Market Matters Report / Market Matters Weekend Report Sunday 17th February 2019

By Market Matters 17 February 19

Market Matters Weekend Report Sunday 17th February 2019

Market Matters Weekend Report Sunday 17th February 2019

The ASX200 had a very quiet week on the surface closing slightly lower but the action under the hood was far from quiet as reporting season maintained its reputation for throwing up big surprises – both good and bad. Almost 30% of the ASX200 ended the week up, or down, over 5% while 10 stocks ended with a move above 10% with AMP again managing to be one of the 3 which fell by over 10% - as we’ve said a few times recently “fighting the tape” requires very careful consideration as the odds are not in your favour.

Following a strong end to the week on Wall Street the local market now looks set to make fresh 2019 highs on Monday, back above the psychological 6100 area. Not only has the market now corrected all of November and Decembers fall but its making a serious dent in the entire 963-point / 15% decline from last August. MM has been bullish the first half of 2019 but we anticipated a far more choppy ascent with periods of renewed economic / political fears causing some decent pullbacks along the way – we certainly got that wrong with the average weekly gain over the last 8-weeks being 87-points, impressive stuff considering 3 of the weeks closed marginally in the red.

Investors have clearly been caught way too bearish / underweight stocks making it hard to forecast when the next market pullback will unfold, its looked underway a few times but there has been a dearth of sellers on the index level although a number of individual stocks have been unceremoniously thrown into the “naughty corner”. We’re now over 10% of the way into 2019 and its clearly been one way traffic but MM still believes this will be year for the active investor, especially on the stock level. I do not believe this is the time to panic buy the market after its ~700-point surge, especially as its now trading above its average valuation of the last decade. In fact I can see “Fear of missing out” (FOMO) hurting investors in the next month or two, just like being too bearish has done over the last 6-weeks.

Time for a deep breath, stand back and look at key influences on market prices.  We know our economy is still struggling under the significant burden of record household debt and the RBA has just revised Australian growth down from 3.25% to 2.75%. Obviously this is good news on the interest rate front but nobody knows where the bottom is for a number of influential cogs in the Australian economy like housing prices / activity and retail sales as the average person continues to tighten their belt.  We’re entering  a delivering period  and  It feels premature to us with today’s level of uncertainty in these influential areas to be chasing stocks on mass – it’s time to be very stock selective.

At MM we remain cautiously bullish for at the least the next 3-6 months hence we will continue to remain focused on sectors / stocks where we want to increase our market footprint.

ASX200 Chart

Last week we showed the CBOE Put / Call ratio chart to illustrate that markets were now far calmer than in December but not yet scarily complacent.

The Fear Index (VIX) below makes exactly the same point – things are clearly returning back towards more normal levels but nothing like as self-assured as they were prior to the previous 2 market corrections, implying to us that this market can go higher for months to come.

The VIX volatility (Fear) Index Chart

We do get a number of subscribers wondering how we see things evolving over the next few weeks which is usually the toughest call of all to make because short-term market swings are dominated by news driven noise, hence we tend to look at a mixture of the daily and monthly picture to generate an idea of what’s the most likely scenario moving forward.

1 – The previous 2-months have seen the SPI futures (which takes out the anomalies with dividends) move 375 and 376 points respectively while Februarys range to-date remains under 300-points. If I was trading I would be looking for triggers to sell around 6100 for the March futures, or 6150 on the ASX200 itself. However this can also useful information as an investor looking to add value to a portfolio.

2 – When we look at the ASX200 chart below the ideal target before we see another 150-point correction would be ~6150 - 6200.

In conclusion our “best guess” is we see the ASX200 trading between 5975 and 6175 over the next few weeks.

ASX200 Index Chart

Next week we enter the 3rd week of reporting season which will hopefully produce some opportunities to MM, some of the companies of definite interest to us are:

Stocks we own – Cochlear (Tues) and QBE Insurance (Fri).

Stocks we are considering buying – NIB Health (Mon), Star Entertainment (Thurs) and Invocare (Fri).

Heavyweight’s – BHP (Tues), Woolworths (Wed) and Wesfarmers (Thurs).

NIB Holdings (ASX: NHF) Chart

1 Bond markets are showing NO warning signs

As we’ve discussed previously we are watching corporate (junk), as opposed to government, bond yields very closely because we believe this is where the risks may lie for equities in 2019 / 2020.

Last week we again saw US equities and bond rally, importantly it’s not until the corporate bond market slips lower, or fails to embrace a bullish equities market that we get a warning signal for stocks moving forward.

Clearly no worries at this stage but we are planning to watch this correlation closely through 2019.

iShares High Yield “Junk” Bond ETF v S&P500 Chart

US 10-year bond yields have now traded sideways for ~6-weeks which is interesting because Jerome Powell, the 16th US Fed Chair, only placated the markets about 3-weeks ago when he said the Fed may stop raising interest rates – a total backflip in policy which caught many unawares but not bond markets.  The chart below illustrates that US bond yields topped out in a meaningful way in Q3 2018, predicting the Fed perfectly by close to 6-months.

Hence we will also be watching this market very closely in the months ahead to get a “handle” on rates moving forward and hence the ideal portfolio mix – at this stage we are now 75-25 in favour that rates start edging higher, historically good for US financials.

US 10-year bonds (yield) Chart

For subscribers who have spread their wings to include overseas stocks one of the standouts to us in the US financial sector is JP Morgan (JPM US)

In January JPM released fairly lacklustre Q4 results below analysts expectations but the stock shrugged off the news and now looks good while it can hold above the $US100 area.

JP Morgan (JPM US) Chart

2 The $A remains on track.

No change, the $A has hit our mid / high 60c targeted area perfectly and we believe that we will see 80c in 2019 / 2020. – MM remains very wary of the crowded $US earners trade medium / longer-term.

Our view is based on a few pieces of the puzzle starting with the extreme pessimism towards the $A but also a combination of potential interest rate differential reversion and the very strong iron ore price. Other base metals are also interesting here, with inventories at low levels. Low inventories met with an increase in demand is a good recipe for strong gains. We’ll look at inventory levels more during the week.

The Australian Dollar ($A) Chart

As we’ve alluded to above we are bullish the $A for at least a 10-15% bounce, a very contrarian view. Hence we are keeping a very close eye on our 3 holdings which fall in that category of “US earners” (ResMed, QBE Insurance & Cochlear) which we believe may become threatened if investors move the dial on their $A expectations. Our  “Gut Feel” is the time is nigh on this group of heavily owned stocks and we are thinking seriously around switching Cochlear (COH) before it reports on Tuesday.

We are likely to be showing a small profit ~5% paper profit from our COH holding on Monday morning, not overly exciting but a huge improvement from ~20% of pain we felt in late November – perhaps this is a “gift horse we should not look in the mouth for too long”.

COH is undoubtedly a quality company but as we saw with CSL post results the market is bullish the stocks which leaves little  room for disappointment.

Cochlear (ASX: COH) Chart

3 The “Growth Sector” is showing the path.

MM had a great foray into the growth end of town in late November almost nailing the lows in Xero (XRO), Appen (APX) and Altium (ALU), unfortunately we have exited a touch early not anticipating the sheer dynamism of the 2019 recovery.

However we now have a relatively clear and fresh picture to how we see them evolving in 2019 / 20 and its exciting for the active investor.  Short-term we are now bullish targeting a break above the 1600 area. Unfortunately the risk / reward is not exciting at this stage but we believe there still exists a strong possibility of re-entering the sector close to the lows of last November before yet another bullish advance to fresh all-time highs for this index.

In other words the “Growth Sector” is in fact agreeing with our previous bullish outlook for stocks in H1 of 2019 i.e. bullish but choppy.

ASX200 Software & Services Index Chart

Appen (APX) is a stock we sold too early around $16 a couple of weeks ago and it now looks destined to challenge the $20 area, unfortunately its currently too hard to identify a decent risk / reward buying opportunity.

MM will consider re-entering APX on its next ~$3 correction.

Appen (ASX: APX) Chart

4 Time to switch from major to regional bank?.

The banks had a tough week with Bendigo (BEN) leading the decline falling -11.5% while heavyweight Westpac (WBC) only drifted -2% lower. If this degree of underperformance continues next week we are likely to switch a small part of our large holding ion the “Big 4” into a regional. Our ideal entry into BEN before it trades ex-dividend is ~$9.50 while our initial target for WBC is ~$27.50.

I remain happy with our 30% exposure to CBA, NAB and Westpac basis Fridays prices but if for example the spread between WBC and BEN widens by over $1 we will consider switching some into BEN.

Bendigo Bank (ASX: BEN) Chart

Westpac Bank (ASX: WBC)

5 Updating our “shopping list”.

Our patient approach to buying into the recent stock market rally has proved incorrect and we are now forced to raise our ideal entry level for a few stocks:

1 – We like NIB Holdings (NHF), ideally around $5.60 but obviously next weeks report is likely to have a significant impact on the stock short-term.

2 – We like Gem Education (GEM) ideally around the $3.35 area but that feels a touch optimistic.

3 – We like Star Entertainment (SGR) around $4 which is possible with the casino operator reporting next week.

4 – We like Invocare (IVC) ideally closer to $12 but again as it reports next week you never know.

G8 education (ASX: GEM)  Chart

We’ve also updated our list of recent “dogs” that we are considering buying at lower prices, a split of 2% into 4 / 5 would be our preference. Obviously these levels will evolve over time but as we’ve seen with AMP last week any buying of stocks entrenched in downtrends needs careful planning and patience:

1 – CSR below $2.50, or ~20% lower.

2 – Nufarm (NUF) around $4.75, or ~15% lower.

3 – Costa Group (CGC)) around $4, or 20% lower.

4 – TPG Telecom (TPM) around $5.40, or 20% lower.

5 – Automotive Holdings (AHG) around $1, or 40% lower.

6 – CYBG (CYB) blow $3, or around 12% lower.

NB The charts of most of these can be seen in this weekend’s Chart Pack. Click here

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2 so far the rally has been absent of any chop!

We continue to see MM being active moving forward with our “buyers hat” now in place as we sit relatively cashed up on both portfolios.

However we are also seriously considering lightening our exposure to the $US earners in the coming weeks. i.e. potentially switching to one / or two of the stocks in Part 5.

Chart of the week.

Since the GFC the ASX200 has been far more correlated to European indices than the US. The Eurostoxx reached our ideal target area last week taking us from bullish to neutral / bearish but note at this stage we have no sell signals.

MM is now neutral / bearish European equities.

EuroStoxx 50 Chart

Investment of the week.

A tough call again this week following a strong market rally and the vagaries of reporting season but we should always remember that the surprise usually happens in the direction of the trend.

I have finally selected a new stock this week, G8 Education which isn’t due to report until mid-March.

MM likes GEM with stops below $3.

G8 Education (ASX: GEM) Chart

Trade of the week.

From one financial to another. Today I have picked out Platinum Asset Management (PTM) which looks very well positioned to participate in the current bounce by many in the battered sector.

Risk / reward is now good to jump on board with ~2% stops.

MM likes PTM targeting at least $5.50 with stops below $4.80 – excellent risk / reward.

Perpetual (ASX: PTM) 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.

Have a great day!

James & the Market Matters Team

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, or after the session when positions are traded.

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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 16/02/2019

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