Market Matters Report / Market Matters Weekend Report – Sunday 13th September 2020

By Market Matters 13 September 20

Market Matters Weekend Report – Sunday 13th September 2020

Market Matters Weekend Report – Sunday 13th September 2020

We didn’t have to look far to decide that today’s report needed to be an extension of last week’s tech / NASDAQ focused missive, when the sector sees the likes of Apple (AAPL US) correct just shy of 20% and the press are full of rhetoric around excessive  valuations in the tech space it’s time to clarify some of the facts and of course our view – we always remain open-minded to change.. The high-flying FANG Index has now corrected 15%, clearly its largest pullback since March’s 37% coronavirus inspired rout. Our underlying conclusion last week was “we believe the tech sector has just experienced a shake out of the weak / short-term investors and momentum traders” in other words prepare to buy the dip however we must always continually review our outlook in case the proverbial goal posts have moved.

For subscribers not 100% clear the FANG Index is a colossal $US120 trillion equal dollar weighted index designed to reflect the highly traded growth stocks from the tech space such as Facebook (FB US), Apple (AAPL US), Amazon (AMZN US), Netflix (NFLX US) and Google (GOOGL US) plus some names not included in the acronym like Alibaba (BABA US) & Tesla (TSLA US).

The decline over the last fortnight has been dramatic in both its magnitude and speed although the lows plumbed on Tuesday have basically held firm implying some accumulation / exhaustion has been unfolding. Last week we discussed the large increase in tech stock call options, in other words the market had gone aggressively long just as Apple and Tesla had undergone stock splits. The option turnover soared at the end of August with the last week seeing 22 million more call options being bought compared to puts – the bull was stampeding in true Pamplona style. However, most of these positions were only around 2 weeks in duration hence these are rapidly starting to expire worthless allowing the market to return to normality if that’s possible in 2020.

To put things into perspective, when we discuss the influence of options on the market the Apple option market is now on its own way bigger than that of the Russell 2000 Index (the smallest 200 stocks in the S&P500).  The chart below illustrates the huge rally and fall of such call options over the last few weeks – these calls expire on the 18th and who wants to buy Apple at $US130 when its trading at $US112. We feel “punters” poured into Apple after its stock split looking for easy money, but history tells us there’s no such thing! The path of most pain is for Apple to bounce hard in Q4 after all of these options have expired worthless.

Please note again this discussion around options is for educational / explanation purposes only.

Apple 130 Call options Chart

Apple Inc (AAPL US) Chart

One characteristic of the last 10-days which make us feel comfortable with our interpretation of the recent sharp correction in the tech space comes from the volatility index (VIX). Historically when stocks fall volatility rises, it’s been a pretty set in stone correlation which hasn’t unfolded over the last week, after an initial spike on the 3rd / 4th of this month we’ve actually seen the VIX fall even while equities continue to crumble, led as we know by the tech based NASDAQ. The 2nd chart below illustrates how since the GFC all the spikes in volatility have been caused by events which sent stocks plunging, albeit usually only temporarily.

MM believes this time was different because most of the blow off top and subsequent correction was actually created by speculation in the options market. The simple step by step theory is as follows:

1 – The out of control demand for call options left derivative traders (Market Makers) dramatically short Gamma, the measure of change in an options sensitivity to moves in the underlying shares.

2 – Hence when stocks like Facebook (FB US) rallied the traders needed to buy shares to hedge their position, a self-fulfilling exercise until the music stops playing and the shares start declining. The volume this time around has been enormous with billions of dollars chasing mega cap tech names like Salesforce (CRM US), Amazon (AMZN US) & Netflix (NFLX US).

3 – The buying was exacerbated by strong reports from the likes of Salesforce (CRM) which saw the stock rally over 25%.

4 – However when the market starts to fall the market makers start to unwind their hedges and, in this case, it fed on its self-due to a dearth of buyers.

MM believes the tech stocks like Apple have / are just experiencing a washout of irrational short-term exuberance.

US Fear Index (VIX) Chart

US Fear Index (VIX) Chart

Returning to the FANG Index, its only retraced back to its breakout level of Mid-August hence in our opinion simply negating the option noise of the last few weeks. Our view remains consistent, we believe this is a buying opportunity in US  tech initially with ~20% upside, obviously we will continue to monitor the influential factors closely but the gyrations of last week hasn’t created an increased level of  doubt in our minds – remember seasonally the NASDAQ struggles between late August and early October implying we should be slowly accumulating the sector over the coming few weeks.

Some simple statistics put the current pullback by the NASDAQ into perspective – September has been the worst month of the calendar over the last 20-years with an average return of  -1.4% and a greatest decline of  -20.5%, currently we’re down -8.4% with the correction between August & September sitting at -12%, my 101 mathematics tell me it’s time to be accumulating US tech.

MM remains bullish the FANG’s into Christmas.

NYSE FANG Index Chart

As we touched on last week MM continues to believe bond yields (interest rates) are the most probable derailment of equities over the coming 1-2 years and especially the growth sectors like tech but as the coronavirus has shown the market can get side-swiped by the most unexpected of events although we believe it’s highly unlikely to occur twice in such close succession. As the chart below illustrates bond yields are basically just treading water as central banks remain committed to “lower for longer” as they try and coax the global economy back to life - last week actually saw yields fall which is usually supportive  of the Growth Sectors like tech.

At some stage we believe the literally mountains of cash being pumped into circulation will re-ignite the very dangerous sleeping giant called inflation and subsequently take interest rates / bond yields up for the ride i.e. the reflation trade. However, for now its part 1 of the equation that’s playing the tune for equities i.e. global interest rates remain around zero.

MM remains bullish bond yields medium / long-term.

US 10-year Bond Yield Chart

Another major financial market which gives comfort to our medium-term picture for stocks is forex. When risk assets sell-off we often get a flight to the perceived safety of the Greenback and  this happened to a certain degree over the last fortnight but its only bounced back to resistance in what is a clear downtrend – MM remains bearish the $US and is a keen seller of any spikes towards the 94 area which implies, assuming we are correct that the equities sell-off is already approaching completion.

MM remains bearish the $US.

The $US Index Chart

Potential actions for next week.

Hopefully it’s clear that until further notice we’re looking to buy / stay put long risk assets into Christmas, importantly so far the markets only done what we’ve been expecting over recent weeks. Obviously it’s a shame we didn’t reduce our IT exposure at the top but looking forward we’re buyers into the current weakness, not sellers.

1 Growth Portfolio

Following our tweaks last week we now only hold 5% in cash hence we need to accumulate in a small way or switch between existing positions: Growth Portfolio

There are 2 ideas on our radar at present:

1 Adding to our Magellan Holding (MFG) $56.87

Hamish Douglass’ fund MFG is highly exposed to the mega-cap tech stocks which dominate the NASDAQ, after its sharp pullback over the last few weeks we are considering taking our MFG position from 3% to 5% if the stock dips ~5% lower.

MM is considering adding to MFG below $54.

Magellan (MFG) Chart

 2 Switch from Macquarie Group (MQG) to Incitec Pivot (IPL)

We discussed MM’s attraction to explosives, chemicals and fertiliser business IPL in our Thursday morning report but a switch from Macquarie Group (MQG) is most definitely not a like for like! We are considering taking a relatively small profit on MQG for 2 very different reasons:

1 – MQG garners a large portion of its revenue in $US and British Pounds (GBP), in our opinion a dual headwind moving forward.

2 – We are already holding market weight in the “Big 4” Australian Banks and although MQG is a very different proposition its certainly more correlated to the banks than IPL!

MM is considering switching from MQG to IPL.

Incitec Pivot (IPL) Chart

2 Income Portfolio

After last week’s tweak we now only have a 4% cash holding in our Income Portfolio hence fresh outright purchases are unlikely: MM Income Portfolio

There is only 1 idea on our immediate radar which we touched on in Wednesday in the Income Note.

Sell RIO Tinto (RIO) into strength

Short-term we feel iron ore is ready for another assault on the 900 CNY/MT level basis the January Future Contract, or ~5% higher. In line with Wednesdays note we’re looking to sell RIO into strength, a pop towards $110 wouldn’t surprise – BHP was up +1.8% in the US on Friday night which should help the cause.

MM is looking to sell RIO between $105 and $110.

RIO Tinto (RIO) Chart

Iron Ore January Futures Contract Chart

3 International Portfolio

Last week we switched from Janus Henderson (JHG US) to Zoom (ZM US) as was flagged in the last Weekend Report but we still hold a 6% cash weighting in our International Portfolio :MM International Equities Portfolio

At this staged we are happy with our portfolio mix and have no immediate buy / sell or switch plans.

4 Global Macro ETF Portfolio

No change, we hold 19% in cash in this portfolio affording us some flexibility when opportunities arise: MM Global ETF Portfolio

The same are 2 ideas on our immediate radar with the former from Wednesdays Overseas Report potentially about to be tweaked.

1 – Invesco QQQ Trust (QQQ US) $US283.58

On Wednesday we discussed buying the tech sector into weakness by leaving 2 resting bids in the NASDAQ facing QQQ - The QQQ Trust is a huge unleveraged NASDAQ ETF with a market cap. over $US135bn

MM is looking to buy the QQQ at $US266 and $US261, with a 5% allocation at each level, totalling a 10% weighting.

Last weeks low was 266.90, no luck so far, we are considering increasing slightly the $US266 bid.

Invesco QQQ Trust (QQQ US) Chart

2 – Silver ERFS (ETPMAG)

We covered our view on precious metals last week:

A - MM is looking to take profit on our ETPMAG position above $40.

B - MM is looking to add to our ETPMAG position around $30.

Silver ETFS (ETPMAG) Chart


MM is happy to take on more risk into the current market pullback as outlined above – importantly we are not sellers here.

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


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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