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

By Market Matters 11 March 18

Market Matters Weekend Report Sunday 11th March 2018

Market Matters Weekend Report Sunday 11th March 2018

This morning I’m taping away feeling good about the markets and how they have evolved so far in 2018 – a potentially dangerous feeling! Overnight the Dow soared well over 400-points (+1.77%) while the index leading tech based NASDAQ rallied almost +2% to fresh all-time highs. If one of MM’s favourite indicators again proves correct the important broad based US S&P500 should follow suit, and also make fresh all-time highs during March / April i.e. well over 4% higher. Please excuse the repetition in places during today’s report but while markets follow our forecasted path it’s important to bang a consistent drum, especially as we believe one of the best opportunities for many years is looming on the horizon for investors in the coming  months – this is the time for focus rather than interesting rhetoric, actionable insight rather than fluffy market commentary.

On Friday night the US market received a very strong combination of economic data to send stocks roaring ahead and as expected the market has forgotten the ~12% plunge in February, for now i.e. the American economy continues to strengthen but importantly we’re not seeing a big uplift in wages which stokes fears around inflation and gives fuel to the concept that the US Central Bank is behind the curve:

1. The US created 313,00 new jobs in February with a jobless rate of 4.1% - a huge beat on analyst estimates of just over 200,000 new jobs.

2. Average hourly earnings only rallied +0.1% after last month’s +0.3% and importantly below analysts’ estimates of +0.2%, plus the icing on the cake was Januarys gains in pay that created havoc in stocks were revised down.

We are in goldilocks territory for stocks, a perfect scenario to create the blow-off top we are forecasting for March / April:

  • The US economy is powering ahead without major signs of inflation (yet) – but inflation will rise at some point causing  a rapid increase in bond yields / interest rates and that will likely be one of the reasons for a sharp market drop e.g. Think February when markets simply sniffed the potential.

Equities are following the path we have largely been anticipating since the major market correction in 2015-6 and hence until further notice our strong view remains intact:

  1. US stocks will form an important top in March / April with the S&P500 likely to make an attempt on the psychological 3000 area i.e. 6-8% higher.
  2. MM is still looking for a +20% correction to commence in 2018/9 – goldilocks scenarios do not / cannot last forever.

Many subscribers often ask why we focus so much on the US market and the twofold answer is straightforward at this point in time:

  • US stocks are currently the tail that’s wagging the dog i.e. when the S&P500 tumbled -11.8% in February the ASX200 followed suit falling -5.9%, not as dramatic but certainly not to be ignored.
  • Also, US stocks are simply clearer technically at present and have been following our expectations for a few years hence there’s no reason to fight “the path” until we are proved wrong – this obviously will eventually happen.

If we are correct and stocks are bracing for a +20% correction get ready to arguably read Warren Buffett’s most famous quote at nauseam – “ Its only when the tide goes out do you discover who’s been swimming naked”. We thought we’d get in early with this given it will likely become a very common phrase if / when stocks start to drop.

US S&P500 Chart

US S&P500 Chart

Last week was ok for the ASX200 as it rallied +0.6% but the market is set to open with a bang on Monday and make fresh highs for March around  ~6020. The local market looks to be receiving at least 2 pieces of good news to start the week i.e. extremely strong global markets and Donald Trump looking to give ”his friends” Australia exemptions to the much maligned Steel and Aluminium tariffs. As you know we believe Donald Trump has simply been sabre rattling as he looks to improve the US’s trade position within NAFTA, plus of course with China - interestingly something Australia’s own Paul Keating thinks makes sense.

As we said earlier overall global stocks continue to follow MM’s forecasted path which has basically been in play since mid-2015. Hence, let’s continue to remind ourselves how we see the local market evolving both short and medium-term:

  1. Short-term– We are net bullish global equities targeting fresh all-time highs by many indices over the coming 1-2 months. We can easily see the ASX200 challenge the 6250 area in March / April, a close over 6020 will reaffirm this view. Perhaps on Monday?
  2. Medium-term – We still believe a correction of over 20% will commence this year for global stocks, suddenly this now feels easy to comprehend following the plunge by stocks in February – the warning we were expecting, positioned for and subsequently bought.

Assuming the ASX200 opens well above 6000 on Monday we will then remain short-term bullish while the market holds 5960. The local market actually looks set to trade within only 2% of its high for 2018, an excellent performance considering its paid out the equivalent to well over 50-points in dividends over recent weeks e.g. BHP, CBA and Telstra.

ASX200 Chart

MM is currently still holding 9% and 5% cash in our Platinum and Income Portfolio’s respectively i.e. we are pretty heavily invested considering our medium-term outlook for global stocks. Our current plan remains to significantly increase our cash levels into market strength, ideally around 6250 for the ASX200 but don’t be surprised if we commence lightening our market exposure earlier. Investors should simply not forget that believe we are potentially in the final stages of the second longest bull market in history.

Last week’s list of major winners / losers (+/- 5%) in the ASX200 shows us the market is currently very strong from 2 important angles, firstly simply because of the 12-1 win ratio and secondly because we experienced strength from Banks to Telcos and IT stocks i.e. a broad based advance is the strongest indication that the markets momentum will be maintained.

Winners : CYBG Plc (CYB) +5.4%, Seek Ltd (SEK) +6.2%, Domino’s Pizza (DMP) +9.8%, Star Entertainment (SGR) +5.6%, IOOF Holdings (IFL) +5.7%, Healthscope (HSO) +7.7%, Orica Ltd (ORI) +5.3%, Carsales (CAR) +7.6%, REA Group (REA) +6.3%, Vocus (VOC) +9.6%, Telstra (TLS) +5.2% and QANTAS (QAN) +5.3%.

Losers : BlueScope Steel (BSL) -6%.

Following the huge rally by overseas stocks on Friday night the ASX200 looks likely to open ~6020 on Monday and the combination of both financials (+2.4%) and resources (+1.8%) advancing strongly in the US is likely to be very supportive for local stocks.

No change, we remain short-term bullish the local market with a close over 6020 required to reaffirm this stance.

ASX200 Chart

1 Seasonality / Statistics

We’ve continually discussed the positive statistics / seasonality over recent weeks, especially when we aggressively bought the panic low around the 9th of February. Today we are again going to bring them into focus as the ASX200 looks set to break to fresh March highs on Monday morning.

  • 80% of the time a market forms the high, or low of, any timeframe in the first 20% of that time frame” – The DOT Theory.
  • An open at 6020 will be new highs for March and create a range of 134-points for the month to-date.
  • The average range for March since the GFC is 280-points ignoring 2 major outliers.
  • Assuming we have seen the low for the month at 5886 this extrapolates to a target, in the next 2-3 weeks, of around the year’s high of 6150.

Also, remember the below excellent statistics we have quoted a number of times since late January:

  • The average rally from the Q1 low into the April / May danger time is over 500-points / 10.7%.
  • Assuming that we have seen the low for Q1 at 5786 that extrapolates to a target of ~6300, sometime in March / April, taking the more conservative of the above 2 statistics.
  • Historically the top usually kicks in between mid-April and early May as the below seasonal chart clearly illustrates.

With the ASX200 struggling to break clear over 6100 so far in 2018 it’s pretty hard to comprehend the market soaring up towards 6250-6300 but as we regularly say “investors must remain open-minded”.

ASX200 Seasonality Chart

As you know were bullish the banks and on Friday CBA closed up only +0.6% for March so far, but seasonally this is a very bullish time for our banks and a lot more can normally be expected:

  • Over the last 10-years CBA has rallied on average over +6.5% over March / April, with March being noticeably almost twice as strong as April – this targets over $81 over the next ~6 weeks.
  • When we look at the other big 3 banks the average gain is on average actually higher e.g. NAB +5.4% in March and +2.7% in April, for a total of over +8% with the worst March return still up +0.6%.

Hence as we believe the “big 4” banks can rally say just +6% over the next 2-months then a further 5% rally in the ASX200 towards 6250-6300 becomes relatively easy to comprehend.

Remember on the 13th of February our morning report was titled “Is there a potentially “free” dividend on offer from CBA?” with the conclusion being yes there was. For subscribers that followed that report and bought CBA ~$76.20 things are looking good i.e. CBA has traded ex-dividend $2 fully franked but CBA shares are already higher. While a buyer needs to own the shares for 45-days plus purchase and sale date to be entitled to the attractive fully franking component of the $2 this should be a walk in the park if CBA follows the above bullish seasonality path which we believe it will.

Commonwealth Bank (CBA) Chart

Not surprisingly after looking at the local market we also find US stocks are bullish during the March / April period i.e. over the last 20-years:

  • Following a weak February, this year was down almost 4%, the average return over March / April for US stocks is an impressive +4.7% - this targets ~2840 for the S&P500, just below fresh all-time highs.

Obviously we can all find statistics to support any argument but we take some short-term comfort from the position of the market leading NASDAQ: on Friday it soared almost 2% to fresh all-time highs. If we are correct the NASDAQ should continue this strong advance next week and a break back below 6925 is required to negate our very bullish short-term view.

Summary – wherever we look from a seasonal / statistical and structural perspective things look very supportive of our bullish short-term view for stocks.

US NASDAQ Daily Chart

2 Overseas Indices

No change, while when we stand back and look at some major international indexes on a weekly basis they look relatively constructive for a rally into a potentially important April / May top, but what appears to come next is scary:

  • The German DAX looks extremely clear on a long-term basis, an assault on fresh all-time highs towards 14,000 before a ~25% correction – this would be the 4th pullback of this degree since the year 2000 so they do happen!
  • The Emerging Markets remain positive on a weekly basis ideally targeting an advance of ~10% before major concerns would evolve technically.
  • The MSCI World Global Index has reached our target that we set back in 2015, ideally it will make one final high but again we can see a major correction looming on the horizon.

German DAX Chart

Emerging Markets (EEM) Chart

MSCI Global World Index Chart

3 Interest rates / bond yields

What a difference a few weeks makes, Friday nights employment and wage data out of the US has put to bed the previous nervousness around inflation / rising bond yields, for now at least.

Last week US 2-year bond yields again managed small gains even with the economic risks of rising inflation diminishing.

At MM we remain bullish US bond yields but following the recent strong gains over the last 6-months a period of consolidation would not surprise - this is likely to be supportive for stocks.

US 2-year Bond Yields Chart

4 The VIX says all’s well with stocks.

The complacency around market volatility was in our opinion the main contributor to Februarys dramatic plunge in equities, which was of course led by the US. The stops to massive volatility positions were so aggressive that a number of prominent US brokers refused to let market players step and sell volatility – actually as we said at the time “the perfect sell signal”. Here we are just a few weeks later and volatility has plummeted from over 50% to under 15%, basically where it spent much of the last 5-years.

MM is very comfortable with its opinion that volatility will again rear its head in 2018 but our best guess would be not until May / June.

The Fear Index / VIX Chart

5 The $US

We’re watching the $US like a hawk – remember it was one of the cornerstones of our MM Outlook piece for 2018.

No change, we are looking for a decent swing low in the $US, ideally just under 88, but it’s very close!

The $US is close to a bottom which is ultimately likely to be very bad news for the reflation trade i.e. resources.

$US Index Chart


No change, we still believe that equities have found a short-term low that should be followed by an eventual rally to fresh all-time highs by many stock indices during March / April – the NASDAQ achieved that on Friday.

However, we still believe that a +20% correction will unfold over 2018/9 and we must now give a revised lower 10% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

Catching our eye in Australian stocks / sectors

1 Beware Kaufland

German powerhouse Kaufland is launching in Australia and pricing pressure are likely to hurt everyone from Woollies to Aldi. A Dutch study shows that we can expect grocery prices to fall by over 8% when the Germans flex their muscles, good news for you and I but not majors Coles and Woolworths – Coles are already spending a staggering $400m per year on discounting.

While Kaufland is more like a Costco selling everything from food to electronics hence margin pressure is likely to also hurt the likes of JB HIFI, Harvey Norman and Kogan.

  • We are not keen on the retail sector and can see Harvey Norman for example hitting 2-year lows, over 10% lower.

Woolworths (WOW) Chart

Harvey Norman (HVN) Chart

2 Telcos look interesting to us

The Australian Telco Sector has clearly had an awful few years with heavyweight TLS falling 50% during the stock markets bull run, albeit while paying a few decent dividends on the way. MM likes to cast its eye over any sector which the whole market appears to have given up on. We believe TLS has now become a trading stock which will probably provide one, or two, great opportunities annually, at least for a while.

  • We are buyers of TLS around $3.20 and sellers above $3.75.

At the more speculative end of town both Vocus (VOC) and TPG Telecom (TPM) look attractive from a risk / reward perspective if we get another sell-off in the sector:

1. Vocus (VOC) $2.50 – we could be buyers into fresh lows below $2.20.

2. TPG Telecom (TPM) $6.13 – We like TPM down towards $5.80.

NB There is no hurry at this stage to chase a sector in such an entrenched downtrend, especially in our case when we are long TLS.

Telstra (TLS) Chart

3 Technically Cochlear (COH) looks vulnerable

COH has enjoyed an amazing run trading at fresh all-time highs on Friday. However from a purely technical perspective COH has reached out target area of ~$190.

  • COH is now trading on a rich 43x Est. 2018x earnings, a large valuation when interest rates are rising.

We would not be surprised to see a $30 / 15% correction back towards $160 for a buying opportunity i.e. only back to Januarys low.

Cochlear (COH) Chart

4 The US / Global Banks.

US Banks soared over 2% on Friday night leaving them only 2.7% below their 2018 high.

  • We are bullish US banks targeting another ~4/5% upside from Fridays close.

Macquarie Group (MQG) is highly correlated with the US Banking Sector and we believe a rally of this magnitude will enable us to take an excellent profit on our holding well above $110.

US S&P500 Banking Index Chart

Our holding in CYB was one of the markets best performers last week rallying +5.4%. The UK based bank now looks firmly on track to reach our $6 target area in the coming weeks.

CYBG Plc (CYB) Chart

“Shopping List”

Below is our basically non-existent shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 9% of the MM Platinum & 5% of the Income Portfolio in cash, hence we are extremely fussy buyers :

1.      Banks – We are comfortable with current exposure but like the sector over coming 1-2 months.

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 just feels ok at present.

5.      Food and Beverage – Happily square at present.

6.      Healthcare – Square feels ok.

7.      Resources – We completed a lot of buying in February and are considering our sell levels moving forward.

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 holding is enough at current levels.

10.   Retail – No investment buying at this stage.

11.   Gold – We have no interest considering our $US view.

“Selling List”

1.      Resources – At this stage we are looking for another 5-10% from our holdings.

Importantly we anticipate the resources will be the first section of our portfolios that we move to cash primarily due to our $US view.

Standout technical chart (s) of the week

The Russell 2000 is made up of the smallest 2000 companies in the Russell 3000 and it appears to have a perfect chart pattern at present.

  • We are bullish the Russell 2000 looking for ~5% more upside before in our opinion it’s time to move into cash.

Russell 2000 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 unlikely to be buying in the coming weeks.
  • We have nothing very close to our sell areas at present (see last Wednesdays MM Morning Report) but anticipate our resources as a sector will be first in the cross-hairs. 

Trading Opportunities on our radar

1. Last week we said “It’s simple, MM believes NAB will outperform BHP over the next 2-months” – this remains one of our favourite trade for now. i.e. Buy NAB and sell BHP.

2. Santos (STO) has been the talk of a takeover over recent years and it feels like now, or never, for the long suffering shareholders. 

  • Buy STO around $4.90 targeting ~$6 with stops beneath $4.60 – excellent risk / reward although these plays don’t have a great success rate.

Santos (STO) 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.


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.


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 10/3/2018. 10.00AM.
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