Market Matters Report / Market Matters Weekend Report Sunday 13th May 2018

By Market Matters 13 May 18

Market Matters Weekend Report Sunday 13th May 2018

Market Matters Weekend Report Sunday 13th May 2018

Before we get into the Weekend Report on a cold, windy Mothers Day in Sydney, below is the link to the recent survey we’ve been conducting. We’re looking to incorporate feedback into some new developments happening at MM over the course of the next 6 months or so, and your feedback / views are incredibly important. For those who have completed the survey, thank you – much appreciated. For those that may have missed it, I would be great to get your feedback by clicking the button below.

Last week was fairly quiet until we look under the hood, the small +0.9% rally by the ASX200 masked some huge volatility by many big names within the local market. We witnessed 15 stocks within the ASX200 end the week up, or down, by over 5% i.e. definitely not a quiet week. Looking at the names below it would be easy to imagine 2 supposedly correlated portfolios performing extremely differently over the week. Some stocks are going in and out of favour almost daily.

Winners – TABCORP (TAH) +6.1%, Pendal Group (PDL) +5.3%, Janus Henderson (JHG) +8.9%, Oil Search (OSH) +7.2%, BHP Billiton (BHP) +5.3%, OZ Minerals (OZL) +5.3% and Real Estate Group (REA) +5.9%.

Losers – AMP Ltd (AMP) -9.9%, IOOF Holdings (IFL) -5%, GrainCorp (GNC) -6.1%, CSR Ltd (CSR) -9.1%, ORICA Ltd (ORI) -9.3%, Incitec Pivot (IPL) -6.9%, JBH HI-FI (JBH) -6.3% and Link Admin (LNK) -17%.

I’ve spent a long time of late investigating the characteristics of market tops and specifically whether the internals provided any regular clues. Tops are harder to pick than bottoms and it would not surprise many to hear that generally all market tops are a bit different but they do have many characteristics in common i.e. parts of the puzzle.

  • M&A activity is usually strong at market tops, just like today.
  • Optimism is high as economies are strong but leading indicators are potentially slipping.
  • Bulls are in control and the bears are licking their wounds, a low VIX reading illustrates this today as investors seem to have given up buying puts.
  • Valuations are high and “mania” stocks are doing well – bitcoin comes to mind!
  • We usually see waning momentum when indexes make a new high e.g. RSI for the technicians out there.
  • The last 3 major tops in the US were formed in relatively quiet quarters (small ranges, see purple circles) and were preceded by warning pullbacks (orange circles)- see 4th chart below of Russell 3000.

Statistics can be dressed up in many ways to tell a 1000 different tales but when I see our market have 7.5% of its top 200 stocks move by over 5% it makes me feel uncomfortable, just like something is slowly bubbling beneath the surface.

  • The Volatility index (VIX / Fear Gauge) may be close to post GFC lows but the unpredictability in our market is very high, and growing on the factory floor.

US Volatility / VIX Index (Fear Gauge) Chart

Over the coming week we will see some big names trade ex-dividend including 3 of our heavyweight banks – ANZ (Monday), NAB (Tuesday) and Westpac (Thursday). Considering this negative drag on the market over the coming days it will be an impressive performance if the ASX200 can break cleanly above its decade high 6150 just yet but the resources are certainly performing some heavy lifting with BHP up another 25c in the US on Friday night.

  • MM remains bullish the ASX200 short-term initially targeting fresh decade highs around 6250, now only 2.2% higher.

The candlestick chart below illustrates that over the last 7-days the market has found some selling around / above the 6100 area, a pullback towards the 6070 area would not surprise us first.

  • MM remains in “sell mode” looking to significantly increase our cash position between 6200 and 6250 and / or add some negative facing positions via ETF’s.

ASX200 Chart

Currently we’re watching the ASX200 Accumulation Index closely as it makes fresh all-time highs while approaching our 65,000 target area, now only 5% away. This index clearly outperforms the ASX200 as it includes dividends but still its endured some major corrections over the last 11-years.

  • In the GFC 49.4%, 2011 20.4% and in 2015 17.6%.

This is not about scaring subscribers but an attempt to maintain open-mindedness, between 2007 and 2016 the index had 3 major corrections, from a timing perspective we are arguably due another one this year.

ASX200 Accumulation Index Chart

Last week US stocks finally re-joined the global bullish equities party clarifying our bigger picture view for markets - We are currently in the second longest bull market in history, one that has basically climbed a wall of worry since the GFC.

  • Our current target for the Russell 3000 remains only ~5-6% higher.

If our outlook is correct stocks have had their warning, which history shows us they usually forget very quickly only to eventually become far poorer due to of the complacency.

  • MM is still forecasting a major correction of over 20% in the medium / longer-term, hence the risk / reward is very dangerous for the bulls, even if we are correct with our target of fresh decade highs by the ASX200 in coming weeks.

We’ve already see how quickly global stocks can turn this year with the ASX200 falling almost ~7% and the Dow 12.3%, if we are correct selling a few % early will not be an issue for the patient investor.

Russell 3000 Index Chart

The picture that’s unfolding in Europe continues to add significant weight to our short-term bullish view, ideally we would love to see one final high to sell aggressively.

Both the UK FTSE and German DAX are following our 2018 path far too well to be ignored and we will definitely consider them as important triggers for our highly correlated local stock market.

  • Our target for the UK FTSE is ~7900, or 3% higher.
  • Our target for the German DAX is ~13,750, or 6% higher.

We actually have a “Gut feeling” that the local and European markets will top out before the US, similar to mid-January this year. If this does unfold we will definitely be selling into the strength.

German DAX Chart

Moving specifically onto the US market where the picture remains consistent - we are looking for US stocks to attempt a rally to fresh all-time highs – we are now 75-25 whether they can break above Januarys top, now currently 5.3% away.

The S&P500 has now broken above its overhead trendline resistance which has capped the market since late January and we believe US stocks are on their way to an important top.

US S&P500 Chart

1 The phones ringing hot on oil stocks

Amazingly over the last week “the MM switchboard” has been lit up by calls about oil / energy stocks – that’s a huge alarm bell in itself. We’ve been calling crude oil up to the $70 area for the last few months and now its arrived we definitely have no intention of chasing the sector up here. Over the last 3-months the US energy sector is up +15%, by far the strongest of the S&P500’s sectors, its due a rest at the very least.

“You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple. …” – Warren Buffett.

  • At MM we are neutral - negative crude oil and the energy sector at current levels.

Crude Oil Chart

At MM we are already licking our “ego wounds” for taking profit on Woodside (WPL) too early….. it ignored most of crudes rally only to pop strongly over recent weeks. We made a conscious decision to run our BHP position and take the money off the table in WPL but in hindsight (a great investor) we should have run both.

Fortunately, and some compensation, our belief in crudes rally to the $US70/barrel area enabled us to weather the storm of WPL’s 18% pullback, our position was very underwater at one stage.

Moving onto Origin Energy (ORG) one of MM’s recent “Standout Charts” its now reached our ~$10 target area.

  • We are now bearish ORG targeting another ~$1.40 pullback back towards February’s lows.

Origin Energy (ORG) Chart

2 AMP – brave or stupid?

AMP has been dragged through the mud at the Hayne royal banking commission, amazingly managing to make the banks look good. Our last few pieces on AMP have placed it well and truly in the too hard basket but we ask after its 30% fall is value emerging?

AMP is trading on forward PE of 10.9x while theoretically paying paying a 7.8% fully franked yield.

However trading conditions are likely to get far worse for AMP before they get better, plus its operating in entirely the wrong sector if we are about to experience a decent stock market correction. AMP may have arrived at 10-year support between $3.50 and $3.70 but its extremely hard to envisage a meaningful rally back above $4 anytime soon.

  • Considering the risks involved AMP simply does not feel cheap enough for either speculative, or investment play.

AMP Ltd (AMP) Chart

3 BHP’s closing in on our sell target.

We’ve lightened our exposure to the Australian Resources Sector into recent strength which evidently was a touch premature as the anticipated weakness in base metals has unfolded but the $A has tumbled even further cushioning the effect for local miners. Importantly China data also remains firm supporting the sector.

However as we often point out these stocks are extremely cyclical and even Rocky in our recent MM resources video acknowledged the we are in the mature stages of the bull market.

Since its major market low in January 2016 BHP has more than  doubled but along the way it has corrected 18.7%, 21.1% and 12.5% i.e. the stock offers opportunities fort those who take profits at good levels.

  • BHP is due to open ~$33.40 on Monday, MM is looking to take profit on our holding ~$34.

BHP Billiton (BHP) on the US ADR market Chart

4 The $A appears to be the “buy” catalyst

The “little Aussie battler” has corrected 8.9% so far in 2018 helping any companies with overseas earnings plus making our overall market more attractive to any offshore buyers. Similarly the British Pound (GBP) has fallen 6.4% over the last 4-weeks and not coincidently the ASX200 and UK FTSE have been 2 of the strongest stock markets since April.

  • At MM we are bearish the $A targeting ~65c, which is likely to be an ongoing tailwind for the ASX200 on the relative performance front.

Australian Dollar ($A) Chart

5 This CBA chart interpretation may concern many

Following the GFC CBA had 2 perfect “abc” corrections, one in 2008/9 and the second in 2010 / 11, we now ask whether the second is unfolding before our eyes.

CBA has fallen 13.6% over the last year, before dividends, in a market which has appreciated almost 5% again before dividends -  a poor performance in anyone’s books.

Lets now consider what we believe is set to unfold over the coming years i.e. a correction of at least 20% by global stocks, most would agree it’s hard to imagine CBA rallying in the face of that degree of weakness.

  • We now believe there is a 50-50 possibility that CBA will again experience an “abc” correction, this time with a target under $65.

However, we do not believe this is time to panic as CBA’s ~$4.30 / 6.1% fully franked annual dividend should be sustainable, assuming Australia does not slip in a recession.

  • At MM we are happy to average our CBA position but only in an accumulation manner and into fresh recent lows, below $69 – exact timing is likely to depend on dividends.

Also, note at some stage fairly soon the current high degree of bank bashing will need to stop because as many economists will say “banking is the single most important aspect of economic and financial health.”

Commonwealth Bank (CBA) Chart

6 We don’t like Sydney Airports (SYD) but its holding?

We dislike SYD for a number of reasons however  its not falling yet – that said  we remain committed to our view on a number of levels:

1. SYD has lots of debt which will cost more to fund as interest rates rise.

2. We believe interest rates have bottomed and will rise in Australia, probably when housing prices calm down.

3. SYD makes a significant amount of profits from parking at Sydney airport – anybody whose parked there would comprehend as its far from cheap!

4. Car sharing and driverless cars feel an inevitable thing of the future, hardly supportive of car parks.

I would never consider borrowing a large amount of $$ to buy a carpark in an environment where interest rates look set to rise and just before the human driving experience looks set to change so dramatically and that’s SYD!

  • MM remains bearish SYD targeting at least $6.

Sydney Airports (SYD) Chart

RBA Cash Rate Chart

Conclusion

No major changes following last week’s strong market:

  • We remain net positive equities for the coming weeks with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position and are firmly wearing our “sellers hat”. 

“Shopping List”

1.       None, we are wearing our sellers hat.

“Selling List”

1.       BHP Billiton (BHP) around the $34 area.

2.       CYBG Plc (CYB) above $6.

3.       Webjet (WEB) above $13.50.

4.       Janus Henderson (JHG) around $49.

5.       A2 Milk around $14.

6.       General selling is / when the ASX200 challenges the 6250 area.

Some of the above list may feel a long way off but remember last week’s stock volatility.

Standout technical chart (s) of the week

We’ve used up many of our ammunition for this reports segment earlier, so today we’ve turned our attention back to the gold sector which like much of our market has benefitted from a weakening $A i.e. EVN has rallied nicely even though gold in $US has gone nowhere.

  • We like Evolution Mining (EVN) into the next 50c retracement, currently below $3.

Evolution Mining (EVN) Chart

Trading Opportunities on our radar

Just like above we’ve used up many of our ammunition for this report segment earlier, hence todays “trade” is very short-term and aggressive in nature.

  • Buy Platinum (PTM) around $6 targeting 6.45 with stops below 5.85, ok risk / reward.

Platinum Asset Mgt. (PTM) 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.

Disclosure

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.

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 12/5/2018. 10.30PM.
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