Market Matters Report / Market Matters Weekend Report Sunday 15th April 2018

By Market Matters 15 April 18

Market Matters Weekend Report Sunday 15th April 2018

Market Matters Weekend Report Sunday 15th April 2018

The local market ended higher last week however there was clear selling into strength, met with some tentative buying of any obvious weakness,  overall though the index remains firmly in a ‘choppy mess’ between 5800-5900, making us at best neutral towards local stocks for now. We need to see a break and close back over 5900 to become bullish while a close below 5800 for the ASX 2000 would create a negative picture targeting a move down to 5675.

On Friday night the US market was strong early only to see those strong gains being lost by a 400 point drop for the Dow Jones which commenced soon after trade opened – the index eventually finishing down -122pts or 0.5% while the S&P 500 was off by 0.29%. Our favoured index the NASDAQ was 0.47% lower, however that was after a strong week with the Tech stocks adding 2.77% overall, outpacing the Dow (1.79%) and the S&P 500 (1.99%).

As I tap away news is breaking about another targeted strike on Syria, this time My Trump has teamed up with allies in the UK and France retaliating to yet another chemical attach from the murderous Syrian dictator Bashar al-Assad – todays attack had been well-flagged throughout the week. The last military attack launched by the U.S was around a year ago on the 7th April in 2017 with 59 Tomahawk missiles being directed to a Syria-government airfield. That was a US targeted attack which Russia vocally opposed, however in that instance the US notified Russia ahead of the strikes and there was no real retaliation other than the usual vocal slurs, warnings about the impact on future relations etc.

This time Donald Trump involved supportive allies launching over 100 cruise missiles targeting specific weapons facilities – it simply seemed they were left with little choice but to use force after Russia has failed dismally to curtail Syrian’s Chemical capabilities. Aside from the obvious humanitarian issues there will be some impact on markets globally, the extent of the impact though will likely rely on whether or not Russia retaliates with more than just words. The US has been careful to avoid Russian assets in Syria, even going as far as notifying them ahead of time of the pending attack.

As you’d expect the US, the UK and France saying the strike was a big success, while Assad’s allies Russia, Iran and Lebanon’s Hezbollah group condemned the moves.

From a markets point of view, the Russian response is the key. In the 2017 attack Russia condemned it but didn’t retaliate. This time they’ve done the same without any rumblings of retaliation (yet). Importantly, it seems the strikes were aimed at targets a long way from Russian bases in the country. Although the US and other simply had to respond it makes very little sense for the U.S to poke the Russian bear as well as start a trade war with the Chinese juggernaut – we doubt either will eventuate however it does create another source of concern for the market.

There was only a slight initial negative market reaction a year when the previous attack occurred.

S&P 500

Last week we saw the local market edge higher by 0.7%- interestingly the Material and Energy sectors were the main drivers of the gain with the Materials adding 3.78% for the week while the Energy Stocks added 1.86%. Within those sectors, Alumina (AWC) was a standout adding 8.37% while Rio Tinto put on 6.82% and Iluka added 6.62%, while for Energy stocks, Origin was the clear standout while Woodside was dragged higher kicking and screaming in what seemed like a bit a grind up rather than a fluent rally.

Looking at the flow of buying in the US last week, it was clearly targeted mostly towards the technology stocks while locally the market was keen to buy Resource stocks. It’s interesting to think that the two respective ‘growth’ sectors or areas that usually do well when optimism is high saw most love last week. This provides a subtle indication that risk appetite is returning, and the tilt back up towards all-time highs for key US indices is still well and truly on the cards.

Another soft week by the US Dollar which is still oscillating between 88 & 90 put the fire back in the belly of commodity prices while the latest Syrian attack will likely see Crude Oil trade up at the start of the week with our $US70 now less than 4% away.

Crude Oil Chart

US Dollar Index

Last week we posed the question of whether or not stocks will be undone by a trade war, or something new, concluding that we seriously couldn’t imagine the US and China allowing a trade war to erupt, there will simply be no economic winners. Last week saw an olive branch extended by Chinese President Xi Jinping and the trade war talk seemed to be getting less airtime – so a resolution or at least more conciliatory language would be a net positive for the market as we move into the middle part of April.

They’ll likely be a reasonable level of confusion on the Australian open on Monday Morning given the strikes we’ve seen over the weekend. On Saturday morning, SPI Futures closed down -6pts however I’d expect more pain than that come Monday, and we’ll take our lead from US Futures once they come online.

It still feels like the Australian market is trying to rally however the banks are simply failing to come to the party with the resources left to do all the grunt work last week. We still need the market to close back above 5900 to get excited to the upside in any meaningful manner but from a trading / buying perspective we are not afraid of buying weakness over the coming weeks. Importantly while we feel weakness can be bought for now it’s certainly does not mean we are buyers of strength!

ASX200 Chart

While most buying last week was targeted towards the local miners and energy stocks, the selling was targeted towards some of the recent ‘go to’ stocks that are typically trading on high valuations.

  • Flight Centre (FLT) -4%
  • Galaxy (GXY) -4.28%
  • A2 Milk (A2M) -4.29%
  • Nanosonics (NAN) -7.42%

We continue to think that rising rates will have a big influence on the high growth, high valuation stocks in the market. While the obvious conclusion to make (and we continue to make this) is that the yield stocks will continue to struggle as rates rise HOWEVER the obvious question is around how much in terms of higher rates has already been priced in? I tend to think a lot less for the high PE/growth areas than the more obvious defensive yield names, property, infrastructure and the like.

Those areas of the market have already been sold down – Transurban (TCL) for instance is already 14% below its highs while the likes of Flight Centre (FLT), A2 Milk (A2M), Cochlear (COH) and CSL for example are all trading within a whisker of their all-time highs.

Transurban (TCL) Chart

Moving onto US stocks the market edged higher last week and our view moving into Q2 is unchanged, we are looking for US stocks to find a low fairly soon before attempting a rally to fresh all-time highs – we are now 50-50 whether they can break above Januarys top, now 10% away.

US S&P500 Chart

Last week we sold out of Alumina (AWC) in the MM Platinum Portfolio – taking a nice 25% profit inclusive of the dividend while we also have Woodside firmly on our radar to sell into strength should it prevail early next week. We’d like the $31 region however we may trigger a sell nearer $30.50 – achieving a very small profit on the positon.

Woodside Petroleum (WPL) Chart

Conclusion (s) 

  • While the attack on Syria is a negative for the market, the US and allies were simply left with no choice and the coordinated approach taken by Donald Trump will be seen as a positive. He almost looked ‘Presidential’.
  • The Russian response will be key, however plenty of warning was provided and specific Russian assets in Syria were not targeted.
  • We remain net positive equities with last weeks buying of ‘growth / risk’ sectors in Australia and the US giving a slight indication that a change of attitude is in the air.  

Catching our eye in Australian stocks / sectors

  1. RIO and BHP to make new highs

Strength in the commodity stocks last week is encouraging with BHP looking particularly strong. A close above $30 would trigger the next target of $32 – easily plausible given the likely move higher in the Oil price early in the week, plus most likely weakness in the $US supporting the broader commodity complex. We remain sellers into strength however will most likely be more patient with BHP offloading RIO in the first instance on a move above $80.

We are targeting a sell on RIO above $80 and BHP above $32

BHP Chart

RIO Chart

  1. Are gaming stocks a safe bet?

Crown Resorts (CWN) has been in a trading range between $10.00 and $14.00 for the past three years with numerous front page scandals keeping pressure on the stock. Earnings have been under pressure and on a PE of 23x forward the stock is certainly not cheap, however earnings expectations are now at a low point leaving room for an upside surprise.  

We like Crown at the bottom of its trading range ~$10

Crown Resorts (CWN) Chart

Earnings Estimate Crown Resort (red line) versus Share price (White)

We’ve owned Star Entertainment (SGR) in the past and did well out of it, with the stock now tracking towards our ‘bearish’ sub $5 target.

SGR offers best risk / reward opportunity below $4.65 – another ~10% lower.

Star Entertainment (SGR) Chart

Earnings Estimate Star (red line) versus Share price (White)

  1. Fortescue cheap as chips

Trading on a valuation of just 7x earnings this year and 8x next year’s earnings,  Fortescue is cheap if the iron Ore price holds up. Clear signs of stabilisation last week in the bulk commodity is a positive for FMG and the discount between benchmark prices and Fortescue product is starting to close.

We are bullish Fortescue (FMG) initially targeting $5.00

"Buy when there's blood in the streets, even if the blood is your own." Barron Rothschild

“Shopping List”

Below is our list of stocks plus ideal levels which are close after last week’s aggressive falls, we now have 6.7% of the MM Platinum & only 2.2% of the Income Portfolio in cash, hence we are extremely fussy buyers in both:

1.      Star Entertainment (SGR) around $4.60 would look attractive, although this is 10% lower than current prices  

2.      Telstra (TLS) under $3.10 is looking attractive to us, this certainly puts us in the minority.

3.      Platinum (PTM) around $5.50 – this would be an active trading play looking for a 15-20% bounce.

4.      Vocus (VOC) below $2.20 – this would be an aggressive trade in our old nemesis.

5.      A2 Milk (A2M) below $11.50 – a fairly aggressive play considering the stocks high valuation.

“Selling List”

1.      Woodside (WPL) between $30.50 and $31.

2.      Clydesdale Bank (CYB) around $6.

3.      Rio Tinto (RIO) above $80

4.      BHP above $32 assuming it closes above $30

5.      Genworth (GMA) above $2.60

Standout technical chart (s) of the week

The US 10 Year Bond Yield now looks primed for another go at the 3% handle and beyond. The bond market is telling us that the Federal Reserve continues to be behind the curve in terms of their policy settings.

  • We remain bullish global interest rates expecting the US 10 year to be above 3% shortly.

US 10 Year Bond Yield Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. Our most likely play early next week:

  • We remain interested in averaging our Telstra (TLS) holding under $3.10. 

Trading Opportunities on our radar

The ASX200 is still neutral while it remains between 5800 and 5900 however buying panic sell offs (if they eventuate) create strong risk reward opportunities.

Buy a panic sell off greater than 50pts on Monday Morning looking for a close back over 5800 as bullish confirmation

ASX 200 Chart

Our Holdings

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

Weekend Chart Pack

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Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . Positions are updated each Friday.

Disclaimer

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 14/4/2018. 4.00PM.
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