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

By Market Matters 10 September 17

Market Matters Weekend Report Sunday 10th September 2017

Market Matters Weekend Report Sunday 10th September 2017

Last week the local market was relatively quiet and ended down 0.9% although a few big stocks like Bendigo Bank and BHP trading ex-dividend added to the relatively small loss. For the first time in a while the local market felt heavy day to day although it did invariably manage to rally into the close, US stocks also closed marginally lower for the week illustrating that we simply traded in-line with global markets. On a sector basis the main story was the ongoing weakness by the banks which fell 2.5%, although they actually outperformed the US banking sector which fell 3.3%. However a few other sectors were also under pressure with the diversified financials -3.5%, food & beverage -2.3%, healthcare -2.9%, insurance -3.2% while the resources, telcos and real estate sectors managed to close off the week in the black.

Again the volatility within the list of major winners / losers for the week shrank as would be expected with reporting season now behind us, the stand out to us was almost double the number of large losers compared to winners. Also, when was the last time Vocus (VOC) was the market darling! I hope some subscribers had the courage to  follow our VOC trading recommendation in the last Weekend Report, unlike ourselves!

Winners : CIMIC Group (CIM) +4.9%, ALS Ltd (ALS) +5.5%, Evolution Mining (EVN) +8.1%, South32 (S32) +6.1%, Scentre Group (SCG) +5.2% and Vocus (VOC) +11.4%.

Losers : CYBG (CYB) -4%, ASX Ltd (ASX) -4.2%, Macquarie Group (MQG) -4.7%, Perpetual (PPT) -4.4%, Janus Henderson (JHG) -5.6%, Caltex (CTX) -4.3%, Healthscope (HSO) -6.3%, Primary Healthcare (PRY) -6.2%, Sonic Healthcare (SHL) -4.7%, IAG Insurance (IAG) -5.2% and Spark (SKI) -5.5%.

Let’s yet again look at the ASX200’s “trading patterns” which continue to contain the ASX200 as we kick on into September: 

  1. Short-term Neutral Pattern between 5629 and 5836 – 16 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 31 weeks to-date.
  3. September’s range to-date is 5661-5734 i.e. 73-points.

When we stand back and look at the ASX200 since its May 5956 top it’s not that pretty on a simplistic level, having dropped 327-points fairly quickly the market has proceeded to track sideways for around 3-months, accepting the lower levels, and not really challenging a break back over the 5800 resistance area.

Considering the position of US stocks and the negative seasonal weakness in particular from our important banks/ financials over the next 2-weeks we must remain short-term bearish local stocks.

Technically MM is ideally still targeting a correction towards the 5525 area i.e. only another ~2.5% lower in the weeks ahead but we remain conscious that the local market continues to experience good buying into any decent declines.

ASX200 Monthly Chart

As we discussed last week September has now arrived and its seasonally a poor time for equities. Three important points to remember over the coming few weeks are:

  1. The average return for September since the GFC is -0.44%, extremely poor considering the strength of the bull market since March 2009.
  2. Twice during that period the ASX200 has closed down over -5.5%, although it has also twice closed up over +4% suggesting index volatility at the very least should be close at hand.
  3. Our banking sector usually drifts for the first 3-weeks of September, prior to rallying well over 4% into the end of October i.e. as investors get positioned for Novembers chunky dividends.

Hence while our market has remained resilient in August / September to-date it has a high probability of providing at least some weakness for investors like ourselves looking to buy some value for the remainder of 2017.

Global Indices

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

However we remain confident that US stocks are looking for / have found a decent top at least for now – note we always have to give bull markets the benefit of the doubt that they can push higher just one more time but on balance this is not our preference. Medium-term the US stock market has played along with our forecast (s) for the vast majority of 2016/7, if this continues the recent consolidation / pullback still has further to play out with our target ~2350 for the S&P500 almost 4.5% lower.

US S&P500 Weekly Chart

Please remember we have remained bullish the Russell 3000 since early 2016 but note our long-term target of ~1550 is approaching reasonably fast, hence we are being particularly careful when purchasing stocks as this 8-year bull market slowly reaches maturity – our current best guess at a major top would be early 2018.

US Russell 3000 Quarterly Chart

No real change for European stocks which have been in correction mode since May, the German Dax currently now sits 5% below its 2017 high. We are targeting ~11,700 before we would be looking for “backfoot” buying opportunities i.e. we see another ~5% downside before we become neutral / bullish.

In the bigger picture ideally we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

After making fresh all-time highs for 2017 the Hang Seng continues to look vulnerable to a correction back under 27,000, or 2.5% lower.

Hang Seng Weekly Chart

Resources

Australian large cap resource stocks held firm last week with BHP marginally ending slightly lower after trading ex-dividend and RIO, Newcrest, OZ Minerals and S32 all closing in the black. However Monday is likely to be a reality check for the sector, which everyone currently loves, after both crude oil  and copper fell -3.3% on Friday night in the US e.g. BHP is poised to open down  over 60c / 2.3% on Monday morning. We believe the current strong run for resources is close to over with MM expecting another decent correction from the likes of BHP which has already pulled back 18.7% and 21.1% respectively since it commenced its impressive rally in December 2016. Hence, there remains a strong possibility MM will continue to lighten our exposure to resources into strength, in particular BHP and AWC.

It’s important to remember that resource stocks depend on cyclical commodities and are price takers, hence if the commodities like iron ore and copper which have been very strong recently fall the shares in the respective sectors are likely to follow suit – this looks likely to unfold on Monday morning to a certain degree.

BHP Billiton (BHP) Weekly Chart

Alumina Ltd (AWC) Monthly Chart

Banks and interest rates

Last week banks continued to decline on a global level as confidence diminished that bond yields would again start to rally in 2017 – yes, bank shares like higher interest rates. However, our view remains that US interest rates will again start to move higher in weeks / months to come and if this proves correct banks should benefit, of course assuming the rally in rates is orderly.

When we consider the September seasonality of the local banking sector two thoughts remain at the forefront of our mind: 

  1. If the local Australian banks decline into the 3rd week of this month, their buy area from a seasonal perspective, they should present excellent risk / reward buying.
  2. The US banking sector, even though it bounced on Friday, looks to have the negative momentum to make fresh 2017 lows, ideally around 4-5% lower.

If the above 2 come together we are likely to increase our local banking exposure.

US S&P500 Banking Index Weekly Chart

Diversified Financials

The diversified financials have been hit with the same brush as our banking sector falling almost 6% over the last month, almost twice as bad as the banks! Stocks like Macquarie and Janus Henderson have broken support areas and look to be headed lower. One of our long-term targets for the MM Platinum Portfolio, Challenger (CGF) is now down 5.8% over the last month and another buying opportunity under $12 feels like a strong possibility.

We are looking to buy CGF under $12, probably in two tranches if recent weakness continues.

Janus Henderson (JHG) Weekly Chart

Challenger Ltd (CGF) Monthly Chart

Retail plus Coles & Woolworths

No change, we are cautious the sector but will be prepared to buy panic weakness in some select stocks.

Harvey Norman continues to catch our eye after their aggressive decline over the last few weeks, primarily because of their recent profit report. While the momentum and sentiment is clearly against both the sector and the stock MM will again become potential buyers of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

Healthcare sector

One of our purchases of the last month that’s looking average today is Healthscope (HSO) which we’re long from ~$1.72 after last weeks dividend. Taking into account our negative outlook for the sector, we may have pulled the trigger too soon buying the panic selling in HSO.

We certainly have no plans to average this position and we may liquidate into any short-term bounce over $1.70.

Healthscope (HSO) Weekly Chart

Ramsay Healthcare (RHC) Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week:

  1. Banks – We like the banks into further weakness over the next 2 weeks, especially if US banks drop another ~4-5%.
  2. Consumer Services – Aristocrat (ALL) ~$20.
  3. Diversified Financials – Challenger (CGF) under $12.
  4. Energy – No interest currently.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and now we are long HSO, that’s definitely enough.
  7. Resources – Were more sellers than buyers at current levels.
  8. Real Estate – Another sector we are not keen on but Lend Lease (LLC) under $15.50 looks good.
  9. Telco’s – We are buyers of Vocus (VOC) under $2.30 and Telstra (TLS) under $3.50 as trades / aggressive investments.
  10. Retail – We like Harvey Norman (HVN) under $3.50.

Potential “Sells”

Three of our MM Platinum Portfolio stocks are close to / at our current sell targets:

1. BHP Billiton (BHP) over $28.

2. Alumina (AWC) over $2.20

3. Healthscope (HSO) over $1.70.

Standout technical chart (s) of the week

Over recent weeks we have considered OZL as potential buy initially around $8.30 and then closer to $8, we didn’t “pull the trigger” simply because we are looking for a medium-term top in the likes of BHP and RIO, hence making the logic behind purchasing OZL extremely flawed / contradictory. OZL is now looking very heavy, especially after Fridays 3.3% fall in copper.

We now have a technical target for OZL around $7.50 making us now overall negative at current levels.

Oz Minerals (OZL) Daily Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report.

Ideally we are still looking to liquidate our resources exposure a few % higher but are unlikely to add to our banking position for at least 2 weeks. In general we remain keen to buy the index / market ~5525.

ASX200 Monthly Chart

Trading Opportunities on our radar

Yet again we have 2 trading situations on our radar and although one is again a repeat from last week and a bit scary we like it technically:

  1. ASX200 – The local index looks poised to test under the psychological 5600 / 5575 area, sophisticated traders may want to consider the cheap September 5600 puts for ~25 points, looking for a quick move down running stops over 5700.
  2. Vocus Communications (VOC) – VOC looks a good “high risk” trade ~$2.40 but stops remain hard to assess hence we advocate a relatively small position.

ASX200 Daily Chart

Vocus Communications (VOC) Daily Chart

Summary

We remain short-term bearish the ASX200 ideally targeting a correction back towards the 5525 support area, we are “hoping” to accumulate equities into such weakness.

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 here. 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 09/09/2017. 9.00AM.
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