Market Matters Report / Market Matters Weekend Report Sunday 12th August 2018

By Market Matters 12 August 18

Market Matters Weekend Report Sunday 12th August 2018

Market Matters Weekend Report Sunday 12th August 2018

August is following closely in the footsteps of July with regard to the ASX200, the markets only traded in a tight 82-point range as we slowly approach the half way stage for the month – Springs now already looming only a few weeks away. Reporting season has however led to some significant moves under the hood on the stock level, below are just a few that have caught our eye over recent sessions:

Winners: Commonwealth Bank (CBA) +3.5%, ALS Ltd (ALQ) +4.3%, Crown (CWN) +6%, Tabcorp (TAH) +6%, Magellan (MFG) +17.6%, Suncorp (SUN) +5% and South32 (S32) +5.8%.

Losers: Seek (SEK) -6.7%, Treasury Wine (TWE) -4.3%, Amcor (AMC) -6.7%, James Hardie (JHX) -5% and AGL Ltd (AGL) -5.5%.

One trend that we’ve been trumpeting over recent weeks is slowly emerging - the old fashioned blue chips have started to outperform the high valuation / growth stocks. This 9 ½ year old bull market is becoming noticeably less tolerant of companies on high valuations who even hint at struggling to live up to the future growth expectations, there’s a few great example above.

  • MM will be steering away from high growth / valuation stocks in 2018/9 and are hence watching our A2 Milk position closely.

Not surprisingly our overall market view has not changed significantly over the recent quiet weeks with MM comfortable sellers of strength in stocks / indices, but not yet weakness. This coincides with our fundamental view that the market is fully valued but not overly expensive unless of course any of the regularly occurring event risks become fully blown macro-economic issues e.g. contagion from Turkey which we look at a little later.

  • MM remains in cautious “sell mode” but our decent cash levels (15%) plus negative facing positions (8%) does allow us to take long positions if compelling risk / reward presents itself.

Interestingly even though US stocks fell -0.7% on Friday the ASX200 SPI futures are pointing a stronger open on Monday, up around 10-points.

ASX200 Index Chart

At this stage of the year when we consider the local market on a more short-term basis we generally switch our attention to the futures market which already has the looming dividends built into its price, as opposed to the ASX200 which gets skewed as the heavyweight stocks trade ex-dividend.

The September futures are currently  trading at around a 55-point discount to the ASX200 with the difference basically comprising of the points from the likes of CBA and Suncorp trading ex-dividend over the next few weeks i.e. as CBA, SUN etc trade ex-dividend the ASX200 will fall in price towards the September futures, they will continue to converge until they are at the same price when the September futures expire on the 20th of September.

Technically the market has been trading in what’s usually referred to as “Rising Wedge” for around 2-weeks:

  • A Rising Wedge (Reversal) is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows – the market is rallying with ever reducing momentum.

The weekly ASX200 chart above illustrates the “Rising Wedge” perfectly while the futures aren’t as classic because they commence trading daily at 950am, before the underlying stocks open. Hence they often trade at erroneous levels early on compared to the underlying stock market e.g. the 6272 high on the 10th of July i.e. the futures simply get it wrong early!

However the underlying technical theme remains the same and fits our short/medium-term outlook for stocks i.e. a minimum 10% correction is close at hand.

  • MM remains sellers of strength and will be considering adding to our Bear and / or BBUS ETF positions over the coming days / weeks.

ASX200 September Futures Chart

1 MM’s strategy moving forward.

Last week was a pleasing result for the MM Platinum Portfolio as we outperformed the ASX200 even though the index was up +0.7% and we hold 15% in cash and 8% in bearish facing ETF’s – the main difference was we hold CBA & SUN from the winners circle while avoiding any of the reporting season hand grenades from last week.

A simple breakdown of the portfolio shows us holding:

  • 27% major banks, 15% insurance, 7% Telstra, 6% Healthcare, 8% financials, 11% resources, Food 3% plus 15% in cash & 8% in Bearish ETF’s.

We are very comfortable with the majority of our holdings at this stage and last weeks performance illustrated we are skewed well but some of the positions highlighted above are certainly causing us some angst on a few different levels.

At this stage it’s important to note:

  1. We have no intention of averaging our worst losers MIN, ORE, A2M and JHG i.e. both weakness and strength is generally following through in stocks at present.
  2. As planned we do intend to average the BBUS negative facing ETF to the US stock market.

We remain committed to our view that local stocks, especially the “boring old fashioned blue chips”, will outperform the US over the next 6-months hence we are comfortable increasing our BBUS position as opposed to significantly increasing our cash position as we have in past e.g. before stocks fell over 20% in 2015/6 MM moved to over 50% in cash, this time we are looking to improve on that excellent result with a combination of high cash levels and negative facing ETF’s.

  • After the market bottomed in 2016 the ASX200 has rallied 33% while the S&P500 has surged over 56% – both before dividends.

US S&P500 v ASX200 Index Chart

Lets put our position in the BBUS into perspective, remember it’s a leveraged product:

  1. If the S&P500 corrects back to the lows of February, around 10% lower, the BBUS should rally ~30%.
  2. If the S&P500 corrects back to the lows of 2016, well over 20% lower, the BBUS should rally ~200%.
  3. Obviously if we are wrong and US stocks continue to rally this position will lose money.

BBUS BetaShares Bear US ETF Chart

Likely actions in the next few weeks:

  1. Increase our BBUS (short US ETF) position.
  2. Buy Crown Resorts (CWN) around $14, Aristocrat around $29, MFG into a $1.50 pullback, 1 or 2 resource stocks ~5% lower.
  3. Reduce stock exposure if an opportunity arises e.g. SUN above $16 and / or rallies in QBE, JHG, ORE, A2M, RHC and MIN – only expect 1 or 2, not a mass clear out!

NB Any buying is likely to be a switch not outright buying at this stage due to our overall market view.

We mentioned above buying 1 – 2 resource stocks into ~5% weakness, one candidate is RIO but because the stock went ex-dividend $1.71 fully franked last week our interested buy level has dropped from around $74 to under $73 which will be ~16% below the highs of 2018.

RIO Tinto (RIO) Chart

2 Another macro-risk = contagion from Turkey.

The news flow has almost been exhausting in 2018 primarily courtesy of a volatile President Trump and of course his Twitter account but except for the “volatility spat” back in January / February stocks have remained quiet and firm. The S&P500 is currently up an impressive 6% for the calendar year however we are entering a seasonally tough time for US stocks – ironically for all of President Trumps controversy it was the economic news that US bond yields were rallying faster than many anticipated that triggered the “volatility stops” leading to the ~11.8% plunge by US stocks over just 12-days earlier this year.

While we remain comfortable with our view that stocks will again test their 2018 lows we’ve been waiting for a catalyst to trigger such a decline, on Friday Turkey was another real threat to hit risk assets. Turkey said they are basically prepared to fight President Trump in an “economic war” while Mr Trump said on Twitter, of course, “our relations with Turkey are not good at this time”.

Markets can only probably see one winner here but the contagion risks are scarring investors, how many fronts can Trump “battle on” before stocks get really worried.

  • The Turkish Lira fell 17% on Friday against the $US and is now down over 40% in 2018.
  • Turkeys inflation hit a huge 16% last month.
  • Turkeys 10-year bond yields hit 20% on Friday, the highest levels since the GFC and up from ~12% in only a few months.
  • The question arises can Turkeys businesses pay their debt load over $300bn which in many cases will be growing i.e. when in $US and not hedged.

The VIX (volatility) Index / Fear Index Chart

Fund managers appear concerned that outflows from Turkey will hit all of the emerging markets and related assets / countries and while the shorter dated EEM picture looks ok the failed rally above post GFC highs is a concern to the bigger technical picture, Emerging markets are a falling knife we will no longer consider catching, at least for now.

Our view on this issue is similar to the China-US trade war i.e. politicians probably will not let this escalate out of control but the relative complacency, as measured by the VIX above, we believe is simply way too confident considering its moves over the last decade.

  • Assuming central banks will prop up asset prices through thick and thin is a dangerous game especially as history tells us they won’t, or can’t!

Emerging Markets ETF (EEM) Chart

3 Clues from overseas Indices

Overseas stocks continue to threaten a decent market correction without generating clear technical sell signals.

Both of our likely scenario’s for the US S&P500 are bearish medium-term with just exactly how things unfold over the next few weeks the question – assuming we are correct of course!

1. The S&P500 will fail to make fresh highs for 2018 and is destined to correct ~10% back towards 2550.

2. The S&P500 will make fresh all-time highs up towards 2900 before failing and then correcting back towards 2550.

At this stage we are not saying the correction will not be deeper, just that we will evaluate its characteristics as the market evolves.

US S&P500 Index Chart

European indices continue to track sideways with no great signals being generated, from  a technical perspective the pattern would be ideal if stocks can break above their 2015 highs but it feels a big ask at present e.g. over 10% higher for the EuroStoxx 50.

EuroStoxx 50 Index Chart

Lastly a quick look at the MSCI world equity Index, which includes the troubled emerging markets indices, shows how tricky the last 6-months have been.

  • The MSCI World Index illustrates perfectly why we are on the fence slightly with exactly what comes next.

MSCI World Index Chart

4 Bond yields (interest rates) & the economic / market cycle - Part 2.

No major change from last week but worth restating - In a number of reports recently we have discussed why many economists / market players are watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends – currently the differential is only 0.269%.

  • Historically stocks will fall when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

The contraction of the bond yield differential implies to us that the US is heading towards a recession in 2020 hence our phrase that the global asset / equity bull market since the GFC is very mature feels on the money.

Hence investors should be looking for “late cycle positions” in stocks / sectors.

When we consider history one of the standout messages for this stage of the cycle is be extremely careful paying up for growth i.e. We want GARP (growth at reasonable price) not GAAP (growth at any price).

To keep things simple (KISS) its time for the below

Look for – solid / predictable profitability (ROE – return on equity) with relatively low debt levels at of course a reasonable price / valuation.

Avoid – high valuation growth stocks who are often unlikely to live up to expectations / hopes if the economy becomes a major headwind.

MM believes the time has arrived for the “boring quality blue chips” compared to the growth stories that have excelled over the last few years.

US 2/ 10-year yield curve Chart


Again no major changes.

  • We are now neutral while the ASX200 can remain above 6140 and we expect US stocks will make fresh all-time highs shortly, assuming Turkey does not blow up – NB. we can now see ourselves switching more negative sooner rather than later.
  • We are comfortable sellers of strength but not weakness, just yet.
  • We will continue to slowly increase our cash / short ETF positions and are still firmly wearing our “sellers hat”. 

Standout technical chart (s) of the week

The small cap Russell 2000 led US equities to fresh all-time highs, as they are the main beneficiary of the “Trump Tax Cuts”, we are now rapidly becoming bearish this index although a false spike above 1710 would be the optimum sell set-up.

  • Technically we are now bearish the Russel 2o00, which led US stocks up after the Trump Tax Cuts.
  • We are targeting at least under 1500, around 10% lower.

Russell 2000 Index Chart

Trading Opportunities on our radar

Lets not sugar-coat the story, QBE has been a market “dog” for over a decade. The stock’s performance has frustrated us as we went long due to the anticipated macro tailwinds of rising US bond yields and a weakening $A, both of which proved correct but alas we still are struggling to make $$ from our position in the Platinum Portfolio.

  • In the future when we have these style of macro-economic views they will largely be “played” via ETF’s, as opposed to stocks where companies / directors can ruin a good idea.

However we feel the Suncorp (SUN) result might just light a short-term fuse under QBE.

  • We are bullish QBE short-term initially targeting ~$11, around 7% higher.

QBE Insurance (QBE) Chart

Investing on our radar

We are keen on Crown’s exposure to the expanding Australian tourism market and especially the growing Chinese middle-class.

We were hoping to buy the stock around $13 but last week’s strong result put the end to that plan, especially with the announced $400m on-market buyback.

  • MM likes Crown (CWN) back around $14.

Crown Resorts (CWN) 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 11/08/2018. 4.10PM.

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