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

By Market Matters 12 November 17

Market Matters Weekend Report Sunday 12th November 2017

Market Matters Weekend Report Sunday 12th November 2017

The ASX200 had another strong week rallying +1.2% with gains across virtually all sectors, overall a very good performance considering the Global World Index actually closed down -0.25%. The previously distant goal of the psychological 6000 level has in the blink of an eye been relegated to the rear view mirror and at MM we continue to believe the big question has now become how far above the 2015 milestone will local stocks rally before a more significant move to cash / negative positioning is warranted – we currently hold 88.5% of the MM Platinum Portfolio invested in stocks i.e. only 11.5% in cash. Medium-term overhead resistance does not come in until around 6200, almost 3% higher, and this now feels a very realistic target for a 2017 Christmas rally.

However we have now entered the seasonally weak middle of November period and considering the stretched position of international indices patience feels very warranted for buyers, at least for the next few weeks. We are keeping the following strong statistics firmly in the front our mind:

1. Since the GFC there has been an average correction in November by the ASX200 of -5.3%.

2. Historically the correction usually lasts round 11-days and commences on the 10th i.e. last Friday.

3. Similarly since the GFC Commonwealth Banks’ pullback in November has been over 6%.

Hence while we remain bullish the ASX200 at MM targeting a significant break over 6000 in 2017 / 2018 a short-term correction down towards the 5900 area would not surprise. Markets are in a period of distinct optimism where buying any dip has paid handsome dividends since Donald Trump’s surprise election victory but investors must remain open-minded as investor sentiment can change, and often rapidly – just remember the ASX200 recently traded sideways for around 20-weeks, when traders successfully bought weakness and sold strength, but then dramatically in only 6-weeks we’ve rallied over 7%.

The list of major winners / losers last week shows a relatively balanced result as the winners notched up another victory, this time only 7 to 4 with the stand out being the buying of the property sector and conversely the selling of some previously in favour material stocks:

Winners : Janus Henderson (JHG) +6.1%, Magellan (MFG) +5.6%, James Hardie (JHX) +7.3%, Westfield (WFD) +8.4%, Mirvac (MGR) +5.8%, Vicinity Centres (VCX) +5.2% and TPG Telecom (TPM) +7.2%.

Losers : Orica (ORI) -13.2%, South32 (S32) -6.9%, Alumina (AWC) -8.2% and CSR Ltd (CSR) -5.2%.

Today’s report is going to focus on our longer-term outlook for markets and hence what / why we are looking to buy / avoid.

ASX200 Weekly Chart

MM’s outlook for markets.

As subscribers know we believe interest rates have bottomed and the break of the 35-year bear market for the influential US 10-year bonds is just a matter of time i.e. interest rates are going up. We are still experiencing artificially low global interest rates as central banks continue to use monetary policy / QE to maintain a degree of economic growth, Europe in particular appears scarred to allow economies to function without huge external assistance. Just consider the following global bond yields, even following some recent strength:

  1. German 10-year bund yields are paying only +0.41% but their 5-years are still negative -0.33%.
  2. Italian bonds yields are +1.85% but Switzerland’s are negative -0.07%.
  3. Australia’s are at +2.64%, relatively close to the US at +2.4%.

Why would any sane investor lend Germany money for 5-years and pay them for the pleasure, especially when global asset prices have been rising. Personally I would also want a lot more than 1.85% to lend Italy money for 10-years, literally anything could happen in their economy over a decade. Moving onto stocks, lets importantly consider the very broad potential winners and losers from rising interest rates:

Winners : Insurance companies, banks and resources to a degree.

Losers : The “yield play”, healthcare, real estate, “safe haven” stocks like our supermarkets and of course gold.

Hence at this point in time we have a relatively small exposure to the second group of stocks and this is where not surprisingly we are likely to concentrate our selling in the weeks / months ahead.

US 10-year bond yields Quarterly Chart

The press have run a number of negative stories on the Australian housing market over recent days focusing on a distinct fall in prices plus a pick-up in mortgage distress. However interest rates remain at all-time lows, imagine the pullback if / when rates double which would only be a tiny blip on the chart of the RBA cash rate.

As we repeat, remain open-minded, we are not saying sell all your property but if Australian property can correct so can shares!

Australia’s RBA cash rate Monthly Chart

US stocks ended their 8-week rally last week on concerns Donald Trump’s tax cuts will struggle for implementation but we believe the likely catalyst for a decent correction in stocks will be when US 10-year bond yields break their 35-year down trend – a door they have knocked on previously and still are today. We believe markets are underestimating the risks of a bond market meltdown / rates higher, or a more probable knee jerk sell-off.

At MM we believe that it’s important to be positioned correctly for when this pop in rates occurs because although its theoretically good news for a large part of the ASX200 the strong likelihood is the whole index will initially be sold off with the concentration likely to be in the negatively impacted stocks.

One of MM’s “out there” forecasts for the next 2-years is the healthcare sector will be a distinct underperformer – I’m sure that puts us in the minority!

We are already watching US healthcare stocks underperform over recent weeks – down close to 4% in a rising market, we believe this has much, much further to travel and the worryingly correlation between Australian and US healthcare stocks is extremely high.

US S&P500 Healthcare Index v Australian Healthcare Index Quarterly Chart

On a micro level potential indiscriminate selling was illustrated last week when US 10-year bond yields rose, theoretically good news for their banks but the banking index fell a significant -4.3%.

If Donald Trump is finally successful with his tax cuts it may initially be positive for stocks but watch bond yields because they may rally in unison putting pressure on large parts of the stock market e.g. in Australia the quasi bonds like Sydney Airports (SYD) and Transurban (TCL), have fallen well over 20% already once in 2017 and can easily do so again.

US 10-year bond yields Weekly Chart

US S&P500 Banking Index Weekly Chart

The Gold market may have been another recipient of selling triggered by rising bond yields. On Friday night a huge 4 million tonnes of gold was sold in ~10 minutes, sending the precious metal down over 1%, for no clear reason. However hedge fund managers often trade spreads i.e. if US bond yields reach x sell gold at y.

This specific example is obviously pure speculation but we do expect triggers of selling in various markets if US bond yields rise strongly which we believe is a strong possibility.

We are 50-50 gold at current levels and will be watching our Newcrest (NCM) position very carefully moving forward due to the negative impact on gold from rising interest rates.

Market Vectors Gold ETF Monthly Chart

Australian stocks / sectors


We have remained patient in adding to our IGO / NCM position within the Australian resource stocks. However there is no change to our overall outlook:

1. We are positive the reflation trade hence are keen on the likes of BHP, OZL and RIO into weakness but still do not plan to chase strength.

2. We currently prefer the base metals over the more volatile and currently weaker iron ore sector. Ideally the spot index will correct ~7% again allowing us a decent risk / reward buying opportunity.

Bloomberg Base Metals Spot Index Weekly Chart


We remain bullish crude oil for now but are conscious that for the first time since crude oils large fall in 2014 oil is now trading in backwardation i.e. buying oil today is more expensive than on the futures market in say 6-months’ time. This regularly occurs at a top in oil, it does not mean sell today but watch carefully at the very least.

Crude Oil Monthly Chart


We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a small paper loss of ~1%, the position is being monitored closely due to the significantly negative influence of rising interest rates.

However, if we are correct and the $US has a good chance of making one final low in the relative near term around the 90 level we should be able to crystalize a profit from this position over $25.

The $US Index Weekly Chart

Banks and bond yields / interest rates

We remain both positive and now mildly overweight the banking sector as we move into this seasonally weak period for the sector – including of course Monday’s dividends for ANZ and Westpac. Obviously as the bulk of this report outlines we are bullish bond yields which should help banks profitability hence are portfolio skew towards the sector.

We continue to keep 3 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is just another ~8% higher.
  2. Between the 10th & 20th is usually a poor time for our banks as investors take some money from the table following some large dividends and healthy gains.
  3. Seasonally CBA usually falls ~6% over the next few weeks (since the GFC) and then rallies over +4% in December hence we may increase our CBA position back towards 10% if we see decent selling in November and / or rebuy CYB.

Commonwealth Bank (CBA) Seasonality Chart

Diversified Financials

The Diversified Financials remain bullish with a target ~13% higher. Recently we executed the planned purchase of IFL within the sector hence will not hesitate to take profit on CGF at our target: 

  • Our target for CGF is ~$14 where we are likely to take profit.
  • Conversely we still like MQG into any weakness, especially if its broadly across the banking sector.

Challenger Ltd (CGF) Monthly Chart

Macquarie Bank (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will consider buying panic weakness in some select stocks if the opportunity arises i.e. HVN under $3.50.

We remain net bearish Woolworths with an eventual ugly, potentially under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

As discussed earlier we remain bearish the US Healthcare Sector which interestingly was again under pressure last week falling -0.5% by Fridays close.

However, we are happy with our purchase of Nanosonics (NAN) in the short / medium-term with a close over $3.05 required to improve the technical picture.

Nanosonics (NAN) Monthly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is now literally only a few % away for the S&P500. Considering we are ultimately looking for a correction of over 20% we are understandably avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the S&P500 has rallied an impressive ~25% with only one small -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip”.

US S&P500 Weekly Chart

We remain bullish European stocks but last week’s weakness has brought our “gut feel” to neutral / bearish. A close by the German DAX back under 12,900 / 2% lower will turn us bearish technically short-term.

German DAX Weekly Chart

The MSCI World Index has followed a perfect “technical path” since the GFC, even correcting exactly 355-points twice since its 2009 low. Our long-term target remains ~2150, over 5% higher but short-term a correction feels overdue, especially from a risk / reward perspective.

MSCI World Index S&P500 Quarterly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 10% of the MM Platinum Portfolio in cash: 

  1. Banks – We like our mildly overweight banking position just for now but may increase our CBA position if we see any seasonal weakness, plus we like CYB at lower levels.
  2. Consumer Services – Nothing is close at present.
  3. Diversified Financials – Following our purchase of IFL that’s enough for now but we do like Macquarie (MQG) into weakness.
  4. Energy – Were mildly positive but see no value at current levels although Santos (STO) is tempting as a trade.
  5. Food and Beverage – We like A2 Milk (A2M0 around $6.50 but are unlikely to add to our position until sub $6, if that occurs.
  6. Healthcare – We still like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We are likely observers this week.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage, as a trade VOC / TPM look interesting for the brave!
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have more than enough exposure at this time with NCM.

Potential “Sells”

The same 3 stocks in our MM Platinum Portfolio are in striking distance of to our current sell targets: 

  1. Challenger (CGF) around $14.00.
  2. Telstra (TLS) over $3.65.
  3. Aristocrat (ALL) between $24.50 and $25.

Standout technical chart (s) of the week

Last week the “Fear Index” (VIX) rose over 23% as professional investors started buying downside protection, although they clearly have not yet started selling stocks. This scenario is easy to understand as its fund managers exposure to equities that has made them look smart in 2017.

At this stage it’s just a warning that a correction is close at hand but it’s a definite “tick in the box” of what we would expect to witness prior to any pullback in stocks.

US Fear Index (VIX) Weekly Chart

Investing opportunities for the coming week(s)

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

  • Nothing imminently close while I’m typing although if CGF and ALL have a good week we may sell.
  • Also, we are buyers of CBA, CYB and MQG into any decent seasonal weakness.

Trading Opportunities on our radar

We only have 1 trading idea this week which is in Santos (STO) where we had a successful foray recently taking a profit of just under 10%. The stock is actually higher than where we exited courtesy of a strong oil price but we are investing / trading to make money, not for ego and hence have no hesitation buying back into a stock at a higher price than we previously exited. 

  • Buy STO around $4.45 with stops under $4.30 targeting ~$5 i.e. excellent risk / reward.

Santos (STO) Daily Chart


We are now confident in our medium-term forecast of the ASX200 breaking well over 6000 in 2017/8  with a “guess” target of over +6200. However short-term we are now cautious at least for a few 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 . 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 11/11/2017. 4.00PM.

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