Market Matters Report / Market Matters Weekend Report Sunday 14th January 2018

By Market Matters 14 January 18

Market Matters Weekend Report Sunday 14th January 2018

Market Matters Weekend Report Sunday 12th January 2018

Last week was an intriguing one for equities from both a local and global perspective with the ASX200 falling -0.9% while the US S&P500 rallied +1.6%. US stocks are revelling in the looming major tax cuts while locally our “yield” play sector and high P/E stocks were smacked as US bond yields rallied strongly, their 2-years breached 2% for the first time since the GFC. We will look at these macro factors at play later in the report but the following 3 points are likely to be fairly consistent with the investing strategy for MM during 2018, considering we believe bond yields / interest rates are going up:

  1. We have no interest in the “yield play” sector e.g. Utilities / Transport and Real Estate sectors which are locally already down -8.1%, -6.8% and -7.6% respectively over the last month.
  2. We will be very fussy buying high valuation (P/E) stocks e.g. A2 Milk, Carsales and REA Group.
  3. We are highly unlikely to buy meaningful positions in the much loved and highly valued / owned Healthcare Sector.

The next 1-2 years will provide a very different investment landscape to the last decade. As investors we need to be very open-minded to switching stocks within our portfolio as dynamics change – and we think they’ll be significant change over the next few years.

Last week’s list of major winners / losers from the ASX200 illustrates that some of our thoughts are already unfolding while also showing a clearly net negative market with only 2 stocks rallying over 5% but 7 falling by more than the same benchmark:

Winners : South32 (S32) +6% and JB Hi-Fi (JBH) +8.8%

Losers : Tabcorp (TAH) -6.9%, A2 Milk (A2M) -7%, GrainCorp (GNC) -6.3%, Coca-Cola Amatil (CCL) -5.1%, Healthscope (HSO) -5.2%, Macquarie Atlas (MQA) -7.6% and Carsales (CAR) -5.2%.

Today’s report will look at how MM is expecting the market to evolve into during 2018 watching carefully for potential bumps in the road with respect to our views.

ASX200 Daily Chart

So far this year the ASX200 has rallied +1.4% only to give back all the gains to close marginally in the red for 2018 on Friday.

  • Seasonally its common for the ASX200 to fall into late January before rallying into the seasonally dangerous late April period.

From an index perspective we would currently be keen buyers around the 5950 region.

ASX200 Seasonality Chart

As local investors it’s frustrating to see US stocks rally extremely strongly while we begrudgingly take 3 steps forward, then 2 steps back, consider the following statistics:

  1. The US broad based S&P500 is 77% above its pre-GFC highs while the ASX200 is languishing 11% below its equivalent milestone.
  2. The S&P500 has rallied 318% from its GFC lows while the ASX200 has only gained 94%.
  3. In 2018 the S&P500 is already up +4.2% while we are very slightly in the red.

However, we shouldn’t be getting too downbeat just yet as the recently approved US tax package is hugely beneficial to most of their listed US companies e.g. the Russell 2000, of small companies, who benefit most from the cuts, has rallied almost double the Russell 3000 i.e. Donald Trumps approved tax cut package has basically thrown petrol on an already strong fire!

Undoubtedly our local economy is now far more related to the new global economies of China / Asia than the old economies of the US / Europe. However, we are also underperforming our regional allies as we seem to be looking at the market from a glass half empty perspective and this attitude may require some further improved economic news and perhaps an interest rate increase, or two.

MM believes more than ever that being invested in the correct sectors in the first instance then the right stocks from those sectors will determine an investors overall performance, it’s not the time for old fashioned “balanced portfolio’s” as a new interest rate cycle commences – it’s not even the time to be in the right stock but wrong sector in our opinion!

Since the SMSF boom retail investors have poured money  into a number of the areas that are now looking very precarious – its not time to set and forget, the major bear market for interest rates looks to be over so portfolios should be adjusted accordingly.

US S&P500 Quarterly Chart

For those of you who watch the market internals very closely 2 things have caught our eye recently: 

  1. Relatively large volume is changing hands in the overnight SPI futures market implying professional traders are probably selling Australia and buying the US.
  2. BHP and RIO both rallied ~3% last week but with the exception of oil commodities were flat to down i.e. fund managers are chasing the sectors where they want to be invested for 2018/9.

Lets assume we are correct and the multi-decade bear market for interest rates is behind us the obvious questions is “what stocks / sectors” usually perform the best / worst as interest rates rise:

Winners - Cyclical stocks like energy, resources, financials, industrials and information technology often benefit from rising interest rates, assuming that such increases reflect an improving economy and it’s not the RBA feeling forced to keep up with the global trend.

Losers - Defensive stocks likes healthcare, real estate investment trusts (REITs), utilities and consumer staples have historically been poorer performers in rising yield environments. As we’ve said repeatedly so-called "bond proxies" like REITs and utilities are seen as particularly exposed, since higher interest rates can hurt profits plus their relative yields compared to bonds / bank deposits are less attractive.

From an Australian perspective banks are tricky, they could be winners due to higher net interest margins but locally they have often been bought for their strong fully franked yield which is a concern as it makes them semi “bond proxies”.

At this stage until we see a clear strong improvement in the local economy the best returns are likely to be from internationally facing stocks in the winners list e.g. BHP and RIO just as we are seeing now.

Importantly  the rotation from bonds to stocks could surprise many in 2018 and perhaps we go a lot higher before a decent correction – remain open-minded as the turn up in interest rates has only just started compared to the almost 40-year decline.

US 10-year bond yields Monthly Chart

Following on from the “winners” stocks, we are very bullish resources stocks into 2018/9 and the pullback we have been targeting for a buying opportunity is currently looking very optimistic.

If we are correct the below chart shows ongoing acceleration over the coming weeks / months for resources.

Our preferred stocks are BHP, RIO, FMG, OZL and ILU – we may bite the bullet and spend some money into the current strength leaving some ammunition to average any decent pullback.

MSCI World Metals & Mining Index Weekly Chart

Australian stocks / sectors


As mentioned earlier we are now bullish the resources space looking to again buy the sector. The “Big Australian” BHP is favourite at present as it accelerates higher.

BHP Billiton (BHP) Weekly Chart


No change, we remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits have been targeting the $US60/barrel area. 

  • We remain very comfortable with our exposure via Woodside Petroleum (WPL).

Crude Oil Monthly Chart


We still hold 7.5% of the MM Platinum Portfolio in Newcrest (NCM) which is currently showing a small 2% paper loss.

The $US has broken its 2017 lows, which we targeted in December, which has helped gold rally $US100/oz. from its December lows. On Friday gold ETF’s rallied close to 3% so hopefully NCM can find some love this week – MM will certainly consider selling / trimming this position into strength.

US dollar Index Weekly Chart

Banks and bond yields / interest rates

We remain mildly positive the banking sector but we do not expect any fireworks in 2018, our view is selling strength and buying weakness will be the correct strategy. Short-term they actually look average and we are glad that MM sold 50% of our Westpac (WBC) holding in late December as planned.

CBA – short-term CBA looks like it could fall towards $78 where we would average our position i.e. 3.5% lower.

NAB – NAB has been boring recently but we would like it ~$28, or 5% lower – alternatively, sellers into the ~$32 region

Commonwealth Bank (CBA) Daily Chart

National Australia Bank (NAB) Weekly Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher although last week was not particularly inspiring with the index drifting -0.6%,

  • Macquarie Bank (MQG) would be interesting under $96, around its December lows.

Macquarie Bank (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises, especially those not heavily exposed to on-line threats. Last weeks rally in the likes of JB Hi-Fi & Harvey Norman may unfortunately be a case of this horse has bolted.

We reiterate that MM will not be “bottom fishing” in Myer (MYR).

Myer (MYR) Weekly Chart

Healthcare sector

We remain neutral/bearish the US Healthcare Sector which interestingly continues to underperform the US market – the US and Australian Healthcare Sectors are highly correlated.

US Healthcare Index Quarterly Chart

Global Indices

We may be seeing a blow-off top evolving in global equities although investors should remember that tops usually take 2/3 times longer to unfold than bottoms and they are MUCH harder to pin-point!

Sceptics that cannot imagine a decent correction should simply stand back and look at the 3 main pullbacks by US stocks since 2007 i.e. 58%, 23% and 17%, we’ve now experienced no meaningful correction for almost 2-years.

However, no sell signals have raised their heads to-date and the upside momentum is strong.

MSCI World Index Quarterly Chart

US stocks have now exceeded our targeted area of the last 2-years courtesy of Donald Trump’s tax package. We still expect a decent correction this year but more pain for the bears feels likely first.

US Russell 3000 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 26.5% of the MM Platinum but only 7% of the Income Portfolio in cash so we can buy areas where we see value :

  1. Banks – We are comfortable with our exposure at present but like CBA ~$78 and NAB ~$28.
  2. Consumer Services – We are comfortable with our exposure at present.
  3. Diversified Financials – We are comfortable with our position at present but like MQG under $96.
  4. Energy – We are long WPL which feels good.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels correct.
  7. Resources – We are considering a number of buys here.
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – No investment buying at this stage.
  10. Retail – No investment buying at this stage.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

Two stocks in our MM Platinum Portfolio are in striking distance of our current sell targets:

  1. Telstra (TLS) over $3.80.
  2. Newcrest (NCM) around $25.

Standout technical chart (s) of the week

The strong US economy is sending their interest rates up strongly and we would not be surprised to see US 2-year bond yields hit 2.5% in 2018.

Hence MM has no interest in stocks which will be negatively influenced by rising interest rates until further notice.

  • The Australian REIT’s Index (Property stocks) looks set to decline ~10%.

US 2 year Bond Yield Weekly Chart

ASX200 REIT’s (Property) Index 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:

  • We are considering buying BHP and a few other resource stocks.
  • We are happy sellers of NCM and TLS at our target areas. 

Trading Opportunities on our radar

This week we have 1 potential trade:

  1. Buy Fortescue (FMG) around $5.20 targeting a quick move towards $5.50 – only for the agile!

Fortescue Metals (FMG) Daily Chart


This year is all about sectors as interest rates rise.

  1. We are keen on resources at present.
  2. We have no interest in any “yield play” / bond proxy stocks.

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 here. 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 13/1/2018. 10.00AM.

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