Market Matters Report / Market Matters Weekend Report Sunday 12th February 2017

By Market Matters 12 February 17

Market Matters Weekend Report Sunday 12th February 2017

Market Matters Weekend Report Sunday 12th February 2017

After starting the week on a poor note buying re-entered our market with gusto around the 5600 area and refreshingly we are back over 5700 within a few days. The notable standout last week, which we flagged in last Weekend's Report, was the sector / stock rotation which is clearly unfolding as investors search for value in a market which many analysts believe is fully valued. While the ASX200 rallied 1.8% for the week the strongest sector was the Telco's +5% who have endured a tough time over the last 3 months i.e. while the ASX200 gained 6.5% Telco's fell -6.3%. On a stock level the story was similar with Sydney Airports (SYD) up 4.8% but BHP falling 1.2%. This tells us that fund managers remain caught underweight equities in general and they are now simply searching the battered up stocks for some perceived value to allocate part of their elevated cash levels.

The local reporting season is going off ok and importantly not as bad as many feared, hence an average result is being met with some relief / buying by the market, this is likely to remain supportive of Australian stocks over the coming few weeks, obviously with the exception of anyone that "misses" badly e.g. mortgage insurer Genworth (GMA). Below are 6 examples of stocks whose results were ok / poor last week along with their respective performance for the week:

AMP +3.2%, Carsales.com (CAR) +7.4%,Henderson (HGG) +1.4 %, Macquarie Group (MQG) +1.9%,Real Estate Australia (REA) +1.5% and Suncorp (SUN) +1.4%.

Conversely RIO released an excellent report plus it enjoyed iron ore making fresh multi-year highs but the stock only gained 2.2%, we continue to believe that the resources sector is extended and a pullback / underperformance is likely in the short-term. Fortescue for example has already corrected 7% from this month's high , we continue to target the $5.80 area where we may buy FMG, or another stock to gain exposure to the sector.

Fortescue Metals (FMG) Monthly Chart

While we need a clear break by the ASX200 of 5735 to technically target over 5800 this month the current momentum, both locally and overseas, suggests this strength is likely to unfold. Furthermore, if we assume last week's low of 5582 was the completion of the current 4.2% correction for Australian stocks the simple monthly statistical ranges targets at least 5800 in coming weeks - note that some major companies will go ex-dividend in February creating some short term pressure on the index itself e.g. CBA, RIO, Suncorp and Westfield.

Overall we remain positive local stocks, especially on a close over 5735, however a break of 5540 would create a bearish change in trend but this currently feels far away.

ASX200 Daily Chart

US equities enjoyed another solid week and yet again made fresh all-time highs on Friday, on the surface the catalyst was Donald Trump promising to "do a number" on the Dodd-Frank Act which would in theory significantly reduce regulatory pressures on the US financial sector, simply making bank / financial stocks far more profitable. However we believe the main driver of equity markets currently is the cash being held by fund managers, which admittedly has dropped from 5.8% in October to 5.1% in January – however the October level was the highest since late 2001. Another number we look at closely in the BofA Merrill Lynch Global Fund Manager Survey is the number of fund managers who say they are overweight stocks, this is slowly rising from 5% a year ago to 39% today, historically over 50% is bearish.

This ties in with our overall view of another ~6-8% higher by US equities before large warning bells will start ringing.

Russell 3000 Quarterly Chart

We continue to watch the $US closely as we believe it will be the key to some great opportunities in 2017/8, one of those areas being the gold sector. Last week the $US recovered back over the psychological 100 area, gaining ~1% for the week, and we still feel a pop to a fresh high around 105 is a strong possibility but we reiterate our view that this will be a major selling opportunity. Interestingly even with the strength in the highly correlated $US the major gold ETF's still rallied over the week - a bullish sign for gold.

We will increase our gold exposure if / when the $US reaches the 105 area with Regis Resources and Evolution Mining on the radar.

$US Monthly Chart

Lastly a number of subscribers have asked why we look at around 100 charts every weekend - for the record its many more! We are just looking for some uncomplicated / clear guide to where markets are heading and hopefully a few good risk / reward opportunities. Many Technical Analysts try and curve fit their methodology onto all markets but we believe many of the charts we look at are simply akin to a spider walking through the ink, after too many glasses of red i.e. as clear as mud! A good example of clarity to us, which was used earlier in the week for a morning report is the German DAX, we feel the DAX is headed towards the 12,000 area (3% higher) which supports our short-term bullish outlook for global stocks. Focus on the charts that are clear and draw conclusions between assets from those. For instance, if the $US is clear then we can apply our thinking here to other related assets like gold for instance to help form our views.  

German DAX Daily Chart

Standout technical chart (s) of the week

BEN rallied strongly last week from its $12 support level. We feel the stock is headed up towards $14 BUT be warned it reports shortly and BEN is expensive relative to the sector however the positive technical setup for BEN is overall bullish for the banking sector at least for the coming few weeks.

Bendigo Bank (BEN) Weekly Chart

Summary

Our view remains that US and local stocks will rally over the coming few weeks, with outperformance from the "unloved" stocks / sectors but underperformance from the recently high flying resources.

Medium term after a rally of ~8% by US stocks we are targeting a 25% correction over a few years.

What Matters this week

The ASX200's is set to open up 10-points on Monday, short-term we need a break of 5735 by the ASX200 to again become bullish the overall index but we do feel this will occur.

Potential Investing opportunities for the coming week(s)

We are now holding 20% in cash and are still wearing our sellers hat into strength BUT our buyers hat into weakness = the theme of Q1/2 of 2017. We are in the middle of no-man's land at present i.e. the sellers hat will come back out over 5800, with a buyers stance under 5600.

Potential Trading opportunities for the coming week

On the index front we still like the German DAX and Japan's Nikkei over coming months.

Locally we would be buyers of a close over 5735.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 10th February is below:

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-10th-february-2017

We are currently holding 20.5% in cash after purchasing SGR last week, plus TPG Telecom as a trade. We remain sellers of strength and buyers of weakness until further notice.

Australian ASX200

The ASX200 could potentially break over 6000 in 2017 before the significant correction we are targeting unfolds over the coming few years - the key remains to be open-minded.

If we assume that last week's 5582 is the low for February then a move over 5800 is definitely anticipated in the coming 2 weeks.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 – March Share Price Index (SPI) 60-mins Chart

American & Canadian stock market indices

US stocks have surged over 13% since Donald Trump's victory with the Dow, Russell 2000, Russell 3000 and finally the NYSE Composite making fresh all-time highs. We remain more cautious on stocks, our best "guess" at present is ~6-8% higher.

Importantly US indices are in a very clear final "Phase 5" of a major bull market since early 2009. We see further upside in what should be a choppy / volatile year prior to a major downturn that is likely to last a few years and correct ~25%.

Chart 5 – Dow Jones Index Monthly Chart

Chart 6 – Dow Jones Index Daily Chart

Chart 7 – S&P500 Index Monthly Chart

Chart 8 – S&P500 Index Daily Chart

Chart 9 – Russell 3000 Quarterly Chart

Chart 10 – NYSE Composite Index Monthly Chart

Chart 11 – Russell 2000 Index Monthly Chart

Chart 12 – US NASDAQ Index Monthly Chart

Chart 13 – The Canadian Composite Index Monthly Chart

European stock market Indices

European indices have broken out to the upside and technically look more bullish than US stocks from current levels with targets for the German DAX of +10% and Swiss SMI +15% - potentially fund managers that have been caught overweight cash are searching for value in previously weak markets. However, on a fundamental basis we may need to wait for some election results later in the year that do not favour extremists for this strength to unfold.

Chart 14 – Euro STOXX 50 Index Monthly Chart

Chart 15 – UK FTSE Index Weekly Chart

Chart 16 – German DAX Index Monthly Chart

Chart 17 – Swiss SMI Index Quarterly Chart

Chart 18 – Spanish IBEX Index Monthly Chart

Asian & Emerging stock market indices

Asian indices remain bullish with the Hang Seng index looking poised to rally ~7% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher. Similarly the Emerging Markets remain positive but fresh recent highs look likely to generate a selling opportunity.

Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Weekly Chart

Chart 21 – Japanese Nikkei 225 Index Monthly Chart

Chart 22 – Emerging Markets MSCI ETF Weekly Chart

Interest Rates & volatility

Short-term interest rates in the US have moved sharply higher since the Trump election win, the move has been assisted by the Fed forecasting 3 interest rate rises in 2017 plus strong wages growth fuelling inflation fears.

Beware, we believe this move higher for interest rates has only just commenced, however short-term we can see further consolidation at current levels e.g. Australian 3-year bonds have reached the psychological and technical 2% support area i.e. a 98.00 bond price.

Chart 23 – Australian 3-year bonds Weekly Chart

Chart 24– The US 10-year Interest Rate Monthly Chart

Chart 25 – The US 2-year Interest Rate Monthly Chart

Chart 26   Volatility (VIX) Index Weekly Chart

Australian stocks & sectors

The Australian stock market rallied 1.8% last week, following the strong lead from both Asia and the US. Short-term we see a likely test of the 5800 area with significant sector rotation an ongoing standout.

Banking sector

The local banking sector is looking strong which makes sense as it becomes more profitable as interest rates rise and Donald Trump considers removing onerous / costly regulations - the Dodd-Frank reform.

Chart 27 ASX200 Banking Index Monthly Chart

Chart 28 US S&P500 Banking Index Monthly Chart

Chart 29 – Commonwealth Bank (CBA) Quarterly Chart

Chart 30 – Commonwealth Bank (CBA) Daily Chart

Chart 31 – ANZ Bank (ANZ) Weekly Chart

Chart 32 – Westpac Bank (WBC) Weekly Chart

Chart 33 – National Australia Bank (NAB) Weekly Chart

Chart 34 – Bank of Queensland (BOQ) Monthly Chart

Chart 35 – Bendigo & Adelaide Bank (BEN) Weekly Chart

The Insurance sector

We remain bullish and comfortably long SUN within the insurance sector. QBE has enjoyed a strong move with the $US and rising interest rates, a pullback / consolidation feels likely short-term.

Chart 36 – Suncorp Group (SUN) Monthly Chart

Chart 37 – Insurance Australia (IAG) Monthly Chart

Chart 38– QBE Insurance (QBE) Monthly Chart

Diversified Financials sector

The Financials Index looks bullish, our target is over 10% higher, with CGF leading the way from current levels.

Chart 39 – ASX200 Financials Index Quarterly Chart

Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart

Chart 41 – Platinum Asset Management (PTM) Daily Chart 

Chart 42 – Henderson Group (HGG) Weekly Chart 

Chart 43 – Challenger Ltd (CGF) Monthly Chart 

Chart 44 – IOOF Holdings (IFL) Monthly Chart 

Resources / Materials  sector

Copper remains in a negative downtrend long-term, even after the recent months fireworks, we are eventually targeting the 150 area.

Iron Ore has significantly exceeded our initial $US70/tonne target, technically we now remain neutral / negative after the "abc" target of ~$US80/tonne has also been surpassed. Importantly the forward prices for iron ore are in a pronounced backwardation e.g. The February 2020 price is trading at a whopping 44% beneath today's price.

NB Backwardation - A situation in which the spot or cash price of a commodity is higher than the forward price, generally associated with short-term supply shortage. Contango is the opposite scenario.

Heavyweights BHP and RIO look positioned for short-term consolidation / weakness.

Chart 45 – Copper Monthly Chart

Chart 46 – Iron Ore Monthly Chart

Chart 47 – BHP Billiton ADR ($US) Monthly Chart

Chart 48 – BHP Billiton (BHP) Weekly Chart

Chart 49 – RIO Tinto Ltd (RIO) Weekly Chart

Chart 50 – Fortescue Metals (FMG) Monthly Chart

Chart 51 – Independence Group (IGO) Weekly Chart

Energy sector

Our target for Crude Oil of +$US60/barrel remains a real possibility after the OPEC decision and a close over the $US52/barrel area. Our main concern for the energy stocks is the overall optimism in the market. Recently we took an excellent profit on our Origin position and feel comfortable square the sector for now.

Chart 52 – Crude Oil Monthly Chart

Chart 53 – Woodside Petroleum (WPL) Monthly Chart

Chart 54 – Origin Energy (ORG) Weekly Chart

Chart 55 – Oil Search (OSH) Weekly Chart

The Gold sector

Cracks appeared in gold in mid-2016 as it fell hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which is where gold is now hovering.

We believe there will be some excellent trading opportunities in 2017 within the gold sector sector primarily on the long side as we continue to look for a major top in the $US.

Chart 56 – Gold Monthly Chart

Chart 57 – Newcrest Mining (NCM) Monthly Chart

Chart 58 – Regis Resources (RRL) Weekly Chart

Chart 59 – Evolution Mining (EVN) Daily Chart

Chart 60 – Market Vectors Gold ETF Monthly Chart

The "yield play" stocks

We have been bearish bonds / bullish interest rates since mid-2016 and this view has not wavered. Hence we will only consider buying the "yield play" stocks as a trade when they are under severe pressure, as we did in late 2016 with both Transurban (TCL) and Westfield (WFD).

Chart 61 – Sydney Airports (SYD) Monthly Chart

Chart 62 – Transurban Group (TCL) Monthly Chart

The Property sector

A confusing picture short-term with the overall sector remaining mildly positive at current levels which theoretically contradicts our higher interest rates forecast. Hence we will avoid the sector in 2016 except WFD as an aggressive play if an opportunity arises well under $9.

Chart 63 – Westfield Corp. (WFD) Monthly Chart

Chart 64 – Mirvac Group (MGR) Monthly Chart

Food & retailing  sector

Some interesting signals are now unfolding within the sector, we believe both JBH and now WOW look interesting at present levels from a technical perspective.

Chart 65 – Wesfarmers Ltd (WES) Weekly Chart

Chart 66 – Woolworths Ltd (WOW) Weekly Chart

Chart 67– JB Hi-Fi (JBH) Monthly Chart

Chart 68– Harvey Norman (HVN) Monthly Chart

The internet / Technology sector

The Australian Tech. sector had a relatively tough 2016, we may have interest this year but currently only into further weakness.

Chart 69 – Seek Ltd (SEK) Monthly Chart

Chart 70 – REA Group (REA) Monthly Chart

Chart 71 – Carsales.com (CAR) Monthly Chart

The Telco sector

The Telco sector endured an awful 2016 falling ~20% after spending many years in the limelight. Changes within Broadband have made it extremely tough to value stocks within the sector which helped create the panic selling in both Vocus and TPG Telecom.

We are now trading buyers of this sector targeting ~10% advance from current levels.

Chart 72 – Telstra Corp. (TLS) Monthly Chart

Chart 73 – Vocus Communications (VOC) Weekly Chart

Chart 74 – TPG Telecom (TPM) Weekly Chart

The Healthcare sector

After being the perfect place to be invested since the GFC last year saw some wobbles within the sector as bond yields rose and excessive valuations were no longer tolerated by investors. While we see higher levels from the sector in years ahead we are 50-50 whether they can be achieved this year, or further weakness is likely first.

Chart 75– US S&P500 Healthcare sector Quarterly Chart

Chart 76– CSL Ltd (CSL) Monthly Chart

Chart 77 Ramsay Healthcare (RHC) Monthly Chart

Chart 78– Healthscope (HSO) Weekly Chart

Chart 79 - Ansell (ANN) Monthly Chart 

Chart 80 - Sirtex Medical (SRX) Weekly Chart 

Chart 81 - Cochlear Ltd (COH) Monthly Chart 

The Gaming / Tourism sector

This sector had a volatile an overall pretty average 2016. However, we currently like Star City (SGR) targeting ~$5.50 minimum.

Chart 82 – Crown Resorts (CWN) Monthly Chart

Chart 83 – Star Entertainment (SGR) Weekly Chart

Chart 84 – Mantra Group (MTR) Daily Chart

The China speculative sector

Significant wealth has been destroyed in this area over recent times as crazy valuations came down to earth with a huge thud. Bellamy's return after suspense confirms our current view that it's all too hard!

Chart 85– Bellamy's (BAL) Daily Chart

Chart 86– Blackmore's (BKL) Monthly Chart

Australian Dollar (AUD) / FX Markets

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region but a test of 80c first feels likely.

The $US remains firm after Donald Trump's victory as the market adjusts for higher US rates. We have been targeting ~105 but short-term feel the bullish $US view is becoming crowded and a correction would not surprise.

Chart 87– Australian Dollar (AUD) / FX Monthly Chart

Chart 88– The $US Index Monthly Chart

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 12/02/2017.  9.00AM. 

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

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