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

By Market Matters 14 October 18

Market Matters Weekend Report Sunday 14th October 2018

Market Matters Weekend Report Sunday 14th October 2018

A cold  and rainy morning in Manly to kick off the Nippers season today however as always, kids just seem to embrace whatever conditions are thrown at them and deal with it.  Clearly a similar mindset will be useful on the investment front after a fairly turbulent week in markets. The ghosts of October came home to roost last week as global stocks were hit hard under the weight of increasing concerns around rising bond yields (interest rates) and US – China trade tensions. Neither of these worrying fundamental issues are new news however it doesn’t appear likely that they’ll dissipate any time soon –  President Trump will maintain his tough stance on trade until after the US mid-terms on November 6th.

As we know, markets tend to fixate on specific issues until the  focus changes elsewhere. For instance, Trump and trade was a non-issue, as were interest rates until the IMF cast a small shadow over global growth and boom, stocks drop sharply. Reading a note from Wilson Asset Management on Friday that suggested the fact that markets have dropped substantially on no real change in the fundamental picture should be a concern for investors, essentially another shot across the bow that this mature market is failing.

For the next few weeks at least, the focus now for US investors should (theoretically) turn to US earnings season which is underway, both Citi and JP Morgan posting better than expected results on Friday. As we’ve suggested in recent reports, and will reiterate below, US earnings need to be strong to justify the big overweight call US equities have been enjoying on the global stage.

This Weekends Report will try to be as clear and succinct as possible, summing up our bigger picture ‘market views’  after stocks showed their hand last week.  This is clearly  an exciting time for action not a time to postulate “what ifs”.

Firstly, some history. In times gone by October has brought some historic and tumultuous events to the world in equities:

“ The October effect” – the infamous reputation has evolved over the decades due to the events of The Panic of 1907, Black Tuesday (1929), and Black Monday 1987 when the Dow crashed -22.6% in one day. Interestingly October is on average a positive month for stocks but panic is something that sticks in most people’s minds - over the last decade the ASX200 has actually appreciated just under +1%.

Last week the only place to hide was the gold sector with money searching for perceived “safe havens” e.g. Regis Resources (RRL) +7.2%, Northern Star (N ST) +3.6% and Newcrest Mining (NCM) +1.7%. The MSCI World stock Index fell -4.1% as volatility clearly gripped risk assets including stocks – that crazy beast Bitcoin fell -6% in less than 30-minutes on Thursday afternoon AEST and this may be the beginning of the end for a number of the peripheral crypto currencies.

1 The ASX200 fell -4.7% led by the Capital Goods, Media and Energy sectors which fell -8%, -10.3% and -7.5% respectively.

2 The US S&P500 tumbled -6% led by the Technology and Materials (resources) sectors, both of which fell close to -8%.

3 European stocks fell -4.5% while the emerging markets only fell -2.1% but they have been declining for a while.

The MSCI World Index Chart

Today’s report will look at 2 timely questions following last weeks aggressive decline in stocks:

1 Firstly, how does MM now believe stocks will trade moving forward, including is the longest bull market in history over?

2 Secondly, and more importantly, how does MM now plan to invest for here?

Last week we were bearish but as it played out, clearly not bearish enough i.e. “At MM we remain short-term bearish the ASX200 targeting a break below the psychological 6000 area” – last weekend’s report.

We now believe equities are entering one of their most exciting times in years, investors should remember the bigger picture to wealth creation before panicking too quickly, this will likely become a great investment opportunity. We hate being cliché however the old Buffet quote is probably timely…“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful” - Warren Buffett.

Its easy to say buy weakness and sell strength but it goes totally against human emotion plus of course the big question, how much weakness to expect? We know from history stocks are the best long-term investment in Australia and significantly more so in the US / Europe. Hence if we put on our “glass half full” glasses the current -9.1% correction by local stocks is presenting a solid opportunity.

Long-term performance of stocks in Australia Chart

Firstly let’s put last week’s decline by the ASX200 into perspective, since the GFC the markets have already experienced 2 major corrections:

1 - In 2010-2011 when the GFC is very fresh in peoples minds the local market corrected 1259-points, or 25%.

2 - In 2015-16 when the news was dominated by a potential China slowdown and BREXIT the local market corrected 1291-points, or 21.5%.

Hence the current 527-point / 9.1% correction may only be half way through its decline and still be in sync with 2 previous corrections over the last decade.

When we look at the longer term chart below the recent pullback certainly does not stand out as anything particularly meaningful at this point in time.

ASX200 Index Chart

When markets get gripped with panic we believe that technical analysis has an increasingly important part to play in successful investing as huge volumes pass through markets with optimism / pessimism swings in an hour what previously would normally take a week. While “Fear & Greed” is dominating markets we believe valuation based fundamental analysis can almost take a back seat in the decision making process compared to having an understanding of how far the valuation elastic band can contract when investors become scarred on mass.

Short-term, given the market failed to be bought aggressively into last weeks declines,  we are now expecting the market the chop around in a range, rather than bounce back strongly from here  -  even on Friday night with the US S&P500 closing strongly up +1.4% the SPI futures are pointing to a ~1% fall on Monday morning i.e. the current path of least resistance is down. Without getting too short-term in nature, we see the ASX 200 unfolding as below:

1 – We believe the ASX200 looks set to rotate between 5775 and 5900 next week

2 – Over the next few weeks, into November, we anticipate another attempt at fresh lows probably down towards 5700.

So, we retain a bearish bias short term however importantly, we believe the worst from an acceleration context is probably behind us at this stage.

We also believe that the market will set up for a very strong / aggressive Christmas rally from lower levels, simply given high cash levels / and current caution that still sits with professional investors i.e. these are not typically associated with major tops.

ASX200 Index Chart

US & Overseas stocks.

US stocks are clearly important  as they’ve been the leader / main catalyst for declines by global stock markets – no great surprise to MM with fund managers more than 20% overweight US stocks and in our opinion they’ve been used as a quasi-bond / safe haven = very dangerous concept.

The market being “long US stocks” certainly created a dearth of buyers last Wednesday / Thursday when the Dow corrected over 1500-points in total. This feels an opportune time to revisit 2 lines from last week’s report, starting with how we looked at the recent huge outperformance by a few very big names as opposed to the broader US market:

“We recently read a perfect yet slightly unpleasant analogy to explain the behaviour of stocks when the cash (buying) dries up – it first shows up in the lower quality stocks, like the weak animals dying first in a drought. However, eventually the lack of water effects all animals including the strong, it simply kills the weak first.

The real warning comes when we look back in history at some of the largest corrections in stocks – the advance / decline regularly turns down ahead of the market itself as the below chart illustrates. Simply put the large “blue chips” cannot do the heavy lifting forever when the broad market is rolling over.”

The Advance / Decline line had turned down for ~6 weeks prior to last week’s carnage.

Advance / decline in US markets Chart

The S&P 500 has now corrected ~200pts – a failure to bounce from current levels would bring into play a  technical target of ~2550, another ~200 pts or around 8% lower.

US S&P500 Chart

US Dow Jones Chart

Now lets turn our attention to European markets to see if we can find any glimmers of optimism.

Both the German DAX below and French CAC shown in our Chart Pack on the MM website imply European stocks have completed a clear 5-wave advance and a correction back towards the 2016 lows is underway, around 20% lower.

European stocks are technically calling the longest bull market in history over.

German DAX Chart

Last week the Emerging Markets Index only fell -2.1%, a great comparative performance before we consider how its faired throughout 2018.

We remain comfortable with our view that the Emerging Markets will outperform US stocks moving forward.

MSCI Emerging Markets Index Chart

Unfortunately, looking at developed market indices versus emerging markets the technical picture is a more bearish one.

Our likely approach from here.

Last week we bought the initial panic lows only to see the market fall away that afternoon before recovering the next day. We are now (rightly so) questioning that call given the aggressive / high volume selling that played out thereafter, before less aggressive, lower volume buying stepped in.

Our initial view for the ASX 200 was a pullback into the 5950 region which occurred – although it went further and with more force than we thought it would. The Platinum Portfolio last week outperformed as it should given we held a leveraged bearish ETF (BBUS) and reasonable cash, however that’s no great consolation, we are not just about adding value / alpha -we want positive returns in all markets i.e. make money, not lose less.

Clearly, that becomes a more difficult task in periods of market weakness, however its during these periods - making tough calls- being vigilant, taking losses when appropriate and monitoring the bigger picture that set up portfolios for good returns in time.

The simple / easy approach right now would be to just sell everything, leave the market until things settle down, however from experience, investors that do that end up missing some great opportunities along the way and they become out of tune with the market. Remember just like Telstra and the banks fell over the last few years when the ASX200 rallied strongly many stocks will rally even if the market does ultimately correct ~20%.

We have banged the ‘active management’ drum for some time now and we feel strongly this is most certainly not a market for “sit & hope”. Solid returns can be made in falling markets by the nimble, and those with an open mind. We’ll need to use ‘broader’ investments, like ETFs and be more active in the management of positions from here. NB An active investor is not a trader.

Current positioning in the Platinum Portfolio

After last week’s buying MM is holding 92% towards long equity positions, 5% short US stocks via the geared BBUS ETF and only 3% in cash – details can be viewed by clicking on the button a little lower in this report. 92% long equities is too high considering the views we have outlined above.  Let’s consider the positions in the MM Platinum Portfolio;

  • 5% in the BetaShares Strong Bear BBUS 5% – the leverage is between 2 & 2.75x times hence we have 10%-13.75% of the MM Platinum Portfolio on any given day bearish US stocks. (the ETF rebalances down to 10%)
  • 3% in cash, this will not be used to buy stocks in the short-term but may be used to increase our BBUS position i.e. this 3% would increase our short US stock position to the equivalent of at least -16% exposure further reducing the “heat” risk on our stocks.
  • 3% in Newcrest (NCM) – we are comfortable here as the sector rallied when the Dow plunged last week hence another potential offset to lower equity prices moving forward.
  • 12% in insurance through Suncorp & QBE -  we are uncomfortable SUN here from a technical standpoint, sell triggers have been generated targeting a correction of ~20%. QBE should hold above $11.00 or we will cut and go to cash.
  • 30% in banks through CBA, NAB and Westpac – we like the ~7% fully franked yield this holding generates plus they have already corrected over 30% from their 2015 highs and look likely to be supported by yield.
  • 7% in financials through Janus Henderson (JHG) – We averaged JHG around ~$34.50 last week. Bell Potter have a $58.20 price target on JHG, while the consensus TP is $45.41, implying huge upside from this dirt cheap financial, however this position feels wrong and we are likely to take our medicine unless we see a strong rally from current levels.  
  • 7% in telco’s via Telstra (TLS) – we remain comfortable with TLS at present as long as it holds above ~$3.00
  • 12% in healthcare stocks via Ramsay (RHC), Healthscope (HSO), Cochlear (COH) and CSL Ltd (CSL) – we will look to reduce into strength. HSO was bought for potential corporate activity which has proved illusive while RHC could be sold into strength. CSL and COH have just been purchased into weakness.
  • 8% in resources via RIO and Mineral Resources – We are still ok with these 2 holdings which are small compared to the sector. This is likely to be  a sector to buy for a strong counter trend correction. We are targeting this sector for opportunities – Iluka (ILU), Western Areas (WSA) and Oz Minerals (OZL) a few on the radar
  • 5% in an ungeared emerging markets ETF (IEM) – Emerging markets are oversold, have led this recent decline and will likely attract FUM if / when it comes out of the US market. Sell strength is the play here for now.
  • 5% in consumer services via Aristocrat (ALL) – This stock outperformed strongly last week implying underlying demand. ALL should hold above ~$26.90 or we will cut and go to cash
  • 3% in infrastructure / mining services via CIMIC Group (CIM) – we like this small position both  technically / fundamentally.

Suncorp (SUN) Chart


MM will be looking to massage our portfolio in line with the above views. We are now looking to be  sellers of any reasonable strength.

Remember our favourite analogy for a bearish decline:

“The market will fall like a ping pong ball down a staircase, it will bounce very well at times but it’s going to ultimately reach its target at the bottom” – MM.

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.

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Enjoy the rest of your Sunday.

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 13/10/2018

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