Market Matters Report / Market Matters Weekend Report Sunday 11th February 2018

By Market Matters 11 February 18

Market Matters Weekend Report Sunday 11th February 2018

Market Matters Weekend Report Sunday 11th February 2018

Last week was the worst performance by the ASX200 in 2-years as stocks tumbled -4.6%, although we managed to outperform the MSCI World index which fell -5.6%. Since the inception of MM our inbox has never been so inundated with questions as subscribers were clearly becoming rattled by a Dow which averaged an intra-day range of 1070-points last week – more than the average monthly range of recent years! As you know we love a good / appropriate quote at MM and two from different legends of investing come to mind today:

  1. "Buy when there's blood in the streets, even if the blood is your own." – Baron Rothschild.
  2. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” – Warren Buffett.

MM was holding 17.5% cash in our Platinum Portfolio last week looking to buy weakness primarily in the resources sector. When panic hits the market, sending our targeted stocks down into our buy zones we must “step up to the plate” and follow our plan i.e. in this case buy!

However, importantly we are not sitting back arrogantly patting ourselves on the back but constantly assessing the market / our positions in case we are wrong and need to again reduce market exposure. Hence the main focus of today’s report will be looking at scenarios which challenge our short-term bullish outlook.

We currently believe the recent -5.9% correction by the ASX200 is / close to complete hence we are still wearing our short-term buyers hat, but with a cash holding of only 5% any further accumulation will clearly be very price sensitive. At this stage we continue to remind ourselves that since the GFC when the ASX200 drifts in January the quarterly low has occurred 80% of the time in early February i.e. now.

Importantly the sell-off has taken the local market back into the middle of “fair value” going back to 2001 hence it undoubtedly can fall further but like an elastic band current levels should offer excellent support moving forward. When we look at the ASX200 on a weekly basis a test of the 5600 area still remains a strong possibility – especially as some heavyweight stocks like CBA trade ex-dividend shortly. In 2016 the local market fell 559-points which if history does repeat itself targets 5591.

Last week’s list of major winners / losers (+/- 7%) in the ASX200 illustrates the market carnage perfectly with the Energy and Fund Managers spearheading the weakness:

Winners : No stocks rallied by over 7%. With the best in the ASX200 Domino’s Pizza (DMP) which rallied +3.1%.

Losers : Downer (DOW) -7%, ALS Ltd (ALQ) -7.7%, TABCORP (TAH) -12.7%, Magellan (MFG) -8.5%, Janus Henderson (JHG) -10%, BT Investment (BTT) -7.5%, Woodside (WPL) -8.3%, Santos (STO) -9.9%, Origin (ORG) -12.4%, Wesfarmers (WES) -7.7%, Medibank Private (MPL) -7.7%, Iluka (ILU) -8.4%, Boral (BLD) -8.5%, Fairfax (FXJ) -7.6%, Carsales (CAR) -8.2%, Vocus (VOC) -7.7%, TPG Telecom (TPM) -7.8% and AGL Energy (AGL) -8%.

ASX200 Weekly Chart



It’s very easy to get caught up in the emotion of large market swings, especially with the media trying to whip up the frenzy but that’s where good old fashion hard work / planning comes into play. The actual reality is last week a technical short volatility position (s) were forced to cover by a hedge fund (s) which created short sharp bursts of selling pressure. The lack of contagion into credit markets is a very encouraging sign of the stock market’s underlying health, as is the lack of buying in perceived save havens like gold and the Japanese Yen.

Last week LJM Partners a US hedge fund, managing ~$US1bn, lost well over 80% (leading to its closure) as did the ProShares Short VIX Short-Term Futures ETF and  the Velocity Shares Daily Inverse VIX Short-Term exchange-traded note. This has led to 2 scenarios unfolding in “volatility land”:

  1. Forced mass covering of short volatility positions which has led to outright selling of stocks.
  2. The usual sellers of volatility have vanished as the likes of Fidelity and Credit Suisse have banned traders “betting” on a calming market. We saw it on our desk this week with many market makers / investment banks reluctant to be sellers of volatility. 

History tells us that while this spike in volatility may have a few more attempts on the upside it’s time to sell – if you can! (volatility that is)

Also, the US VIX formed a spike high on Tuesday and although we saw fresh equity lows on both Thursday and Friday the VIX was relatively well behaved i.e. this negative influence on stocks is slowly diminishing.

US Fear Index / Volatility Index (VIX) Daily Chart


Overseas Indices

US Stocks

Last week US stocks had their worst week for many years with the broad based S&P500 tumbling -8.5% led by the Energy and Technology sectors. The obvious question is have we seen a washout to buy, or is there something more sinister brewing beneath the hood.

Our view at MM is we have seen a warning of what 2018/9 will bring but in the short-term the risk / reward we believe is with the buyers BUT the time for complacency is definitely behind us.

The latest data from Investors Intelligence shows us the spread between the bulls and bears has fallen -14.5%, the largest decline since the major correction in 2011. As a point of reference -6% is recognised as a washout targeting a bottom for stocks. At this stage we anticipate a ~4% minimum rebound but US stocks have not yet fully showed their hand.

US NASDAQ Weekly Chart


Warning #1

 At MM we have held onto our long-term view that stocks will eventually challenge their 2016 lows as Quantitative Easing is removed / interest rates rise i.e. over 20% lower for US stocks.

  • Hence while our short-term view targets fresh 2018 highs we must remain extremely mindful that we see the next meaningful move for stocks to the downside.

 US S&P500 Quarterly Chart


European Stocks

Over recent weeks we have been targeting the 12,000 area for the German DAX, many thought we were “mad” looking for an almost 12% correction but in just a few weeks voilà!

We are bullish the DAX from this 12,000 area targeting a final push to fresh all-time highs before its time to get off the train.

German DAX Weekly Chart


Warning # 2

However we have been targeting a break of 2015 highs for the Swiss market before a ~20% correction. Currently it looks like we might have significant failure from these fresh highs.

Swiss SMIU Index Quarterly Chart

Asian Stocks

Recently we have been targeting a 3000-point / 9% correction from the Hang Seng, our targeted area has now been reached and ideally we will see a bottom form in the relatively short-term.

Hang Seng Weekly Chart


We have been targeting  a ~10% pullback in Emerging Markets to provide us with a buying opportunity into the highly correlated resources sector, this played out last week now lets see if our resource stocks can find some new love and rally.

Emerging Markets (EEM) Weekly Chart


Warning # 3

Let’s reiterate what we said last week around corrections using 2 powerful statistics:

  1. The ASX200 only experienced a 5% pullback last year but only ~once every 12-years has the index experienced such a small pullback.
  2. The average annual pullback for the local market is well in excess of 10% e.g. In 2016 the ASX200 corrected 10%, following a classic early May high. 

Thus it would be expected to see a correction in 2018 of over 600-points far more likely which targets a test of 5500 if we have already seen the high for 2018. Remember our second point in the MM annual Outlook Piece:

“The market is bullish stocks with many ‘upbeat’ calls for the ASX in 2018. Bear in mind that often those penning an outlook piece are doing so for marketing purposes and optimism / bullishness tends to sell! At MM we believe it will be a choppy year with a negative bias overall, and having ones finger on the pulse will be more important than ever.”

Bond yields

Fundamentals drive share markets in the medium term not news flashes. Stocks managed to ignore all of North Korea’s antics but not bond yields rallying too far over that on offer from stocks. We can now sit down to see how well Central banks can juggle raising interest rates without damaging the economic outlook through hurting consumer confidence – no easy task! 

Warning # 4

At MM we have been calling interest rates higher for over a year and while this trend has been acknowledged by the market its only recently that it’s started causing some concern for equities.

  • Bond yields have been in a multi-decade bear market while at the same time stocks have enjoyed a multi-decade bull market.

If we are correct and the world has seen the low for interest rates for the foreseeable future then the road ahead for stocks is likely to very bumpy at best. At MM we are bullish both interest rates and volatility although short-term volatility looks to have gone too far.

US S&P500 v US 10-year Bond yields Monthly Chart


$US Index

Warning # 5

People that are familiar with the recent MM Outlook Piece for 2018 understand one of our main calls for this year was in 2 parts:

  1. The $US Index would make fresh multi-year lows down towards the 88 region – currently a big tick!
  2. Following this weakness we are targeting a significant bottom and a rally of around 10% minimum.

 Assuming we are on the money again with our $US fundamental / technical analysis there are potentially huge ramifications for equities in 2018. Since late 2016 the $US and stocks have been moving in the opposite direction i.e. if we are correct and the $US is headed higher in 2018 then stocks are likely to struggle.

  • At this stage we will ideally see a another low in the $US in coming weeks / months but the risk reward is skewing from bearish to bullish.

MM believes the combination of bond yields and the $US remains the key to successful investing in 2018/9.

$US Index Daily Chart


 The $US Index v S&P500 Weekly Chart


Australian stocks / sectors


While we remain bullish the resources into 2018/9 considering the sectors bull market is now 2-years old and we are looking for a $US low / interest rates higher MM can easily enisage more volatility short-term e.g. Friday night copper was down -1.6% in the US.

We intend to accumulate further weakness in the sector if any of our “Shopping List”  falls into our respective buy zones.

  • Resource stocks still look good but after a strong 2-year rally investors must expect / be prepared for some decent pullbacks in 2018 i.e. volatility!

Following last week’s purchases our preferred resource stocks, plus ideal buying levels, are:

  1. Diversified miners - BHP and RIO – around 2% lower.
  2. Nickel – Western Areas (WSA) – levels are hard to determine, probably ~$2.80 but we will watch the nickel price for clues.
  3. Lithium – Orocobre (ORE) – Around $6.00. 

Obviously “buy levels” will have an enormous impact on a portfolio returns over the next 12-24-months hence at this stage we advocate patience, opportunities will come along as we saw last week.

Orocobre (ORE) Monthly Chart



No real change, we believe the local banks may not offer significant growth over the coming years but their yield should remain pretty solid, hence NAB currently paying 6.85% fully franked is undoubtedly attractive to many Australians even as interest rates look destined to tick higher.

  • MM likes banks at current levels but we have enough exposure.

National Australia Bank (NAB) Weekly Chart



No change, we remain bullish crude oil and an extension towards ~$US70/barrel is our ideal target, especially as many pundits have been targeting the $US60/barrel area – Fridays sub $US60/barrel is unfortunately not encouraging short-term.

  • We still remain relatively comfortable with our exposure via Woodside Petroleum (WPL) ideally targeting the $38 area i.e. ~10% higher.

Crude Oil Monthly Chart



As discussed the $US has been very weak which has helped gold rally. However, if we are correct and the $US is close to a decent low then gold may be ready to underperform, especially as traders have been going long the most liquid ETF’s implying a short-term bullish view which could subsequently see some selling hit the sector moving forward.

 The fall in gold last week as equities tumbled is not a good sign for the oven perceived “safe haven”.

 We currently own no gold stocks.

Newcrest Mining (NCM)Weekly Chart


Bond yields / interest rates

No change, we’ve covered this subject in detail over recent weeks. It’s almost impossible to find an analyst who doesn’t think bonds are going down / interest rates higher – we’ve actually been preaching this for many, many months!

Last week we said – “We believe fund managers have been scarred of missing out on the move from bonds to stocks, classic “Fear of missing out (FOMO)” which so often ends in disaster.” – how right we were!!

MM is unlikely to buy any classic “yield play” stocks in 2018/9 except as short-term plays.

US 2-year bond yields Weekly Chart


Diversified Financials

We remain bullish the Diversified Financials with an eventual target well over 10% higher but this feels miles away at present! 

  • Last week we bought Macquarie Group (MQG) just over $98 which looks good at present. 

Macquarie Group (MQG) Monthly 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, especially those not heavily exposed to on-line threats. The recent rally in the likes of JB Hi-Fi may unfortunately indicate this horse has bolted.

JB HIFI Monthly Chart


Healthcare sector

We are now neutral / negative the US Healthcare Sector, looking for potential sell signals, as interest rates rise – the US and Australian Healthcare Sectors are highly correlated. The recent 13.3% tumble is worse than most sectors which we take as warning at this stage. 

However, conversely we are conscious that the Australian Healthcare Sector has excellent exposure to $US earnings which we believe will be a positive influence over 2018.

US S&P Healthcare Sector Quarterly Chart


“Shopping List”

Below is our now limited shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 5% of the MM Platinum & 5% of the Income Portfolio in cash so we are fussy buyers :

  1. Banks – We are comfortable with current exposure.
  2. Consumer Services – We are comfortable with our exposure at present.
  3. Diversified Financials – We are comfortable with our position at present.
  4. Energy – We are long WPL which feels ok at present.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels ok but are favourite stock is ResMed around $11.50.
  7. Resources – We are considering a number of buys here, see earlier in the report i.e. ORE, WSA plus BHP/RIO.
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – We believe the Telcos will outperform in 2018/9 but our Telstra is enough at current levels.
  10. Retail – No investment buying at this stage.
  11. Gold – We have no interest considering our $US view.

Standout technical chart (s) of the week

Last week we purchased Iluka (ILU) when it spiked down  towards $9.10.

  • If ILU were to trade sub-$9 we may consider increasing our holding.

Iluka (ILU) Weekly Chart


Investing opportunities for the coming week(s)

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

  • We are looking to accumulate resource stocks ORE and WSA.
  • We have nothing very close to our sell areas at present.

Trading Opportunities on our radar

Today’s trading opportunity is back to ZIP Co. (Z1P) which we tried to buy back under 90c and were too fussy on price!

  • We like Z1P around 95c, with stops under $87c. A good risk / reward play targeting ~$1.50.

ZIP Co ltd (Z1P) Daily Chart



On balance we believe that stocks are looking for a short-term low that should be followed by a rally to fresh all-time highs by many indices.

However, we still believe that a 20% correction will unfold over 2018/9 and due to the outlined warning signals in todays report we have to give a 20% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

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.



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 when positions are amended in either portfolio.


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 10/2/2018. 9.00AM.
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