Market Matters Report / Market Matters Weekend Report Sunday 14th July 2019

By Market Matters 14 July 19

Market Matters Weekend Report Sunday 14th July 2019

Market Matters Weekend Report Sunday 14th July 2019

The ASX200 is following the MM recent script as it chops around between 6625 and 6775 in what could easily become a classic top forming pattern. The local market failed to embrace US strength last week with the Australian Index retreating -0.8% while the Dow rallied +1.5% to fresh all-time highs – a dovish Fed appears to have only excited its own stocks with markets now anticipating two 0.25% rate cuts in the US this year, just a few months behind our own RBA. While the volume of selling was fairly light last week the breadth was most definitely encouraging for the bears as only 36% of the market managed  to finish off the week in positive territory. However it was the names on the negative side of the ledger which hurt our index the most with the Banking sector and major miners all closing down for the week.

As subscribers know at MM we believe it’s a time to be boring, or conservative, with our exposure to stocks and we are rejigging our portfolios accordingly. The chart below illustrates perfectly the huge rally Australian stocks have enjoyed since late December i.e.  up over 25% with the largest pullback along the way only ~3%, which for the record this has occurred 3 times, a 4th would target ~6565. Our current thought process has some very simple foundations which when we consider the ASX200 back in December ~5400, and today around 6700 are summed up perfectly by a quote by a reasonably well known American investor:

“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett.

We reiterate no sell signals have been generated but our “Gut Feel” remains the next 200-points is more likely down than up i.e. sub 6600. However we should not forget the relative value supporting equities into weakness with term deposits paying below 2% while the ASX 200 is yielding around 5% fully franked.

At MM we remain in “sell mode” as we look to adopt a more defensive stance than over the previous 6-months, the specific thoughts and skews across our 4 Portfolio’s will be discussed later.

Short-term MM is targeting sub 6600 for the ASX200.

The ASX200 is set to open on Monday down around 30-points totally ignoring the Dows 243-point rally on Friday night, the weakness looks likely to come from the resources with BHP down 20c in the US while the popular $US earners might start to experience some profit taking as the $A punches through the psychological 70c area, on Friday night it eventually closed up +0.7% at 70.2c – MM remains bullish the $A and long in our ETF portfolio.

ASX200 Chart

The most widely watched interest rate from a global perspective is the US 10-years which are currently bouncing as we had expected but it’s important for us to clarify a couple of points here:

1 – We only anticipate a bounce for a few weeks before the downtrend resumes for yields towards a fresh 2 ½ year low, hence the short-term underperformance of interest rate sensitive stocks / sectors is already probably mature. The picture is almost identical for Australian 10-year bond yields.

2 – A larger bounce is more likely further down the track, probably after a rate cut by the Fed as the good news gets totally baked into the dovish cake.

MM are not convinced of a 3rd rate cut in Australia but we do believe the downward trend by bond yields is intact.

Equities with sustainable yield remain arguably cheap with interest rates at current levels– term deposits are paying way under half of the average yield of the ASX200.

US 10-year bond yields  Chart

The correlation we looked at last week is slowly becoming even more pronounced which we regard as a warning sign for US equities. The last 18-months rally by US stocks has been strongly correlated  to “cheap money” as the S&P500 and iShares IBOXX ETF (HYG US) have moved in almost perfect tandem.

MM is becoming increasing wary of US stocks after they have reached our targeted 3000 area while Junk Bonds are feeling heavy.

US S&P500 & Junk Bond ETF (HYG US) Chart

The Australian resources  stocks have basically been a game of 2 halves over the last year with weakness in most stocks unless they have decent iron ore exposure. We think iron ore is now looking rich and the other sector members look bearish short-term, below is our targets for 5 we are following closely:

1 – BHP Group is only 2.5% below its all-time with our buy zone over 10% lower.

2 – Fortescue Metals (FMG) has quickly dipped 10% as iron ore  prices came off the boil, we would be keen accumulators another 10% lower.

3 – South32 (S32) already down 27% from its 2018 high, we have interest another 10% lower.

4 – Western Areas (WSA) has halved  from its 2018 highs, another 10% and MM will be looking to accumulate the nickel miner.

5 – RIO Tinto (RIO) is only 4% below its all-time high, we keen buyers ~10% lower.

MM is wary of iron ore short term but we’re very keen buyers into a decent pullback.

South32 (S32) Chart

BHP Group (BHP) Chart

As we approach August’s reporting season we remind investors of how quickly “hot stocks” can turn south just by slightly missing over inflated expectations. Consider the following small list of pain over the last 3-months alone:

Reliance Worldwide (RWC) -21%, HUB24 (HUB) -22%, Speedcast (SDA) -49% and Webjet (WEB) -16%.

Hence MM is comfortable holding a large cash position into next month’s reporting season, the anticipated volatility “under the hood” is highly likely to throw up some quality opportunities.

HUB24 (HUB) Chart

The 2 strategies we outlined last week remain at the front of our minds with regard to sector allocation and the macro back drop for stocks:

1 – Investors have been chasing the obvious and usual suspects in their hunt for yield, we believe as these stocks become too expensive the secondary (not necessarily in quality) less familiar “yield play” stocks will come to the fore and outperform.

2 – The market is expecting a recession but it’s not currently pricing the risk into share prices. Investors  were far more afraid of a recession because of higher rates than one which unfolds when rates are already low – this makes no sense to us because central banks have far less  ammunition to deal with economic issues if they unfold today as rates are already at extreme levels.

Understandably we are keeping a close eye on stocks / sectors that usually outperform during a recession.

1 –  Platinum Portfolio

The MM Platinum Portfolio continued to tweak our portfolio largely as flagged in previous reports - we sold BHP Group (BHP), Iluka (ILU) & Macquarie Group (MQG) while buying Tabcorp (TAH), BlueScope (BSL) and Domino’s (DMP).

In the process we have reduced our Beta (correlation to the ASX200) and taken our cash position slightly higher to 25% in the process: .

As mentioned earlier with Augusts reporting season looming a cash level ~25% feels optimum to potentially take advantage of any overreactions on the downside. While we have no sell signals for stocks at this stage we are becoming increasingly cautious with both our own and the US indices, hence we feel the prudent risk / reward strategy is to continue slowly moving to a more defensive skew over our portfolio.

Following the last few weeks repositioning we still have a number of stocks that we are considering switching out off, and obviously into:

Holdings MM is considering selling -  Healius (HLS), NIB Holdings (NHF) and Ausdrill (ASL).

Stocks MM is considering purchasing – Smart Group (SIQ), Sigma Healthcare (SIG), Stockland (SGP), Sky Entertainment (SKC), Resolute Mining (RSG) plus of course increasing some of our existing holdings.

Expect MM to continue “tweaking” our Platinum Portfolio although I do feel we are certainly more than half way along the path.

*watch for alerts over next few weeks.

Sigma Healthcare (SIG) Chart

Below is a quick snapshot of the stocks on our by radar:

1 - Smart Group (SIQ), the main thing holding us back with this salary packaging business is the stocks turnover (only $1.75m on Friday) but we do like the business at todays levels.

2 - Sigma Healthcare (SIG), a similar issue to SIQ with volume but we like the shares at today’s prices; one option is a reduced position size in SIQ  and  SIG, say only 2.5% in each. 

3 - Stockland (SGP), MM added the residential facing  property business to our Income Portfolio last week but we also like it for the Platinum Portfolio with stops below $4.45 i.e. good  risk / reward.

4 - Sky Entertainment (SKC), the NZ based gaming and casino business looks set to rally towards $4.20, over 10% higher – also a consideration for our Income Portfolio.

5 - Resolute Mining (RSG), we’ve had this gold play on our radar for a couple of weeks, it rallied strongly last week after an impressive quarterly update which showed production had jumped 33% courtesy of a ramp up in production out of its Syama mine. This remains a sector where we want more exposure.

Lastly a potential bank switch caught my eye this weekend, over the last month ANZ has underperformed NAB by ~5%. The chart below shows the relationship between the 2 has only really coming back into line but if the trend continues by another $1.50 we will consider switching our NAB into ANZ.

ANZ (ANZ) and  NAB Banks (NAB) Chart

2 Income Portfolio

The Income Portfolio saw some tweaking by MM last week as we switched a couple of stocks, adding Stockland (SGP) and Tabcorp (TAH) while increasing our cash position very slightly up to 6%.

Our reasoning and specific moves  were discussed in last week’s Income Report .

Again no major change, until we see any indications that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

3 –  International Equites Portfolio

Last week we added Netflix (NFLX US) to our MM International Portfolio leaving us still holding 75% in cash : .

We are currently considering a couple of very different positions:

1 –  Facebook (FB US) still looks bullish targeting at least 10% upside.

2 – Walmart (WMT US) has already broken to all-time highs but we still like the companies outlook moving forward, especially from a relative perspective if we see a slowdown in the American economy.

3 – We are being patient in pressing the buy button with our bearish facing ETF to US  stocks (BBUS) but the time is slowly approaching.

BetaShares US Bear Fund ETF (BBUS) Chart

The major US indices have reached our targets as mentioned previously leaving us very cautious the S&P500, NASDAQ etc, especially as the junk bonds markets are starting to struggle. We are cautious stocks but no clear technical sell signals have yet been generated hence we have remained patient with the BBUS.

US S&P500 Index Chart

4 - MM Global ETF Portfolio

MM launched its Global ETF Portfolio this month, and so far we have tickled on 3 positions, long both the $A and gold, plus we have started building a short equities position leaving us 80% in cash. Construction of this portfolio like our International Equities Portfolio will be a slow and patient process. We are currently keeping an eye on 2 other scenarios:

1 – We are considering ways to outright short the Emerging markets.

2  – We are looking for a short-term opportunity to go long bonds i.e. targeting yields to recommence their downtrend.

Emerging Markets ETF (EEM) Chart


Short-term Australian stocks look ok but we still feel it’s time to adopt a more conservative stance, we are likely to continue tweaking our portfolios accordingly in the weeks ahead.

US stocks will trigger a sell signal with a break below the 2960 by the S&P500, similarly we may consider another “cheeky” short around the 3030 area.

Gold still looks great and we want to increase our exposure to the sector in our portfolio (s).

*Watch for alerts.

Chart of the week.

We preach at almost nauseam that subscribers should remain open-minded with markets and  US equities are  currently illustrating this point perfectly, simply consider the following 3 points:

1 – The broad  based Russell 3000 has broken out to new all-time highs, while we feel a decent correction will unfold in 2019 / 2020 there are zero sell signals and another 7-8% upside is easy to envisage.

2 – The small cap Russell 2000 Index remains technically bullish targeting ~10% upside.

3 – The largely followed S&P500 and NASDAQ have achieved our target areas but have not yet generated any sell signals.

We may be concerned that a top is  evolving in US stocks but they could easily run a lot higher first.

Russell 3000 Index Chart

Russell 2000 Index Chart

Investment of the week.

It’s a tough one this week after we’ve  have mentioned a few stocks in our “buy bucket” moving forward but I’ve finally plumbed for Sigma Healthcare (SIG). The Australian business wholesales and distributes pharmaceutical products, the stock collapsed ~40% back in 2017 when it lost the Chemist Warehouse contract and has not really recovered since.

MM is bullish SIG with an initial target ~15% higher.

Sigma Healthcare (SIG) Chart

Trade of the week.

We remain bullish iron ore medium term but we believe it will be a volatile ride hence preparation for major swings is important. Technically we can see the bulk commodity testing 800 on the downside, a pullback of this degree we believe will provide a buying opportunity in the related sector names, especially leveraged player Fortescue (FMG).

MM likes FMG around 10% lower i.e. under $8.

Iron Ore (CNY/tonne) 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.

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.


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 6/07/2019

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