Market Matters Report / Market Matters Weekend Report Sunday 15th October 2017

By Market Matters 15 October 17

Market Matters Weekend Report Sunday 15th October 2017

Market Matters Weekend Report Sunday 15th October 2017

The ASX200 enjoyed a great week, albeit on relatively lows volumes, as fund managers appeared to capitulate on their bearish / underweight stance towards Australian stocks – if the market keeps rallying and there caught too underweight we’re probably see some fund managers looking for jobs in the not too distant future! The US S&P500 has now rallied for 5 consecutive weeks and we think this may have led to the capitulation by some local bears – last week while the ASX200 rallied a very healthy +1.8% the US broad based S&P500 only managed to gain +0.2%. The markets gains were across all sectors with only the stocks heavily exposed to iron ore attracting any noticeable selling.  The broad based gains is historically the sign of a strong market with only the volume lacking to tick all the bullish technical boxes i.e. Last week’s SPI futures volume was 40% below that of the first week of this month. We have mentioned the aggressive selling that hit our market via the SPI futures over the last month and simply in its absence we believe the ASX200 will trade higher / outperform on a distinct lack of selling, as opposed to aggressive buying – sounds like the classic Christmas rally.

The list of major winners / losers illustrated last week’s strength within the market as the winners notched up a 9 to 1 victory when we consider stocks in the ASX200 which moved by over 5% for the week:

Winners : Seek (SEK) +5.7%, Domino’s Pizza (DMP) +8.6%, Aristocrat Leisure (ALL) +6.9%, AMP Ltd (AMP) +5.2%, Graincorp (GNC) +5.6%, Ansell (ANN) +6.1%, Bluescope Steel (BSL) +6.4%, Northern Star (NST) +6.6% and Fairfax (FXJ) +5.9%.

Losers : Fortescue Metals (FMG) -5.4%.

When we look at the winners above, plus some other moves during the week, it feels that investors are in “bargain hunting” mode, buying stocks which have underperformed / pulled back from their recent highs – even that much hated beast Telstra (TLS), which we own, has bounced +5% in the last 2-weeks. Conversely Bank of Queensland (BOQ) which has rallied +26% since June actually fell -0.3% last week, even after a good profit report including a special dividend i.e. yet more stock / sector rotation.

The ASX200 is entering its 22nd week of trading in the tight range between 5629 and 5836 with some index volatility statistically definitely overdue, last week’s strong move has the upside now as the clear strong favourite with our initial target the 5850 area.

Below are the ASX200’s “trading patterns” which continue to contain the local market as we move into mid-October, a break over 5836 feels highly likely next week:

  1. Short-term Neutral Pattern between 5629 and 5836 – 21 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 36 weeks to-date.
  3. October’s range to-date is 5650-5825 i.e. 175-points, already the largest range since June.

ASX200 Weekly Chart

We noticed a story in today’s Financial Review titled “Go global to build your wealth” which focused on the better opportunities offered overseas to both the IT and healthcare sectors. While we have to agree with the story on a stock by stock level, larger markets clearly offer more opportunities, we certainly would not be throwing the bathwater out just yet for local stocks, just consider the following:

  1. The ASX200 is outperforming the broad US S&P500 in $US terms since the recent strong market advance commenced in early 2016.
  2. Most retail investors do not hedge their overseas investments hence on an index level Australian investors would be worse off in the broad US market, plus they missed out some juicy fully franked dividends.
  3. We believe the story should explain the risks to unhedged investors if the $US continues falling – its dropped by over 12% in 2017.
  4. Also we believe both the healthcare and IT sectors are vulnerable to corrections after their huge gains since the GFC, plus they are likely to be pressured by rising interest rates.
  5. Overall at MM we think the story is years too late.

ASX200 v S&P500 (in $US) Weekly Chart

We have addressed at length recently the implications of a potential break of the 35-year downtrend in US bond yields and this remains something we will watch very closely and obviously update subscribers when appropriate. However with sector rotation remaining at the forefront of our minds at MM we thought today would be an ideal time to explain the $US’s influence on some of our decision making process as its influences are definitely coming into play at present.

The clearest correlation for the $US is against gold and its respective stocks. As can be seen from the chart below as the $US declines Regis Resources (RRL) rallies, this makes sense as gold is denominated in $US, hence a weaker US currency usually leads to an increasing gold price. As the $US bounced 3.6% from its early September low RRL tumbled over 18%, allowing us to go long at $3.66 just before the $US again turned lower. One interesting characteristic when you look at the chart closely is that RRL often leads the turns in the $US. Hence our view on the $US becomes very important with how we adjust / tweak our investments within the “gold sector”:

  1. We believe the $US Index will eventually make fresh lows down towards the 90 region to complete the drop for 2017 – the jury is out whether is a the start of a massive $US devaluation.
  2. Hence if the $US is set to fall another 4% RRL should add to its recent 12% bounce from $3.54.
  3. However we are comfortable taking profit above $4 in RRL following our original plan, the $US may easily bounce again before renewing the downtrend back under the 2017 lows, in which case we are likely to rebuy RRL.
  4. If the $US eventually has a strong rally from the ~90 region its likely to provide us with another great entry into RRL later in 2018.

Assuming we are correct and the $US is eventually heading to a fresh 2017 low at around say the 90 region, prior to a decent rally, the following implications occur:

  1. As explained above we should get a better entry into the gold sector later in 2017 / 2018 as the $US recovers.
  2. Other $US denominated commodities also have an inverse correlation to the $US hence we are unlikely to chase resource stocks into strength if the $US falls towards 90, we would rather be sellers.
  3. However, if the $US falls towards the 90 level our local $US earners may come under some short-term pressure providing some great buying opportunities e.g. Macquarie Group (MQG), CSL Ltd, Aristocrat Leisure (ALL), Janus Henderson (JHG) and Treasury Wine (TWE).
  4. A question comes to mind, “will US stocks correct if / when the $US makes fresh 2017 lows as they have rallied strongly while the $US was falling?”.

As above illustrates the AUDUSD exchange rate is an important part of the investment mosaic of our decision making process at MM, whether on a short-term basis like with our gold play, or over the medium-term if we buy some $US earnings exposure basis the $US around the 90 area.

The $US v Regis Resources (RRL) Weekly Chart

The US S&P500 is now sitting above all 18 predictions that Blomberg compiled at the start of 2017, the path of most pain may actually still remain on the upside. The last time that the S&P500 exceeded the most bullish forecasters was in 2013 when the market subsequently rallied 10% into Christmas! Our medium target of a break back over 6000 in 2017/8 looks almost conservative in comparison. In the US ETF mutual funds have seen $45bn outflows since April leaving many investors frustrated with missing out on the rally and hoping to buy weakness – my experience in the markets is “hope” usually costs me money! Markets definitely feel like they are entering the FOMO phase (Fear of missing out) but how far it goes can be very hard to forecast, especially short-term. Last week’s rally in Australian stocks came out of nowhere, especially with no large positive leads from global markets. As Bloomberg said today “scepticism is getting expensive” with a quarter of global indices within 2% of their all-time highs, it feels like many people still remember the GFC far too well and its restrained them from becoming bullish when a multi-decade opportunity presented itself.

The message we are pedalling is one you’ve heard before “remain open-minded” we may easily surge through 6000 by Christmas, it’s now only 3.2% away. On this state of mind who would have though Bitcoin would surge over 20% last week, definitely not me! A note of caution the “taxi drivers” are now discussing bitcoin like they were the internet before the “Tech Wreck” and stocks in general before the “1987 crash”, I would certainly be taking some $$ off the table if I had been smart enough to be long.

Bitcoin Currency Weekly Chart

Australian sectors

Resources

Australian large cap resource stocks have been choppy recently with the general trend “sell iron ore and buy base metals” which we have been advocating but have yet to find a good risk / reward opportunity. No change to our overall outlook:

  1. We are positive the reflation trade hence are keen on the likes of BHP and RIO into weakness but do not plan to chase strength.
  2. We generally prefer the base metals over the more volatile iron ore sector at present.
  3. Iron Ore is our least favourite part of the sector and although FMG is due to a decent bounce we can easily see the stock under $4.

Iron Ore Monthly Chart

Fortescue Metals (FMG) Daily Chart

BHP Billion (BHP) Weekly Chart

Energy

We are bullish crude oil for now, especially with Iran back in the news who are now responsible for 11% of OPEC production. Overall we are net positive crude with a test of $US60/barrel a definite possibility.

MM is currently long Santos (STO) from $3.95 with a ~$4.40 target, or 5-6% higher, this feels on the money at present.

Crude Oil Monthly Chart

Santos (STO) Daily Chart

Gold

Gold stocks have bounced well over the last 2-weeks, especially our purchase Regis Resources (RRL) which has rallied 12% already from its lows, as discussed earlier we will still take profit above $4 if the opportunity arises next week. Unfortunately for now market heavyweight Newcrest, which we also hold, is currently dragging the chain.

We are keen buyers of gold moving forward but can see further weakness into Christmas following its usual seasonality path – this implies a second bounce by the $US which we feel is about 50-50.

Regis Resources (RRL) Weekly Chart

Newcrest Mining (NCM) Monthly Chart

Banks and bond yields / interest rates

We remain both positive and overweight the banking sector as we move into reporting season and Novembers dividend season – Bank of Queensland (BOQ) was first of the blocks last Thursday, the report was solid but profit taking hit the stock, erasing early gains and leaving it down 0.3% on the week. At Fridays close of $12.85 BOQ is yielding 5.9% fully franked plus its paying a special 8c fully franked dividend on November 2nd along with its usual 38c dividend. We may increase our position around the $12.60 level if the selling continues where BOQ would yield over 6%, and 9.7% over the next 13-months.

As mentioned last week the previous undervaluation relative to the index for our banks has gone following a few weeks of strength and we are currently sitting just over the normal historical comparative levels.

We continue to keep 2 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is ~9% higher following last week’s pullback.
  2. November is usually a poor time for our banks although dividends clearly have a significant impact, we may take some money off the table in 1 / 2 of our holdings in a few weeks if we see some decent gains, either pre / post dividends.

CBA, the only member of the “big 4” who does not pay a November dividend looks strong at current levels with a move towards $78.50 on the cards. Seasonally CBA usually corrects in the middle of November before rallying into its February dividend – this may prove useful if we consider a switch within the sector.

Bank of Queensland (BOQ) Weekly Chart

US S&P500 Banking Index Weekly Chart

Diversified Financials

The diversified financials rallied steadily over the last week gaining 1.6%. We continue to like Macquarie Group (MQG) at lower levels and we noted it fell 0.2% last week, edging lower with the $US – no surprise as it earns a significant % of its revenue in $US.

Macquarie Group (MQG) $93.02 – This now feels like an opportunity looming on the horizon, initially we are buyers under $92.

Macquarie Group (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will be prepared to buy panic weakness in some select stocks if the opportunity arises.

Harvey Norman continues to catch our eye after their aggressive decline in early September, primarily because of their recent profit report. While the momentum and sentiment is clearly against both the sector and the stock MM will become potential buyers of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

Healthcare sector

Taking into account both our negative outlook for the sector MM remains likely to be very fussy with any buying but we never say never. We are also still licking our wounds for exiting Healthscope (HSO) a few days too early.

Last week the local sector rallied an impressive +3.3% while the US fell -0.6%, illustrating local fund managers / investors pressing the buy button within the local market.

US Healthcare Sector Quarterly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is only ~3% away for the broad Russell 3000, considering we are ultimately looking for a correction of over 20% we are not surprisingly avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the Russell 3000 has rallied an impressive 23% with only one small 5.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet another ~5% pullback simply feels overdue but as we wrote earlier perhaps too many people are hoping / looking for it.

Interestingly confidence in Donald Trump’s tax reforms looks to be waning as the stocks which are theoretically the main beneficiaries actually fell last week, we are targeting a ~6% correction for the Russell 2000 (smaller cap stocks) but a clear catalyst again feels required.

US Russell 2000 Monthly Chart

US NASDAQ Weekly Chart

No real major change for European stocks which were very quiet last week. The ideal scenario for a low risk entry into the German DAX will be a second correction back under 12,000 following failure over 13,000. Last week’s lack of follow through on the upside is a warning to the short-term bulls but no sell signals have yet been generated.

Obviously time will tell if this pullback unfolds but successful investing, like many things, is all about preparation.

German DAX Weekly Chart

At MM we’ve been very bullish the Japanese Nikkei for all of 2017 but we are now only 4% from our target area after rallying ~30% since late 2016. While we remain positive the attractive risk / reward for the bulls has diminished significantly.

Japans Nikkei Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we now have 14% of the MM Platinum Portfolio in cash: 

  1. Banks – We like our overweight banking position at present but BOQ around $12.60 will be tempting.
  2. Consumer Services – Nothing is close after ALL’s strong 6.9% rally last week.
  3. Diversified Financials – We like Macquarie (MQG) under $92 ideally to start accumulating.
  4. Energy – Were positive but see no value at current levels to increase our exposure beyond our STO position.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and have no buying targets.
  7. Resources – We remain likely observers for a few weeks.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No further buying at this stage.
  10. Retail – We like Harvey Norman (HVN) under $3.50.
  11. Gold – We have enough exposure at this time.

Potential “Sells”

Two of our MM Platinum Portfolio stocks are close to our current sell targets: 

  1. Regis Resources (RRL) over $4.
  2. Santos (STO) around $4.40.

Standout technical chart (s) of the week

Last week we saw a clear reduction in upside momentum from both US and European stock, at this stage there are no sell signals but we would not consider buying these markets at current levels.

US S&P500 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:

Buys – Bank of Queensland (BOQ) around $12.60 and Macquarie Group (MQG) under $92.

Sells – Regis Resources (RRL) over $4 and Santos (STO) around $4.40.

Trading Opportunities on our radar

We have only one trading idea today and it’s for the more sophisticated player : Buy BHP v RIO.

We believe RIO should not be outperforming BHP considering its heavy exposure to weak iron ore and BHP’s healthy exposure to rallying oil. Obviously the buyback has created this parting of the ways but our view is BHP will close the gap on RIO moving forward.

RIO v BHP Weekly Chart

Summary

We are now more confident in our medium-term forecast of the ASX200 breaking over 6000 in 2017/8 than our short-term call / hope of a spike down towards 5525 – overall this should be no surprise because there is a lot of “noise” in the short-term movements of markets and 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.

Disclosure

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.

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 13/10/2017. 4.00PM.
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