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

By Market Matters 15 July 18

Market Matters Weekend Report Sunday 15th July 2018

Market Matters Weekend Report Sunday 15th July 2018

Last week the ASX200 was quiet as school holiday apathy kicked in with even a belligerent Donald Trump having only a few hours impact on both local and global stocks. It almost feels like fund managers completed any intended monthly buying in the first week of July, pushing the ASX200 up 100-points, so they could subsequently focus on some quality time with the kids . There was little to get excited about on the stock, or sector front with weakness in the utilities / energy sectors offset by strength in healthcare the main standouts.

As subscribers would appreciate by now we believe a decent correction for stocks is likely in 2018/9 but their current resilience should not be ignored – tops are the hardest period for investors to navigate as their evolution is usually prolonged and includes many false dawns until one day it unravels. The trouble is by the time the respective market is ready to turn lower it seems the majority of investors / traders who have continually taken false sell signals are out of $$ ammunition, or just pure personal energy, they miss the  move and can only sit back and declare how they knew it was going to happen without actually profiting from its decline, most definitely not our objective!

  • With the exception of a couple of weeks in January / February the bears have been continually hurt since early 2016, way before Donald Trump’s election.
  • Over the last 2-months fund managers have actually turned from well underweight US stocks to slightly overweight but cash weightings remain at 4.8% above the 10-year average of 4.5%.

Ideally for MM to feel a top might be about to unfold fund managers will be holding less cash than the average hence the safety net of buyers into weakness will be removed – “buy the dip” has worked for the last few years and its undoubtedly the investors current habit and hey why not, it’s working! Investors should always remember the often quoted adage – “KISS” i.e. keep it simple stupid.

  • Global equities remain firm in the face of heightening trade tensions between the US & China. A market that holds / rallies on bad news is a strong market.

We are currently only looking to sell new highs in stocks and indices i.e. sell strength not weakness. We monitor our performance closely and we are relatively content with the recent results considering we have a large 22% cash position plus 8% in negative facing ETF’s – in other words we are slowly positioning ourselves for a downturn in equities hence a positive relative performance result when stocks rally is a good outcome.

  • The flagship “Platinum Portfolio” current holdings has outperformed the market by +0.17% over the last month.

NB These numbers do not include dividends and recently realised profits / losses i.e. just our current holding. In terms of strike rate for the June quarter, out of 16 closed alerts we sent to subscribers, 14 were profitable while 2 were not. Further details available here.  

ASX200 Accumulation Index Chart


The recent resilience in the face of adversity by global equities, with the exception of the emerging markets, makes us believe that US stocks in particular are still likely to make fresh highs in 2018, our best guess is ~3-4% higher. This pop to new highs is likely to stop many bears out of their positions while in our opinion presenting an excellent risk / reward selling opportunity.

  • MM is likely to increase our short ETF position (BBUS) if US stocks rally 3-4% higher.

The NASDAQ is the US index we believe leads in most cases and it has again made fresh all-time highs on Friday night, hence we feel the bulls remain intact for now.

US Russell 3000 Index Chart


1 Reassessing US v Europe.

Last week we touched on our view that the massive outperformance of US stocks (S&P500) compared to their European equivalent (EuroStoxx 50) was very mature and close to at least partially retracing.

We still hold this view and believe it may provide our Platinum Portfolio with some excellent short-term offset to our initial foray into the negative facing US ETF (BBUS), theoretically making it easier to increase our short exposure to the US if they do make fresh all-time highs as we now expect.

  • MM is considering buying the HEUR ETF to offset our BBUS ETF position for at least the coming few weeks.

US S&P500 v EuroStoxx 50 Chart


US BBUS ETF v European HEUR ETF Chart


2 US and Australian bond yields

In Fridays report we discussed why many economists / market players were watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends.

  • Simply because of historical data we believe stocks will correct when / if the US yield curve inverts i.e. the move will become self-fulfilling because so many market players are conscious of it.

US 2/ 10-year yield curve Chart


The US economic engine has been humming along nicely over the last few years while our own coughs and splutters, especially today as the unfolding correction in house prices combined with large household debt constrains economic growth.

  • The US Fed has raised interest rates 7 times since 2015 with the current target band 1.75-2%, further hikes are expected in 2018/9.
  • Conversely the RBA has left the cash rate at 1.5% for around 2-years i.e. its lowest level in history.

With the Fed’s target interest rate already above the RBA cash rate and now US 10-year bond yields are above the Australian equivalent its hard to imagine a meaningful rally in the $A until further notice but this is a crowded trade we are constantly monitoring i.e. MM is long the BetaShares $US ETF in its Platinum Portfolio.

US 10-year v Australian 10-year bond yields Chart


3 Should we buy any bank weakness

Bank shares pared early gains this week after a huge recovery over the last 5-weeks e.g. CBA rallied +14.2%. With CBA reporting on August 8th and subsequently due to trade ex-dividend ~$2.37 on the 15th of next month some consolidation feels likely.

  • Technically a pullback towards the $72.50 area for CBA feels likely i.e. 3% lower.

Commonwealth Bank (CBA) Chart


Second tier Bank of Queensland (BOQ) has been following our technical path well over recent weeks and it reached our retracement target nicely.

  • Technically we are now neutral BOQ but would be keen buyers if weakness returned to the sector pushing BOQ below $9.50.

Bank of Queensland (BOQ) Chart


After over a year of huge underperformance the Australian banking sector came back into favour with a bang about 5-weeks ago but when we look at it graphically it’s only a blip compared to the 12-months of pain and suffering, largely caused by the royal banking commission.

  • MM believes the outperformance of the Australian banking sector has much further to evolve which should help the ASX200 especially from a relative performance perspective.

Australian v US Banking sectors Chart


4 Woolworths has been another elastic band trade, what’s next?

On Friday night when I was updating the “Chart Pack”, an exercise which often generates many of the ideas for the Weekend Report, I remembered the negativity that surrounded good old Woollies back in 2016 with the stock tumbling almost 50% over 2-years. The stock could do nothing right and everybody was talking ALDI, Costco, margins etc. Interestingly all of the concerns have played out as expected BUT nothing like as bad as the share price was implying i.e. the negativity had stretched way too far.

Big money can be made by investors in picking the snap back in the sentiment (elastic bad like), a couple we are watching today:

Potentially too bullish – Tech / growth stocks, energy sector and resources.

Potentially too bearish – Banks and Telco’s.

NB we have a pretty good track record on these plays overall although we can at times be  too early to join the party – an area we are targeting to improve moving forward.

Woolworths (WOW) Chart


5 BHP and the emerging markets remain in focus

BHP has been defying all of its usual headwinds i.e. falling oil price, base metals and emerging markets. The optimism around the “Big Australians” looming cash returns is huge with investors expecting both increased dividends and large buybacks, at MM we do not question the outcome but how much is built into the current share price – could we be seeing a classic case of buy on rumour & sell on fact?

  • MM is confident the gap between BHP and base metals / emerging markets will again close but will BHP fall, or the other 2 markets rally is the question.

Interestingly just like we believe global equities will be lower in 2019 timing is the key to this BHP outlook hence we are watching carefully.

  • MM remains a keen buyer of BHP ~$29, or over 10% lower.

BHP Billiton (BHP) v Emerging Markets Index Chart


BHP Billiton (BHP) v Bloomberg Base Metals Index Chart


6 Gold stocks pulling back is catching our attention

The local gold price has been stagnant over the last year with the $US100/oz drop being offset by a weakening $A for Australian miners but last week felt like we may be about to see a test to the downside. If this unfolds we need to be prepared after such a quiet time:

  • MM remains a buyer of Evolution Mining (EVN) between $3 and $3.10.

Evolution Mining (EVN) Chart


7 Utilities get whacked

Last week the Australian utilities sector was smacked almost 6%, ironically the same amount it has fallen over the last 12-months.

During the week we addressed AGL Energy (AGL) outlining our negative view target level ~10% lower. Today we’ve quickly addressed 2 other stocks in the sector:

  1. Spark Infrastructure (SKI) $2.21 – Technically SKI looks positioned to continue its drift lower with our eventual target below $2.
  2. APA Group (APA) $9.66 – The natural gas infrastructure company has enjoyed 2018 so far given a current takeover bid but technically we are now neutral / bearish.

As we expected considering our positive outlook for interest rates the utilities sector has zero appeal at present.

Spark Infrastructure Group (SKI) Chart


APA Group (APA) Chart


Again no major changes although following the recent solid gains by the ASX200 / banking sector it continues to be hard to be negative local stocks, just yet.

  • We remain net positive equities for the coming weeks (just) while the ASX200 can remain above 6250, and especially 6140.
  • We will continue to slowly increase our cash position and are still firmly wearing our “sellers hat”.

“Shopping List”

  • We still need decent weakness in COH, MQG and CSL for example before we start buying.
  • Similarly we are interested in a number of resources stocks into reasonable weakness.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.50-$16 but we may reduce this large position into initial strength above $15.
  • Janus Henderson into a further strength.
  • Orocobre (ORE), ideally into any reasonable strength, or potentially a switch into Kidman Resources (KDR) – see Trading Opportunity in last week’s report.

Standout technical chart (s) of the week

Last week we held back on pulling the trigger with our planned purchase of OZ Minerals (OZL) below $9 for a number of reasons including our thoughts on BHP in section 5, plus the below chart of RIO. 

  • RIO has drifted 10% lower over the last few weeks but our target remains ~$74, or another 7% lower.

RIO Tinto (RIO) Chart


Trading Opportunities on our radar

MM has talked about the emerging markets in today’s report, plus a number of others over recent weeks but when a markets interesting it will get air time!

  • We like the EEM into fresh lows ~42 which would represent an almost 20% correction.
  • This is a play that can be potentially implemented using ETF’s e.g. BlackRock’s’ iShares MSCI Emerging Markets ETF.

Emerging Markets (EEM)) 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.


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 14/07/2018

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