Market Matters Report / Market Matters Weekend Report Sunday 13th November 2016

By Market Matters 12 November 16

Market Matters Weekend Report Sunday 13th November 2016

Market Matters Weekend Report Sunday 13th November 2016

Overview

 

Last week was up there with some of the most amazing we've experienced over the years and that list includes the GFC plus the 1987 crash! On Wednesday as the polls closed and a "shock" victory to Donald Trump unfolded before our eyes the S&P futures plunged and then rallied strongly, swinging in an amazing 6.8% range. The local ASX200 had a 5.46% range over 24 hours as initial panic swung to euphoria from certain sectors of the market. The whole share market reaction to this victory comes down to Mr Trumps polices of huge tax cuts and potentially massive fiscal spending, both of which are likely to lead to inflation and higher interest rates for the US - we've been banging this drum very hard over recent weeks. The markets are in a euphoric mood for now and they are ignoring the risks of trade wars, rising interest rates and the potential failure of the EU. This market strength overall comes as no surprise when we consider 3 important facts:

 

1. Historically the US stock market rallies ~5% after a close election - whoever wins.

2. Seasonally November - January is the strongest 3 months for US stocks.

3.US investors are sitting on their highest cash levels in 15 years.

 

While the local market has thrown some curve balls over recent weeks the US share market has remained bullish throughout ignoring numerous negatives, from bearish high profile investors, rich valuations to rising interest rates. We remain bullish US stocks, ideally targeting 8-10% further gains into 2017 but after this we will be looking for a ~20% correction. The market has a habit of moving down the path of most pain and simply too many fund managers want this market lower so they can buy, hence it won't fall - yet! Donald Trumps victory gives us the perfect catalyst for a blow-off top as cashed up investors chase stocks that benefit from fiscal spending and rising long term interest rates e.g. Financials and Materials.

 

US NYSE Composite Index Monthly Chart


 

Last week's market strength, with the Dow making fresh all-time highs and the S&P gaining 3.8%, was very different across different market sectors. For the US the standouts were:

 

Winners: Financials 11.2%, Financial Services +10.3%, Industrials +8.1%, Healthcare +6% and Materials +3.8%.

 

Losers: Utilities -4%, Consumer Staples -2.1% and Real Estate -1.2%.

 

We have discussed the US Banking Index over recent months targeting a  breakout above 2015 highs, this is now only 0.8 % away. We remain bullish US banks targeting ~8-10% further gains BUT the easy money has gone. The local banks look set to gain a further ~5% which is pretty solid with Westpac and ANZ trading ex-dividend on Monday. We are long CBA and Westpac and will look for further gains before taking some $$ off the table.

 

Banks make more money when long-term interest rates are rallying faster than short-term rates as they borrow short and lend long. Last week US 10-year rates increased 0.325% to 2.15% while 2 -year rates increased only 0.13% to 0.915%. i.e. long-term rates rallied by three times as much. This is an incredibly important concept given it works in favour of banks BUT against other sectors like real-estate and infrastructure who borrow long.

 

US S&P500 Banking Index Monthly Chart

 

Moving onto the local market some of the standout stocks / sectors, when the ASX200 rallied 3.7%, were:

 

 

 

Winners: Banks +6.7%, Diversified Financials +5%, Oils +3.5%, Healthscope +6.4%, Ansell +5.7%, QBE +9%, BHP +12%, RIO 11.7%, FMG +18.7%, REA Group +9.4%.

 

 

 

Losers: Consumer Services -0.2%, Newcrest -5.2%, Northern Star -6.5%, Real Estate -2.8%, Retailing -4.6%, Telstra -3.7%, Sydney Airports -4%, Transurban -6.7% and Utilities -5%

 

 

 

There are 3 classic "million dollar questions" which we will now answer with our usual straight forward opinion:

 

 

 

Question - Will the trend of buying banks / materials while selling the yield play / gold's continue?

 

 

 

1. If we owned resource stocks we would be selling at least half early next week using Iron ore as a classic yardstick, it has reached our upside potential target ~$US80/tonne.

 

2. We believe banks will rally for the next few months on the combination of the market having been negative this sector for over a year and they benefit from rising long term rates - the market has only chased them for a few days, it takes longer than that for fund managers to rebalance.

 

3. The yield play stocks have retraced to our target areas over the last 4 months, except Telstra, hence we would no longer advocate selling them BUT in a rising interest rate environment we will not buy them yet.

 

4. Gold stocks look average and the Gold ETF we follow looks awful falling 8% on Friday night, we now have no interest in the Gold sector.

 

 

 

Iron Ore Monthly Chart

 

Question: Are we still targeting a +20% correction next year and if so when do we sell our shares aggressively?

 

 

 

1. Yes we still believe US stocks will be 20% lower than where they are now sometime in 2017/8 BUT we believe they go up first.

 

2. Interestingly we now have a catalyst to push stocks higher short-term plus many to give us the major fall we are forecasting.

 

3. Assuming / Once the NYSE Composite and Russell 2000 Indices make fresh all-time highs we anticipate increasing our portfolio cash position~50% but we will still be sellers into any strength of our remaining holdings. We have no issues holding 100% cash if we believe stocks are set to fall hard.

 

 

 

Russell 2000 Index Iron Ore Monthly Chart

 

Question: What are our favourite 2 stocks to buy next week?

 

 

 

1. Macquarie Bank (MQG) - They benefit on many fronts from Mr Trumps win, including significant US earnings.

 

2. QBE Insurance (QBE) - An almost hated stock for many years who benefits from rising US interest rates,  and a falling $A - both of which we believe will play out.

 

 

 

Standout technical chart (s) of the week

 

 

 

The insurance sector is one which benefits from rising interest rates especially QBE, then IAG and lastly SUN -for every 0.5% rally in US rates IAG makes +7%, SUN +4% and QBE +13%! Technically QBE and SUN, our preferred two majors look excellent.

 

 

 

QBE's false break under $10  targets $12.50 and potentially $15.

 

 

 

QBE Insurance (QBE) Monthly Chart

Technically SUN remains on track to test $15.50, that feels miles away at present but these are volatile times.

 

Suncorp (SUN) Monthly Chart

 

Summary

 

 

 

Our view is that US stocks will rally ~8% over the coming months prior to a significant decline. Our favorite sectors locally into 2017 are the Financials (including banks) and Healthcare. We are not keen on Europe at present as more disgruntled elections may see the end of the EU in our opinion.

 

 

 

What Matters this week

 

 

 

The ASX200's is set to open down 30-points on Monday, with ANZ and Westpac trading ex-dividend.

 

 

 

Potential Investing opportunities for the coming week(s)

 

 

 

Currently our favourite 2 stocks are MQG and QBE, entry may not be ideal hence we may buy 4-5% with a view to averaging into any weakness.

 

 

 

Potential Trading opportunities for the coming week

 

 

 

Due to their strength last week and hence not ideal entry both MQG and QBE could be deemed as trades.

 

 

 

On the index front we like the Hang Seng but not Europe.

 

 

 

 

 

* Watch out for trading alerts*

 

 

 

 

 

Portfolio / Trade Holdings

 

 

 

The updated Market Matters Portfolio will be in Mondays report:

 

 

 

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-friday-4th-november-2016/

 

 

 

We are currently holding 18% in cash with no stocks in the currently vulnerable "yield play" space.

 

 

 

Australian ASX200

 

 

 

The ASX200 experienced an amazing week in both directions courtesy of the US election, we are now mildly positive the local market with the banking sector leading the way.

 

                                                                                                                  

 

Chart 1 – ASX200 Monthly Chart

 

Chart 2 – ASX200 Weekly Chart

 

 

 

Chart 3 – ASX200 Daily Chart

Chart 4 ASX200 Banking Index Monthly Chart

 

Chart 5 US S&P500 Banking Index Monthly Chart

 

 

Chart 6  Volatility (VIX) Index Weekly Chart

 

 

Interest Rates

 

 

 

Short-term interest rates in the US have moved sharply higher as expected but beware we believe this move has only just started.

 

 

 

Chart 7a – Australian 3-year bonds Weekly Chart

Chart 7b – The US 10-year Interest Rate Monthly Chart

 

 

Chart 7c – The US 2-year Interest Rate Monthly Chart

 

 

 

 

American Equities

 

 

 

 

 

The US stock market has surged since Donald Trump's victory with the Dow making fresh all-time highs. Eventually we expect all US indices to play catch up and achieve fresh highs, once this has occurred we will be far more cautious stocks.

 

 

 

Chart 8 – Dow Jones Index Monthly Chart

 

 

Chart 9 – Russell 3000 Weekly Chart

 

 

 Chart 10a – US S&P500 Index Monthly Chart

 

 

Chart 10b – US S&P500 Index Daily Chart

 

Chart 10c – US S&P500 Healthcare Index Quarterly Chart

 

Chart 11 – NYSE Composite Index Monthly Chart

 

 

Chart 12 – Russell 2000 Index Monthly Chart

 

Chart 13 – US NASDAQ Index Monthly Chart

 

Chart 14 – The Canadian Composite Index Monthly Chart

 

 

European Indices

 

 

 

European indices remain tricky and neutral, they continued to struggle even after the Trump victory which sent most global indices soaring. The risks to the future of the EU are growing fast.

 

 

 

Chart 15 – Euro Stoxx 50 Index Monthly Chart

 

 

 

Chart 16 – UK FTSE Index Weekly Chart

 

 

 

Chart 17 – Spanish IBEX Index Monthly Chart

 Chart 18 – German DAX Index Monthly Chart

 

 

 

Asian & Emerging Markets Indices

 

 

 

The Hang Seng index still looks poised to rally, the Nikkei conversely still needs to close over 17,500 to look positive. Conversely the Emerging Markets ETF has turned bearish.

 

 

 

Chart 19 – Hang Seng Weekly Chart

 

 

 

Chart 20 – China Shanghai Composite Index Weekly Chart

 

 

 

 Chart 21a – Emerging Markets MSCI ETF Weekly Chart

 Chart 22 – Japanese Nikkei 225 Index Monthly Chart

 

 

Australian Stocks

 

 

 

The Australian stock market had an amazing week both during and after the US election. The market has chased banks / resources and sold off the "yield play" as Donald Trump's victory is interpreted to be inflationary.

 

 

 

Chart 23 – BHP Billiton ADR ($US) Monthly Chart

 

 

Chart 24 – BHP Billiton (BHP) Weekly Chart

 

 

 

Chart 25a – Woodside Petroleum (WPL) Monthly Chart

 

 

Chart 25b – Origin Energy (ORG) Weekly Chart

 

 

Chart 25c – Oil Search (OSH) Weekly Chart

 

 

 Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart

 

 

Chart 27 – Fortescue Metals (FMG) Monthly Chart

 

 

Chart 27b – Independence Group (IGO) Weekly Chart

 

 

Chart 28 – Newcrest Mining (NCM) Monthly Chart

 

 

Chart 29 – Regis Resources (RRL) Weekly Chart

 

 

Chart 30 – Northern Star Resources (NST) Weekly Chart

 

 

Chart 31 – Market Vectors Gold ETF Monthly Chart

 Chart 32a – Commonwealth Bank (CBA) Quarterly Chart

 

Chart 32b – Commonwealth Bank (CBA) Daily Chart

 

 

Chart 33 – ANZ Bank (ANZ) Weekly Chart

  

Chart 34 – Westpac Bank (WBC) Daily Chart

 

 

Chart 35 – National Australia Bank (NAB) Weekly Chart

Chart 36 – Macquarie Group (MQG) Monthly Chart

 

 

Chart 37a – Bank of Queensland (BOQ) Weekly Chart

 

 

Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart

 

 

Chart 38aAMP Ltd (AMP) Monthly Chart 

 

 

Chart 38b – Henderson Group (HGG) Weekly Chart 

 

 

Chart 39a – Sydney Airports (SYD) Monthly Chart

 

 

Chart 39b – Mantra Group (MTR) Daily Chart

 

 

Chart 40 – Suncorp Group (SUN) Monthly Chart

 

 

Chart 41 – Insurance Australia (IAG) Monthly Chart

 

 

Chart 42 – QBE Insurance (QBE) Monthly Chart

 

 

 Chart 43 – Wesfarmers Ltd (WES) Weekly Chart

 

 

Chart 44 – Woolworths Ltd (WOW) Weekly Chart

 

 

Chart 45a – Seek Ltd (SEK) Monthly Chart

 

 

Chart 45b – REA Group (REA) Monthly Chart

 

 

Chart 46 – Telstra Corp. (TLS) Monthly Chart

 

 

Chart 47 – Vocus Communications (VOC) Weekly Chart

 

 

Chart 48 – TPG Telecom (TPM) Monthly Chart

 

 

Chart 49 – Westfield Corp. (WFD) Monthly Chart

 

 

Chart 50– CSL Ltd (CSL) Monthly Chart

 

 

Chart 51 Ramsay Healthcare (RHC) Monthly Chart

Chart 52– Healthscope (HSO) Weekly Chart

 

 

Chart 53 - Ansell (ANN) Monthly Chart 

 

 

Chart 54 – Amcor Ltd (AMC) Monthly Chart

 

 

Chart 55a – Crown Resorts (CWN) Monthly Chart

 

 

Chart 55b – Star Entertainment (SGR) Weekly Chart

 

 

Chart 56– Bellamys (BAL) Weekly Chart

 

 

Chart 56b– Blackmore's (BKL) Monthly Chart

 

 

Chart 57– JB Hi-Fi (JBH) Monthly Chart

 

 

Chart 58– Harvey Norman (HVN) Monthly Chart

 

 

 

The $A like many markets is very trickly at present, we continue to eventually target the ~65c region but short-term we are 50-50 around ongoing strength towards the 81c area.

 

 

 

The $US is looking very strong after Donald Trump's victory as the market adjusts for higher US rates. We are targeting ~102 minimum.

 

 

 

Chart 59a– Australian Dollar (AUD) Monthly Chart

 

 

 Chart 59b– The $US Index Monthly Chart

 

 

Commodities

 

 

 

Cracks appeared in gold recently as its fallen hard in anticipation of rising interest rates in the US, initial target is the $US1200/oz support area.

 

 

 

Copper remains in a negative downtrend, even after last weeks fireworks, on a longer-term basis we are targeting the 150 area.

 

 

 

Our target for Crude Oil of +$US60/barrel this looks a distant thought after recent weakness, it needs to punch through $US52/barrel to look good.

 

 

 

Iron Ore achieved our initial +$US70/tonne target, technically we are neutral after the "abc" target of ~$US80/tonne was achieved on Friday.

 

 

 

Chart 60 – Gold Monthly Chart

 

 

Chart 61 – Copper Monthly Chart

Chart 62 – Crude Oil Monthly Chart

 

 

Chart 63 – Iron Ore Monthly Chart

 

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 3/11/2016 5.25PM

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