Market Matters Report / Market Matters Weekend Report Sunday 10th February 2019

By Market Matters 10 February 19

Market Matters Weekend Report Sunday 10th February 2019

Market Matters Weekend Report Sunday 10th February 2019

The ASX200 caught many markets players napping last week rallying by over 200-points / 3.6% while global equities were largely unchanged, or lower as in the case of Europe. The strength enjoyed by Australian equities was primarily down to 2 pieces of very important and tangible domestic news:

1 – Firstly, the Hayne royal banking commission report released on Monday evening was significantly more “bank friendly” than many anticipated leading to a dynamic relief rally by our largest and most influential sector e.g.  For the week Westpac (WBC) +9% and Commonwealth Bank (CBA) +7.2%.

2 – Secondly, the market euphoria was given a second shot in the arm later in the week by the Reserve Bank of Australia (RBA) who said they are now basically 50-50 whether the next interest rate change in Australian will be up or down – a far more dovish stance than they held previously where the only question being asked was when would rates be increased i.e. this change in stance is one of the few benefits of a struggling housing market. Remember only back in August the RBA governor was telling borrowers to prepare for rate hikes!

As we have been pointing out in a number of recent morning reports the underlying markets strength is broad based which is usually a very bullish sign. Last week over 80% of the ASX200 closed up for the week with an impressive 26% of the market closing up by 5%, or more. Catching my eye for the week amongst a lot of green on the screen were:

Winners: Banks and financials, healthcare, insurance, Telcos and interest sensitive real estate / transport stocks.

Losers:  Energy, Golds and media.

Last week we correctly called the market jitters to creep into global equities but definitely underestimated the speed and magnitude of the banking relief rally that unfolded locally. Fortunately we are overweight the sector but our relatively large cash levels still felt a touch uncomfortable considering our positive outlook for stocks in Q1/2 this year.

At MM we remain bullish for at the least the next 3-6 months hence we will continue to remain focused on sectors / stocks where we want to increase our market footprint.

ASX200 Chart

Following Fed Chair Jerome Powell’s 180 degree change on interest rates the whole world has suddenly turned dovish, after being hawkish since bond yields began climbing back in late 2016. With the Fed, and now the RBA, clearly very nervous of the economic impact of raising interest rates anytime soon the “risk on” dial has been fully turned back on - the “Bernanke Put” has become the “Powell Put”.

Only 2-months ago around Christmas time we saw levels of market panic/ negativity not witnessed since equities were plunging back in 2015 because of China but over the last 5-6 weeks stock market sentiment has simply moved back to the average of the last decade. This can be perfectly illustrated by using the widely followed CBOE Put / Call Ratio shown below – investors buy puts when they are scarred sending the put / call ratio higher.

However even while we are looking to be buyers in the weeks ahead its important not to get sucked into FOMO (Fear of missing out) as a number of stocks are trading above our initial targeted entry levels – remember global economic growth is slowing hence company revenues and profits are likely to follow. Stock market valuations are now back above long-term averages, it’s time to remain disciplined with our buying - At MM we want to buy stocks we like with the correct risk / reward, especially as we anticipate further bouts of volatility in 2019.

The bears are being forced to buy into a market at levels they are finding very uncomfortable, fund managers cannot be underweight forever in a rising market, fortunately we can be a touch more pedantic.

CBOE Put / Call Ratio Chart

Our view of global equities remains intact as we look for a ~5% correction over the next weeks but as we’ve witnessed over the last 4 trading days the Australian market seems to be made of sterner stuff in 2019, we even believe local stocks can outperform the US for the first time in over a decade. However if we are correct and US stocks do fall ~5% in the next few weeks, well over 1000-points for the Dow, it will be a big ask for the ASX200 to maintain its upward trajectory.

Most importantly we believe subscribers should remain focused on looking for quality buying opportunities at this point in time.

MSCI World Index Chart

One factor that is potentially on our side as MM looks to accumulate stocks is we are in the middle of reporting season, a time where short-term volatility is usually very elevated following company profit numbers and outlook guidance e.g. our recent purchase of ResMed (RMD) is already up over 5%.

Some heavyweights report next week including a couple we have our eyes on e.g. Cochlear (COH) & Telstra (TLS) because we own, Macquarie Group (MQG), CSL Ltd (CSL), Cleanaway Waste (CWY) and ASX Ltd (ASX).

1 Bond yields continue to drift

Global bond yields have drifted lower in 2019 as most central banks appear to have all boarded the dovish train, nobody appears to be keen to raise rates at the moment and it feels to me that bond yields are around the correct level until we see further economic signals / news over the months ahead.

As we’ve discussed previously we are watching corporate (junk), as opposed to government, bond yields very closely because we believe this is where the risks lie for equities.

If we look at the correlation between junk bond prices and the S&P500 two things catch my eye, one more pronounced than the other:

1 – A healthy corporate bond market is clearly very supportive of the US stock market.

2 – When the corporate bond market slips lower, or fails to embrace a bullish equities market it’s a warning signal for stocks moving forward.

NB At this point in time junk bonds are consolidating recent gains, just like stocks, no concerns at this stage.

iShares High Yield “Junk” Bond ETF v S&P500 Chart

I cannot remember US bonds yielding less than our own as they are today, its clearly a headwind for the $A hence the vast majority of analysts / economists are calling the $A lower – we believe they’re wrong!

If we apply some simple mean reversion to the below chart its far from a brave call that the respective bonds will be yielding the same at some stage in 2019 / 2020 but the $A is not pricing this to occur.

US 2-year bonds v Australian 3-year bonds (yield) Chart

2 The $A remains on track.

The $A has hit our mid / high 60c targeted area and we believe that we will see 80c in 2019 / 2020. – MM remains very wary of the crowded US earners trade medium / longer-term.

Our view is based on a few pieces of the puzzle starting with the extreme pessimism towards the $A but also including potential interest rate reversion touched on above plus the very influential iron ore price.

The Australian Dollar ($A) Chart

The $A is extremely cheap when compared to today’s iron ore price although we did have a similar scenario unfold in early 2017 when the iron ore strength dissipated fairly quickly.

However iron ore stocks have embraced the bulk commodities strong rally, I ponder who will be correct this time? If the Iron Ore price stays up for longer, which is now the  view of our Resource Analyst ‘Rocky’, then the AUD will rally.

The reality is that if our bullish outlook for the $A proves correct it will result from a combination of 2, or 3, of the above points.

The Australian Dollar ($A) v iron ore Chart

3 We remain cautious $US earners (heavily owned stocks)

Over recent months we have seen some almost unprecedented damage inflicted on heavily owned positions / stocks e.g. the high growth play.

As we’ve alluded to above we are bullish the $A over the next year,  a very contrarian view. However this may potentially confuse some subscribers with regards to 2 of our holdings, and one of member of our shopping list hence some clarification:

1 – ResMed (RMD) – We recently bought RMD following the stocks spike lower following its latest report. We feel this is a quality business that was unduly sold off on an average but not diabolical  report – simply too many people were long. Obviously we will continually re-evaluate but we feel comfortable at least over the coming few months.

2 – Cochlear (COH) – COH reports this week which may change the picture in a few keystrokes but the almost 30% recovery from its late 2018 sell-off does offer a degree of confidence in our holding, but assuming there are no surprises when they report we will considering taking our $$ into strength above $200.

3 – Macquarie Group (MQG) – MQG also reports this week and its currently on our shopping list ~$115. Again the report may change the picture very quickly but at this point we are bullish targeting ~$135 hence a 4-5% pullback would offer solid risk / reward opportunity.

In a nutshell we can see MM not owning any of these positions into the next financial year which is in line with our view that 2019 /2020 will be a period to be fluid with your investments between stocks, sectors and occasionally cash.

ResMed (ASX: RMD) Chart

Cochlear (ASX: COH) Chart

Macquarie Group (ASX: MGQ) Chart

4 The banks will continue this week.

The banks powered ahead last week following the release of the Hayne report with the “big 4” rallying an average of 7%, CBA closed 15% above its 2018 low and it does feel like we may have seen a major bottom.

With the uncertainty of the royal banking commission behind us its back to simple fundamentals:

1 – The banks aren’t growing fast but they’re stable and likely to pay sustainable dividends unless we get a deep recession.

2 – With their yields ranging from 5.8% for CBA up to 8% for NAB, both fully franked, they may again become very hard to resist for any yield hungry investors, especially as the RBA is hinting at rate cuts.

This month sees CBA, Bank of Queensland and Bendigo Bank all trade ex-dividend and we saw on Friday even with the market down the appetite was building for dividends with CBA rallying almost 1% while BOQ closed up and only BEN followed the market lower.

I’ve spent time this week considering switches / allocations across the banks but keep arriving at the same conclusion – I remain happy with our 30% exposure to CBA, NAB and Westpac.

Commonwealth Bank (ASX: CBA) Chart

National Australia Bank (ASX: NAB) Chart

5 The energy sector looks fragmented

Unfortunately we called but missed, through being too fussy, the recent nice 25% rally in New Hope (NHC) to fresh 5-year highs but the risk / reward has now reversed from a technical perspective.

A weekly close below $4 would have our stance become neutral / bearish hence we will now not be chasing Whitehaven (WHC) at this stage.

New Hope Corp (ASX: NHC) Chart

Alternatively the oil and gas part of the sector appears to have commenced a pullback that may offer solid / risk reward opportunities – we like buying oil into weakness because it correlates with our 3-6months bullish outlook for equities.

At this stage MM likes Santos ~$6.

Santos (ASX: STO) Chart

6 Updating our “shopping list”.

Last week we discussed that this year could be the year of the dog when it comes to stocks, as opposed to the pig for the Chinese New Year. We picked out 4 stocks that we thought were well positioned to buck their bearish medium-term trend and last week they performed well i.e. CYBG (CYB) +11%, IOOF Holdings (IFL) +2.7%, GUD Holdings (GUD) +5.6% and Invocare (IVC) +2.7% - a good result even in a strong market.

However we didn’t buy any so it doesn’t count! This week I have simply expanded our shopping list in a period where we anticipate weakness for global equities:

1 – We like NIB Holdings (NHF), ideally around $5.50, with an averaging area of $5.20.

2 – We like Ausdrill (ASL) around $1.45 and $1.25.

3 – CIMIC Group (CIM), after selling out at lower levels we now like CIM around $45 – being too proud to buy back in higher is not a clever investing emotion.

Ausdrill (ASX: ASL)  Chart

CIMIC Group (ASX: CIM) Chart

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2 however a reasonable pullback appears to be unfolding.

We continue to see MM being active moving forward with our “buyers hat” now in place as we sit cashed up on both portfolios.

Chart of the week.

Like many stocks last week the ASX rallied strongly to fresh multi-week highs. While we remain bullish the ASX targeting fresh all-time highs a pullback towards $64 would offer a good risk / reward opportunity with stops below $62.

MM is bullish the ASX targeting ~$75.

ASX Ltd (ASX: ASX) Chart

Investment of the week.

A tough one following a strong market pop higher but the stock I’m most comfortable with today is NIB.

Our ideal entry levels are $5.50 and $5.20 but momentum is building on the upside.

We also  like gold stocks even after their recent strength.

NIB Holdings (ASX: NHF)  Chart

Trade of the week.

We’ve had Perpetual on the radar for a few weeks and like much of the index it popped higher last week.

Risk / reward is now good to jump on board with 5% stops, or for those that bought recently time to raise stops.

MM likes PPT here with stops below $33.50. (NB we hold in the Income Portfolio)

Perpetual (ASX: PPT) 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 Sunday!

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

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 9/02/2019

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