weeks it’s time to see how the commodities unfold after their recent correction.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage.
  10. Retail – No investment buying at this stage.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

A few stocks in our MM Platinum Portfolio are in striking distance of our current sell targets:

  1. Telstra (TLS) over $3.80.
  2. Newcrest (NCM) around $25.

In general we will look to increase cash levels around 6125 and 6225 for the ASX200.

Standout technical chart (s) of the week

We could not resist this chart following Denis’ well received piece on Friday – hopefully everyone understands a bit more on the subject.

Bitcoin may become a new definition for volatility, on Friday alone the cryptocurrency moved by 20% in a week when it rallied 44% , definitely not for the fainthearted!

Bitcoin Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report. A summary of the most likely activity next week is:

  • We are considering increasing our CBA position targeting Februarys dividend while looking to take profit on one of our other bank holdings into a Christmas rally.
  • We are potential sellers of TLS above $3.80 – other positions feel unlikely next week. 

Trading Opportunities on our radar

This week we have 2 potential trades: 

      1. Buy CBA under $80 with stops under $79 – see investment opportunities.
      2. Buy the index SPI on a break above 6051 with stops under 6030.

Share Price Index (SPI) 60-mins Chart

Summary

We are becoming increasingly confident that global stocks are close to a ~5% correction hence we only intend to buy weakness and will consider selling opportunities into an expected Christmas rally.

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.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . Positions are updated each Friday.

Disclaimer

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 8/12/2017. 4.00PM.

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