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

By Market Matters 17 September 17

Market Matters Weekend Report Sunday 17th September 2017

Market Matters Weekend Report Sunday 17th September 2017

Last week the local market was again pretty choppy rallying 105-point from the open on Monday peaking on Wednesday, before then giving back almost 80% of the gains by Fridays close. The banks came back into favour with a bang led by CYBG Plc (CYB) +5.3% and Commonwealth Bank (CBA) + 4.2% but the recently hot resources sector became the bane of the market with Fortescue (FMG) -5.1%, RIO Tinto (RIO) -2.5% and BHP Billiton (BHP) -3.8% all becoming a drag on the index. This sector rotation from resources to banks is something we’ve flagged in recent reports and MM believes it has much further to unravel, potentially through into 2018– investors have fallen too much in love with the new capital management direction of our large cap resource stocks while forgetting their profits remain fundamentally determined by the underlying relevant commodity prices which have enjoyed an extremely strong run since early 2016.

Again the volatility within the list of major winners / losers for the week shrank as would be expected with reporting season now well and truly behind us, only 4 stocks in the ASX200 moved by over 6%.

Winners : CYBG Plc (CYB) +5.3%, Commonwealth Bank (CBA) +4.2%, TABCORP (TAH) +8.1%, Macquarie Group (MQG) +5.8%, CSR Ltd (CSR) +4.5%, BlueScope Steel (BSL) +4.9%, Lendlease (LLC) +5.6% and Computershare (CPU) +5.3%.

Losers : Flight Centre (FLT) -4.7%, Ramsay Health Care (RHC) -4.8%, Primary Health Care (PRY) -4.1%, Iluka (ILU) -4%, Northern Star (NST) -7.8%, Evolution Mining (EVN) -9.4%, Oz Minerals (OZL) -5.2%, Fortescue Metals (FMG) -5.1% and Vocus (VOC) -7.5%.

Let’s yet again look at the ASX200’s “trading patterns” which continue to contain the ASX200 as we move into the second half of September:

  1. Short-term Neutral Pattern between 5629 and 5836 – 17 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 32 weeks to-date.
  3. September’s range to-date is 5661-5734 i.e. 116-points.

Again when we stand back and look at the ASX200 since its May 5956 top it’s not that pretty on a simplistic level, having dropped 327-points fairly quickly the market has proceeded to track sideways for over 3-months, accepting the lower levels, and not really challenging a break back over the psychological 5800 resistance area. Considering the position of US stocks and the negative seasonal weakness in the short-term we must remain mildly bearish local stocks for now at least. Two important points to remember over the coming few weeks are:

  1. The average return for September since the GFC is -0.44%, extremely poor considering the strength of the bull market since March 2009.
  2. Twice during that period the ASX200 has closed down over -5.5%, although it has also twice closed up over +4% suggesting index volatility at the very least should be close at hand.

However we continue to bang the drum that profitable / outperformance investing is currently all about sector rotation as opposed to simply jumping on board the market train to make money. We regard ourselves at MM as “active investors” but not traders and the next few years look perfect for this approach NB This is something we will tweak in years to come when appropriate.

E.g. We sold BHP last week ~$27.60 which has now fallen over 5% while in the previous week we bought CYBG Plc (CYB) ~$4.62 and it has rallied almost 4% i.e. a 9% differential already from this example of selling resources and buying banks.

Technically MM is ideally still targeting a correction towards the 5525 area i.e. only another ~2.5% lower in the weeks ahead but we remain very conscious that the local market continues to experience good buying into any decent declines.

ASX200 Monthly 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 yet time to jump ship. 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 a huge 20% with only one small 3.25% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue. Over the last 6-months the average monthly range for the S&P500 is ~69-points, so far this September we have rallied 54-points from the low on the 5th hence the likelihood is we can easily rally a little further in the next 2-weeks but don’t expect too much. Technically we need a close back under 2390 to generate a sell signal.

US S&P500 Weekly Chart

We have to remain open-minded at this stage of a stock market cycle as the termination of a bull market / a major top can be very tricky, far harder than bottoms, which makes sense as they tend to hurt the most number of people from a financial perspective. The US small-cap index, the Russell 2000, is actually looking bullish into next week targeting a few percent further upside before we would become concerned i.e. watch for a failed pop over 2017 highs.

US Russell 2000 Monthly Chart

Please remember we have remained bullish the Russell 3000 since early 2016 but note our long-term target of ~1550 / around 5% higher is approaching fairly fast, hence we are being particularly careful when purchasing stocks as this 8-year bull market slowly reaches maturity – our current best guess at a major top would be early 2018.

US Russell 3000 Quarterly Chart

No real change for European stocks which have been in correction mode since May, the German Dax currently now sits only 3.3% below its 2017 high. We have been targeting ~11,700 before we would be looking for “backfoot” buying opportunities, we are now 50-50 whether  the correction is complete or it has second leg about to unfold.

In the bigger picture ideally we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

The Hang Seng made fresh all-time highs for 2017 2-weeks ago, it still looks vulnerable to a correction back under 27,000, or 3% lower.

Hang Seng Weekly Chart

Currencies have arguably played the biggest role in determining which global indices perform the best, let’s consider Japan and the UK last week:

1 Japanese Nikkei – Last week the Nikkei gained 3.3% as the USDYEN rallied 2.8% i.e. a weaker Yen as safe heavens fell out of flavour.

2 UK FTSE - Last week the FTSE fell 2.2% as the GBPUSD rallied 3% i.e. a strong Pound following bullish rhetoric from the Bank of England on interest rates courtesy of stronger than expected inflation.

The simple lesson here is there are lots of pieces to a puzzle which determines how a stock / sector / market moves not just the Dow for example.

Resources

Australian large cap resource stocks pulled back last week as expected but obviously one poor week does not end an impressive 1 ½ year bull market. However, we believe the risk reward has definitely switched more to the neutral / negative stance as opposed to the bullish view we have held for the last 3-4 months. Our stance for the next few weeks minimum;

Sell – AWC around $2.20.

Buy – BHP under $24, RIO under $60 and OZL under $7.50.

In the case of BHP and RIO that’s well over 10% below Fridays close which feels unlikely for now but for the volatile OZL its only ~5%, albeit 17% below the high of late August.

Hence, there remains a strong possibility MM will lighten our exposure to resources further into strength next week i.e. AWC.

RIO Tinto (RIO) Weekly Chart

Alumina Ltd (AWC) Monthly Chart

OZ Minerals (OZL) Daily Chart

Gold

Gold stocks fared badly last week as safe haven assets were sold off like the Yen and gold but our individual gold stocks seemed to get the worst of it considering gold only fell $26US /oz. / 1.9%. e.g. Evolution Mining -9.4% and Norther Star (NST) -7.8%.

We are currently holding 7.5% of the MM Platinum Portfolio in the gold sector via Newcrest (NCM) but we’ve been looking to increase this exposure into weakness and this now feels a strong possibility over the coming weeks.

Buy – Regis Resources (RRL) around $3.70 a ~15% correction and / or Evolution Mining (EVN) around $2.10 a ~21% correction.

It’s important to have these levels in mind now because the likelihood is the stocks will look awful if / when they get to these areas.

Regis Resources (RRL) Weekly Chart

Evolution Mining (EVN) Daily Chart

Banks and bond yields / interest rates

Last week banks finally got off the floor with the local sector rallying 3.1% following global bond yields higher – remember bank shares like higher interest rates. Our view remains that US interest rates will continue to move higher in weeks / months to come and if this proves correct banks should benefit, of course assuming the rally in rates is orderly and of course the Australian property market holds together.

We are 50-50 whether we have seen the low for Australian banks, or it’s just a warning that they are looking for a low i.e. it’s a very different dynamic to see investors buy strength as opposed to accumulate into weakness. CBA managing to rally over $3 after making fresh 2017 lows is clearly encouraging. Overall we still see US banks up ~15% from current levels into 2018 which should be excellent news for our sector.

US S&P500 Banking Index Weekly Chart

Commonwealth Bank (CBA) Weekly Chart

Diversified Financials

The diversified financials have been hit with the same brush as our banking sector and they only managed to rally last week following a solid result by Macquarie Group (MQG) which put on 5.8%. We currently like 3 stocks in the sector but all at lower levels:

1 Challenger (CGF) under $12 i.e. 2% lower.

2 Janus Henderson under $40 i.e. 3.5% lower.

3 Macquarie Group under $85 i.e. 3% lower.

Macquarie Group (MQG) Monthly Chart

Challenger Ltd (CGF) Monthly Chart

Retail plus Coles & Woolworths

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

Harvey Norman continues to catch our eye after their aggressive decline over the last few weeks, 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 again of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

Healthcare sector

Taking into account both our negative outlook for the sector, and major player Ramsay Healthcare (RHC) which fell 4.8% last week MM is likely to be very fussy with any buying but we never say never!

We are buyers of RHC ~$55, over 10% lower but approaching fairly fast, remember the stock has now corrected 26% so another 10% is not out of the question for this highly owned and loved stock…..it’s definitely the path of most pain with no major brokers having a sell on the stock.

Also, we definitely have no plans to average our HSO position and we may liquidate into any short-term bounce towards $1.75.

Healthscope (HSO) Weekly Chart

Ramsay Healthcare (RHC) 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 16% of the MM Platinum Portfolio in cash: 

  1. Banks – We like the banks into any weakness but we are already very overweight the sector.
  2. Consumer Services – Aristocrat (ALL) ~$20.
  3. Diversified Financials – Challenger (CGF) under $12, Janus Henderson (JHG) under $40 and Macquarie (MQG) under $85.
  4. Energy – No interest currently.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and we are long HSO, that’s definitely enough unless Ramsay Health (RHC) falls over 10%.
  7. Resources – OZ Minerals (OZL) under $7.50.
  8. Real Estate – Another sector we are not keen on but Lend Lease (LLC) under $16 looks good.
  9. Telco’s – We are buyers of Vocus (VOC) under $2.25 and Telstra (TLS) under $3.50 as trades / aggressive investments.
  10. Retail – We like Harvey Norman (HVN) under $3.50.
  11. Gold – We like Regis Resources (RRL) ~3.70 and Evolution Mining (EVN) ~$2.10.

Potential “Sells”

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

1. Alumina (AWC) ~$2.20.

2. Healthscope (HSO) over $1.74.

Standout technical chart (s) of the week

Last week the UK FTSE broke down to fresh lows not seen since late April and importantly we remain bearish targeting a test of 7000 minimum. The catalyst for the sell-off appears to be Bank of England’s flagged intention to start raising interest rates which strengthened the Pound. However, higher bond yields has been a catalyst for a rally in stocks in 2017, especially the banks.

What is especially catching our eye is the FTSE is usually very correlated with our own ASX200 due to their resources exposure, definitely a “watch this space” situation.

UK FTSE Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report.

In general we remain keen to buy the index / market ~5525 i.e. allocate our 16% cash into stock weakness.

ASX200 Monthly Chart

Trading Opportunities on our radar

Yet again we have 2 trading situations on our radar, new ones this time but we still like Vocus (VOC) below $2.25: 

  1. Computershare (CPU) – We are bullish CPU targeting over $15.50 with stops under $14.20, a great set-up and ok risk / reward.
  2. TABCORP (TAH) – We are bullish TAH targeting ~$5.50 with stops under $4.20, excellent risk reward and an ok set-up.

Computershare (CPU) Weekly Chart

TABCORP (TAH) Monthly Chart

Summary

We remain short-term bearish the ASX200 ideally targeting a correction back towards the 5525 support area, we are still “hoping” to accumulate equities into such weakness.

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 15/09/2017. 4.00PM.
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