Market Matters Report / Market Matters Weekend Report Sunday 12th May 2019

By Market Matters 12 May 19

Market Matters Weekend Report Sunday 12th May 2019

Market Matters Weekend Report Sunday 12th May 2019

Firstly, Happy Mothers day to all those wonderful Mum’s out there. I’m married to a superstar and have a fantastic Mum and Mother in Law – all coming to lunch today at our place along with the rest of the family. Should be a sensational Autumn day on the Northern Beaches -  I hope you all enjoy a great one.

Turning to markets, the ASX200 outperformed most global indices last week as we embraced the prospect of lower interest rates, especially after NZ cut rates to 1.25% on Wednesday. The positive market undertone was understandable but it was especially impressive as US – China trade talks threatened to unravel courtesy of another Tweet from President Trump, yet again a few keystrokes sent waves of panic through many global equity indices – the ASX200 finished the week only down -0.4% compared to the US S&P500 which fell -2.2%, even after Fridays +0.4% bounce. Within the local market the Banks, Golds, Real Estate and the “Yield Play” stocks rallied confirming the dovish central banks narratives are currently the main positive influence on domestic stocks.

We feel the “sell in May and go away” phenomenon might not come to fruition this year, or perhaps may simply be delayed, especially after witnessing the ASX200 shrug off significant negative global leads last week. The major movers (+/- over 5%) in the ASX200 during the first full week of trading for May was unfortunately dominated by the losers. When we combine this with less than 40% of the index managing to close in the black it warns us that perhaps the markets broad internals are not as strong as they felt by the close of play on Friday.  However at the end of the day “don’t fight the tape” and in this case local stocks don’t want to go down for now.

Winners – Bingo (BIN) +7.3%, Saracen (SAR) +10.6%, Evolution Mining (EVN) +8.5%, Northern Star (NST) +9.6%, Pilbara (PLS) +6.3% and Domain Holdings (DHG) +7.4% = 6 stocks.

Losers – CYBG Plc (CYB) -5.6%, CIMIC (CIM) -9.5%, Emeco Holdings (EHL) -11.8%, NRW Holdings (NRW) -13.3%, Seven Group (SVW) -6.9%, G8 Education (GEM) -5.7%, Corporate Travel (CTD) -5.8%, Pendal Group (PDL) -5.6%, HUB24 (HUB) -11.1%, Eclipx Group (ECX) -7.3%, Treasury Wines (TWE) -11.5%, Costa Group (CGC) -6.9%, Graincorp (GNC) -15.1%, Bellamys (BAL) -9.3%, Tassal Group (TGR) -6.5%, Nanosonics (NAN) -6.4%, Brickworks (BKW) -5%, Adelaide Brighton (ABC) -17.9%, Nufarm (NUF) -5.7%, News Corp (NWS) -5.1%, OOH!MEDIA (OML) -7.3%, Mayne Pharma (MYX) -6.3%, Lend Lease (LLC) -5.8%, URW CDI (URW) -5%, Appen Ltd (APX) -6.4%, Afterpay (APT) -5.2% and TPG Telecom (TPM) -7% = 27 stocks.

Short-term MM remains bullish the ASX200 while it can remain above 6250 with an initial technical target just above 6400.

On Friday night US indices recovered from initial steep losses to close up on the session with the S&P500 recovering an impressive +2.3% from its lows. The SPI futures are calling the ASX200 to open up around +0.5% on Monday assisted by the US granting China a month to finalise an amicable trade deal, or face tariffs on all its exports to the US. Trump imposed a further $US200bn in tariffs on Friday but left clear room for negotiations moving forward albeit from the posture of the schoolyard bully.

Stock markets are factoring in less than a 10% chance of the US - China failing to sign a deal, we believe they are correct  but investors should not underestimate the downside for stocks if a full blown trade war does unfold.

ASX200 Chart

Last week we saw NZ cut rates below our own to 1.25% while Australian 10-year bond yields challenged their 1.704% all-time lows. The RBA is understandably being influenced by Australia’s failing property market and they lowered their economic forecasts suggesting the futures market factoring in a drop of official interest to 1% by the end of 2020 is on the money, I even read a few articles spouting the idea of quantitative easing by the RBA moving forward – never say never and don’t underestimate how worried the RBA will become if employment starts to trend the wrong way.

As we said last week the train driving equities at present is bond yields and last week both Australia & New Zealand stocks were full steam ahead on a relative performance basis as their respective yields fell – the NZ equity market traded at a fresh all-time high on Friday. However we should always remember that stocks generally trade ahead of events i.e. they are now pricing in a RBA cash Rate of 1% and perhaps lower &/ or some QE BUT only in December stocks fell aggressively as the world thought rates would be raised too fast and push the developed world into a recession – what a difference 6-months makes!

MM believes stocks will remain firm until bond yields start to increase, or perhaps just plateau.

ASX200 v Australian 3-year Bonds Chart

Some investors became concerned last week with both President Trumps “Tweets” and the dip in the number of US job vacancies but the Advance-Decline indicators remain robust and we believe they are critical to the health of the US stock market as it excellently represents financial market liquidity i.e. we don’t yet appear to be at the end of this current economic and employment expansion in the US.

 NB The ratio is calculated by the “advances” being the number of the NYSE listed stocks which traded above their previous days close and "declines" is the number of the NYSE listed stocks traded below their previous day close hence representing an excellent picture of the markets internal strength with ~2800 stocks trading on the New York Stock Exchange (NYSE).

Our preferred scenario remains both US and Australian markets will make fresh 2019 highs in the months ahead.

Tom McClellan’s Advance – Decline Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio had an ok week outperforming the market https://www.marketmatters.com.au/new-portfolio-csv/ but unfortunately it was dragged back by Emeco (EHL) and Costa Group (CGC) who were both in the wrong sector at the wrong time, fortunately Bingo (BIN) and Orica (ORI) repaired the damage - a thumbs up for the portfolio theorists.

Firstly, the easy bit looking at our best performer from last week Bingo (BIN) which rallied over 7%, our target remains the $2.10 area where MM expects to take profit in the weeks ahead.

Bingo (BIN) Chart

Secondly, let’s consider the 2 stocks which weighed on the MM Platinum portfolio last week, both fell into the “losers” category mentioned earlier – remember “look after the downside and the upside will look after itself”.

Costa Group (CGC) fell almost 7% last week, frustrating as we recently increased our position but we see no reason to panic on this stock but any further additions will only be considered at significantly lower levels.

If we had no position we would buy CGC around current levels.

Costa Group (CGC) Chart

Earth moving equipment leaser Emeco Holdings (EHL) tumbled almost 12% last week in sympathy with CIMIC (CIM) on the back of a report from a Hong Kong research firm accusing CIM of inflating profits by a massive $1 billion over two years – a bad week for the Mining Services space. Again frustrating as we recently increased our position in EHL but we see no reason to panic on this stock but again any further additions will only be considered at significantly lower levels.

If we had no position we would buy any dip to fresh 2019 lows.

Emeco Holdings (EHL) Chart

Thirdly, stocks we are considering buying in the weeks ahead, still a very important consideration as we have elevated cash holdings in both the MM Portfolios plus of course we remain bullish! A mixed group today but we are looking for stocks that can “pop” higher as they return to favour, it’s been a characteristic of the market through 2019.

1 – Iluka (ILU) $8.65 – The mineral sands producer has struggled in 2019 after releasing an average first quarter update but we are now positive ILU at current prices with stops below last weeks $8.16 low.

2 – Worley Parsons (WOR) $13.78 – WOR fell hard last October following its $33bn accusation of Jacobs Energy, and subsequent cap raise but we believe 6-months on its catch up time; buy below $14 targeting above $20 with stops under $13 – excellent risk / reward.

3 – (1) Pendal Group (PDL) $7.59 – Buy into fresh 2019 lows, a more speculative play but we like the risk / reward and similarly (2) IOOF Holdings (IFL) $5.94 – Buy targeting fresh 2019 highs around $7 using stops below $5.70, again a more aggressive play but excellent risk / reward :  NB this is a one or the other situation.

4 – Gold Sector – we are keen to accumulate gold stocks into weakness but as we saw last week with the stocks rallying as Trump put the jitters through markets hence if we witness a rally to fresh 2019 highs, our preferred scenario, hopefully it will present more optimal entry opportunities.

Iluka (ILU) Chart

Worley Parsons (WOR) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ currently holds 18% in cash following our fairly aggressive switch from Telstra (TLS) to CSR Ltd (CSR) – definitely not following the crowd with this one!

We gave the Portfolio a spring clean in mid-April leaving us mainly focused on where to invest our “excess” cash. The answer is very similar to the Platinum Portfolio, we have been waiting for a pullback in the resources to build a position, like RIO around $90. Fortescue was close on Monday but not close enough however we believe patience may pay off in the months ahead. Also, as we saw last week with CSR we are constantly looking at situations as they evolve.

With bond yields continuing to knock on the door of all-time lows quality companies with sustainable yield should continue to trade strongly, just as we have seen with the banks in 2019 – we will continue to scour the landscape but as touched on earlier the market is already pricing in a RBA Cash Rate of 1% leaving room for disappointment to the dovish camp.

RIO Tinto (RIO) Chart

3 –  International Equites Portfolio

Repeating what we said last week “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a careful process.”

Following a decent correction by a number of quality stocks courtesy of President Trump we have identified 3 stocks we would buy at today’s levels (see this weekend’s Chart Pack)

1 - Chevron (CVX US) looks poised to break to fresh post GFC highs – this ties in with our attraction to Worley Parsons (WOR) on the Australian bourse.

2 – Alibaba (BABA) closed at $US178 on Friday after hitting a low ~$US173, we like the current pullback as a “cheeky” opportunity with an ultimate target around $US200.

3 – Trade Desk (TTD US) is a slightly smaller company albeit with a $US8,170m market cap, it  looks very interesting after last week’s sharp drop, we are bullish between $US170 and current prices.

Watch for the launch of the MM portfolio in the next few weeks but we will play our way in slowly unless the market has a deeper correction in May / June.

Trade Desk (TTD US) Chart

4 - MM Global ETF Portfolio

A new concept to MM but the portfolio will replicate our macro opinion primarily around global stock indices, different market sectors, interest rates and currencies – this can very often be played by investing in ASX listed ETF’s but when we required may also turn to overseas listed ETF’s. We have regularly discussed our views across these economic themes and its time to put theory into practice. Below is a list of Australian ETF’s updated at the end of February this year:

https://en.wikipedia.org/wiki/List_of_Australian_exchange-traded_funds

No trades are jumping out at us today but 2 definitely feel worth preparing for:

1 – A potential spike towards 65c by the $A.

We have discussed  a number of times in 2019 that we believe the consensus bearish Australian $A view is becoming way too crowded – MM believes the $A will see 80c before 60c against the USD but a spike down towards 65c is the ideal buying opportunity.

Hence when we believe the time is right we are likely to buy the AUDS ETF for the MM Global ETF Portfolio.

Australian Dollar ($A) Chart

 2 - Consider short Equity ETF’s into fresh 2019 highs.

Above 6400 for the ASX200 (pre bank dividends) and above 3000 for the US S&P500 we are likely to become bearish equities hence we could / may buy the BBOZ but we may still be bullish gold (QAU) or the Resources (QRE) hence we can create a mosaic of positions which at times have limited exposure to the underlying index itself as opposed to which sectors outperform – an exciting prospect for all at MM.

BetaShares Leveraged Bearish ASX200 ETF (BBOZ) ETF Chart

Conclusion

Short-term stocks look mildly bullish with our main focus in May looking to any decent pullback in the resources / gold stocks plus a few specific situations.

Chart of the week.

Last week we tried to buy FMG with a $7.10 and the low on the days was $7.11 – no comment required!

Fingers crossed a few subscribers were smarter than us on the day and paid up a few cents.

MM would take profit on any FMG longs into fresh 2019 highs.

Fortescue Metals (FMG) Chart

Investment of the week.

We mentioned Worley Parson (WOR) when we looked at the Platinum portfolio but it looks great plus as a bonus we like the Energy sector at present. WOR looks solid buying with stops below last week’s lows – excellent risk / reward.

MM is keen on WOR with stops below $13.20.

Worley Parson (WOR) Chart

Trade of the week.

We have mentioned QBE in this section previously but as its unfolding as expected, we are short-term bearish even while the indices look bullish.

MM is bearish QBE targeting ~5% downside.

QBE Insurance (QBE) 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.

 

 




Have a great day!

James & the Market Matters Team

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, or after the session when positions are traded.

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