Market Matters Report / Market Matters Weekend Report Sunday 17th December 2017

By Market Matters 17 December 17

Market Matters Weekend Report Sunday 17th December 2017

Market Matters Weekend Report Sunday 17th December 2017

A quiet week for the local market with the ASX200 trading in a very tight 54-point / 0.9% range with the influential Banking Sector struggling and hence restraining any meaningful attack on fresh 2017 highs. Next week should in theory be a seasonal “Christmas Cracker” with bank dividends filtering through into investors accounts and the resources sector likely to open very strongly on Monday morning e.g. BHP closed up 46c / 1.7% in the US.

MM remains bullish the ASX200 targeting a decent break over 6000 in 2017 / 2018 with our best guesstimate a close for 2017 around 6125, or ~2% higher. For the more active subscriber we believe a break to fresh 2017 highs over 6052 should not be followed by failure back under 6030 if our bullish short-term bias is to remain intact.

Considering we believe global equities are vulnerable into 2018 MM will continue to watch markets very closely with a view to increasing our cash levels over the coming weeks, in both the Platinum and Income Portfolios.

Last week’s list of major winners / losers from the ASX200 again shows a balanced market which only gained +0.04% as winners notched up a small victory by 3 stocks to 2 i.e. only five stocks in the ASX200 moved by 5%, or more:

Winners : OZ Minerals (OZL) +6.5%, Fortescue Metals (FMG) +6.6% and Westfield (WFD) +10.1%.

Losers : Domino’s Pizza (DMP) -5.4% and AGL Energy (AGL) -5%.

Today’s report will continue to look at how MM is expecting the market to evolve into Christmas / 2018 and hence why subscribers should not be surprised to see our cash levels increase over the coming weeks / month.

ASX200 Daily Chart

So far the ASX200 has oscillated between 5938 and 6043 this month - following the GFC the average range for a December is 282-points, with the lowest range still 188-points in 2012. Hence if 5938 remains the low for this December we have some simple logical statistical targets:

  • An average December range since the GFC targets ~6220 for the ASX200, while the quietest still has an objective of 6125.
  • The average gain for December since the GFC is +2.5% which coincidentally has 6120 as the likely conclusion for this month.
  • In 6 out of the 8 years the high for December was in the last few days while in 2010 it was on the 23rd, only in the unusual 2011 was the high early on the 5th.

Hence we are targeting ~6125 minimum by around Friday week.

ASX200 Seasonality Chart

MM’s December / January outlook for markets.

1 Asia / the Hang Seng as a leading indicator.

Undoubtedly our local economy is now far more related to the new global economies of China / Asia than the old economies of the US / Europe. The correlation on the below chart between the Hang Seng and our ASX200 illustrates that the stock markets totally agree with this view.

If we can work out where the Hang Seng is heading its likely to give us a helping hand with the local ASX200.

Hang Seng v ASX200 Weekly Chart

Over 2017 the Hang Seng has followed our anticipated path as well as any index, there are currently 2 distinct, but very different paths, we can see unfolding into 2018:

  1. The preferred scenario is the Hang Seng rallies around 3% towards the 30,500-31,000 area into 2018 providing a good short-term selling opportunity.
  2. The Hang Seng continues to correct back towards the 27,300 area to provide a great risk / reward buying opportunity i.e. 5.4% lower.

At this point in time we are neutral the Hang Seng and waiting for a catalyst for the ASX200.

Hang Seng Weekly Chart

2 The Resources Sector looks hot!

We are extremely long the resources stocks compared to MM’s average portfolio over recent years i.e. in the Platinum Portfolio holds Oz Minerals (OZL), Fortescue Metals (FMG), Independence Group (IGO), Woodside Petroleum (WPL) and Newcrest (NCM).

If we are correct the Base Metals Index will rally to fresh 2017 highs over coming weeks for an excellent profit taking opportunity.

Bloomberg’s Base Metals Spot Index Weekly Chart

We actually will not be surprised to see an explosive few weeks by the local resources stocks. We bought OZL for example under $8 targeting at least $9 but an assault on the big $10 area feels a distinct possibility.

OZ Minerals (OZL) Daily Chart

3 Global Indices still look “toppy”.

We are slowly seeing signs of a reasonable top evolving in global equities although investors should remember that tops usually take 2/3 times longer to unfold than bottoms and they are MUCH harder to pin-point!

Sceptics that cannot imagine a decent correction should simply stand back and look at the 3 main pullbacks by US stocks since 2007 i.e. 58%, 23% and 17%, we’ve now experienced no meaningful correction for almost 2-years.

Our best guess for the MSCI Global World Index is the 2150 area before a major correction i.e. another 3% higher. However MM will feel more comfortable moving to a heavy cash position, in both of our portfolios, if stocks correct 5-7% and then make fresh all-time highs in 2018, on reduced momentum. Similar to the classic warning signals which were provided in both 2010 and 2014 before significant 355-point corrections i.e. 25% and 19.6% respectively.

MSCI World Index Quarterly Chart

US stocks have now reached our targeted area of the last 2-years and although we expect a 5-7% warning pullback first we do anticipate generally holding higher cash levels in 2018/9 than over the last 2-years.

Another 20% pullback in 2018/9 would simply be in rhythm with the current bull market since, and including the GFC.

US Russell 3000 Quarterly Chart

Australian stocks / sectors

Resources

As mentioned earlier we are now bullish the resources space with a potential new buying opportunity for next week.

Alumina (AWC) has had a tough time since October correcting 17% at its worse. From a solid risk / reward perspective we can buy AWC around $2.20 with stops under $2.09.

Alumina (AWC) Weekly Chart

Energy

No change, we remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits are targeting the $US60/barrel area.

  • We remain comfortable with our exposure via Woodside Petroleum (WPL).

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a paper loss, plus we are nervous the sector due to our view on interest rates.

If we are correct and the $US has a good chance of making one final low in the relative near term to around the 90 level, then MM should be able to crystalize a profit from this position but we are watching carefully.

Overall we are bullish global interest rates which is not good news for gold, hence we are likely to exit this position over the coming weeks / months.

US dollar Index Weekly Chart

Banks and bond yields / interest rates

We remain both positive and mildly overweight the banking sector although news of the royal bank commission has concerned some investors. Obviously as subscribers know we are bullish bond yields which should help banks profitability hence our slight portfolio skew towards the sector i.e. 30% of the Platinum Portfolio is in banks. However, the current “wobble” in the Australian property market will also keep a number of investors wary of the sector.

CBA – short-term CBA looks positioned to rally nicely towards the $82 area, this would certainly help the ASX200.

ANZ – ANZ has been falling of late and in the short-term looks like a trading buy under $29.90 for at least a $1 bounce.

Commonwealth Bank (CBA) Daily Chart

ANZ Bank (ANZ) Weekly Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher although last week was not particularly inspiring with the index drifting -0.8%,

  • Janus Henderson (JHG) $48.79 – nwe recently went long at $48.28 and are currently targeting ~$55.

Janus Henderson (JHG) Weekly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises, especially those not heavily exposed to on-line threats.

We reiterate that MM will not be “bottom fishing” in Myer (MYR).

Myer (MYR) Weekly Chart

Healthcare sector

We remain neutral /bearish the US Healthcare Sector which interestingly yet again failed to follow most US sectors to fresh all-time highs last week.

However, a significant portion of Australian healthcare stocks enjoy sizeable revenue from the US leaving us mixed on the local sector in comparison.

US Healthcare Index Quarterly Chart

Global Indices

As discussed touched on earlier we believe a short term correction is close at hand, ideally at the end of December / start of January.

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).

Since Donald Trump’s US election victory the S&P500 has rallied an impressive +28% with only one minor -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5-7% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip” is approaching.

We now feel aggressive traders can sell any strong days to fresh highs as pullbacks are likely to become both more frequent and larger.

US S&P500 Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently only have 10.5% of the MM Platinum & 2.5% of the Income Portfolio in cash so any buying will be small and careful :

  1. Banks – We are comfortable with our exposure at present.
  2. Consumer Services – We may add to our Webjet (WEB) under $9.
  3. Diversified Financials – We are comfortable with our position having purchased JHG.
  4. Energy – We are long WPL which feels enough for now.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels correct.
  7. Resources – We are considering Alumina (AWC) around $2.20.
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – No investment buying at this stage.
  10. Retail – No investment buying at this stage.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

A few stocks in our MM Platinum Portfolio are in striking distance of our current sell targets:

  1. Telstra (TLS) over $3.80.
  2. Newcrest (NCM) around $25.
  3. Banks to be reduced into ideally strength.
  4. Resources ideally to be reduced into fresh highs for the Base Metals index.

In general we will look to increase cash levels around 6125 and 6225 for the ASX200.

Standout technical chart (s) of the week

We felt its was time to consider the longer-term Dow chart to practice what we preach i.e. remain open-minded.

  1. When we look at the broad S&P500 its still following our forecasted path of the last few years with what MM believes is most likely to follow shown by the red / green arrows.
  2. However the Dow, which is only 30 stocks, is accelerating higher implying a far more bullish path ahead.

At this stage we will continue to pay more attention to the S&P500 due to its broad based nature but we will be keeping an eye on the Dow for alternative scenarios.

Dow Jones Quarterly Chart

US S&P500 Quarterly 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:

  • We are considering  buying Alumina (AWC) around $2.20 but this would be regarded as an active position.
  • We are looking to increase our cash position into strength over the coming few weeks.

Trading Opportunities on our radar

This week we again have 2 potential trades:

  1. Buy ANZ around $29.90 targeting a $1 bounce while using a 50c stop i.e. 2:1 reward over risk.
  2. Buy the ASX200 index on a break above 6052 with stops under 6030.

ASX200 Daily Chart

Summary

No change, we are becoming increasingly confident that global stocks are close to a ~5-7% correction hence we only intend to buy weakness and will consider selling opportunities into an expected Christmas rally.

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 . 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 15/12/2017. 4.00PM.
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