Market Matters Report / Market Matters Weekend Report Sunday 18th August 2019

By Market Matters 18 August 19

Market Matters Weekend Report Sunday 18th August 2019

Market Matters Weekend Report Sunday 18th August 2019

The ASX200 has endured an extremely tough few weeks as recession fears and US-China Trade concerns have been joined by additional “scary” economic news which has weighed heavily on investor sentiment. In quick time the local index has corrected 479-points / 7% with red dominating the screen, over the last 5 trading days well over 80% of stocks have closed down, with the tale pretty similar over the previous fortnight. The market is oscillating on an almost daily basis around which piece of news determines whether stocks feel bullish or bearish - volatility continues to increase. In our opinion the current dominating influences are as follows:

Bullish: Bond yields, potential central bank stimulus and of course a US- China trade resolution.

Bearish: A potential global recession with yield curves ringing alarm bells, ongoing risks of a US – China trade war, looming financial default by Argentina & a few friends like Italy plus a number of internal risks to the Australian economy.

Previously I said my “Gut Feel” was the market wasn’t cheap enough to absorb the current plethora of bad news but a 7% pullback certainly helps plus we still cannot ignore the large cash reserves hoping to buy weakness as bond yields / term deposits continue to make all-time lows. In our opinion following the recent aggressive decline, as global bond yields continue to invert, it’s time for some relief for the bulls. Central banks are starting to wake up, in the last couple of days we’ve seen 2 important short-term glimmers of hope:

1 – Hong Kong announced a $US3.4bn stimulus package as protests continued to slow their economy.

2 – The local press have reported the German coalition government is prepared suspend its balanced  budget rule and take on debt = stimulus.

While I am far from convinced that central banks can maintain the post GFC expansion I have no doubt they will try extremely hard which should in theory help stocks bounce, Fridays 300-points rally by the Dow feels like stocks are looking for a low.

At MM we remain comfortable adopting a more defensive stance than over the first half of 2019. However we believe it’s going to a choppy few months ahead where value can be added  (alpha) through buying weakness and selling strength e.g. MM has closed out its defensive gold exposure which has proven correct to-date but we are intending re-enter into a more meaningful pullback.

ASX200 Chart

Last week again saw a number of bond yields make fresh all-time lows as fears of a global recession intensified  e.g. Australian 10-year bonds @ 0.85% while US 30-years hit 1.914%, before bouncing back above 2% on Friday. At the same time CBA’s yield has risen as equities declined, basis Fridays close CBA is estimated to yield 5.74% fully franked over the next 12-months, pretty appealing compared to term deposits which are yielding well under 2% without any franking.

Incredibly the US are now considering issuing 50 & 100-year bonds, actually  sounds smart to me with yields at current levels, I’ll be fascinated to see when / if they are issued what yield they command.

Equities with sustainable yield remain arguably cheap with interest rates at current levels – term deposits are still paying way under half of the average yield of the ASX200.

Comparative Australian interest rates / bond yields Chart

A great illustration of how investors have already migrated to a defensive stance is cash levels which sit at their highest level in a decade, hence large stock market bounces should be expected moving forward, even if we do enter a bear market.

MM still believes we are in a market phase where strength should be sold and weakness bought i.e. it’s time for plenty of choppy price action.

Money Market Assets $US Monthly Chart

The financial press has been enjoying a field day as bond yields invert with the subsequent negative implications for stocks but little is written about what assets traded well back in 2005, the last time they inverted. We need to be on top of this as news flow can almost create a self-fulfilling problem.

The answer is not surprising but worth clarifying – stock markets fell while gold and bonds rallied (yields down). Inside equity markets Utilities and Consumer Staples were the best performers, it currently feels like many investors  have already positioned for this but if a recession does hit their recent outperformance should continue.

However the 2/10’s only inverted last Wednesday yet history shows us that stocks typically rally for the next ~18-months before the major trouble hits.

US 10 & 2-year bond yields Chart

Australian gold stocks have experienced a decent correction over the last few weeks although the underlying precious metal remains within $US20 of its 2019 high, a great illustration of the vulnerability of crowded trades e.g.  The corrections for some local stocks Newcrest (NCM) -7.7%, Resolute Mining (RSG) -17%, Northern Star (NST) -16.3% and Regis Resources (RRL) -21%.

Gold has enjoyed the tailwind of falling interest rates, strong demand from the likes of China & India and general global uncertainty as it garners a safety bid. However it felt like a crowded position before we took our $$, this can now be seen by how rapidly the Australian sector has corrected, it actually feels like Australian gold stocks have pre-empted a pullback in the precious metal. 

Our current levels to buy back into the gold sector:

Resolute Mining (RSG) ~$1.65 / 7% lower, Regis Resources (RRL) $4.80 / 14% lower, Northern Star Resources (NST) $11.50 / 6% lower, Evolution (EVN) $$4.60 / 11% lower and Newcrest Mining (NCM) $34 / 6% lower – as is often the case we are likely to accumulate into weakness.

MM is looking to buy / accumulate weakness in gold stocks.

Gold ($US) Chart

1 –  The MM Platinum Portfolio

We have been tweaking the MM Platinum Portfolio slowly but surely with cash levels now standing at 21% after we took profit on our gold exposure:

If we are correct stocks should bounce  now for a week or two, with the ASX200 ideally testing the 6600 area hence our likely next action (s) will be  to increase cash, buy some gold exposure  &/or a negative facing ETF:

1 –  A number of positions in the Platinum Portfolio are being considered  to be cut / reduced  including – Bank of Queensland  (BOQ) and  Orica (ORI).

2 -  We like the gold sector into weakness as described above with RSG, NST and NCM probably our preferred  stocks at this point in time.

3 – We will like the BBOZ  bearish ETF around 6600 for the ASX200, this should be  ~10.25 for the ETF which is shown below.

*Watch for alerts.

BetaShares  Leveraged  Bearish ETF (BBOZ AU) Chart

2 MM Income Portfolio

The Income Portfolio was again left unchanged last week

No major change, until we see any indication that bond yields have bottomed MM sees no reason to significantly reduce our market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

While local 10-year bond yields sit over 0.1% below the RBA Cash rate MM is comfortable with our view that the RBA will cut at the least once more in this cycle. Our 6% cash level feels ideal during reporting season as opportunities are likely to present themselves.

The Australian 10-year bond yield & RBA Cash Rate Chart

3 –  International Equites Portfolio

Over  the last few  weeks we’ve  seen global equities lose their “mojo” hence we remain comfortable playing a defensive  game : .

The “risk off” theme in recent weeks has made us extremely careful with the construction of this portfolio; we hold 75% in cash, 5% short the US  index and 5% in a gold stock. This week we are considering 2 different positions:

1 –  Buy Alibaba (BABA US), the company has been performing splendidly even through tough economic trading conditions.

2 – Increase our ProShares short S&P500 (SH US) position from 5 to 10% around 2% higher for the S&P500.

At this stage I can envisage MM buying BABA in combination with increasing our ProShares bearish ETF.

US S&P500 Chart

Alibaba (BABA US) Chart

4 - MM Global ETF Portfolio

No change last week with MM’s new Global ETF Portfolio -  we are holding 3 positions, long both the $A and gold, plus we have a small short US equities position leaving us holding 80% in cash. Construction of this portfolio similar to our International Portfolio has been slow but opportunities are starting present themselves. We still considering the same 3 additional positions / views:

1 – We believe US stocks are vulnerable to a much deeper correction hence we are looking to increase our ProShares short S&P500 (SH US) from 5% to 10%, basis a few percent higher for the underlying S&P500.

2 – We feel the risk / reward of being long volatility from current levels makes sense, especially as short positions are around record highs, hence buy the VIXY ETF around the 22 level :

3 – Averaging our long $A position.

ProShares Short Term VIX (VIXY US) ETF Chart


Short-term Australian stocks look poised to bounce back towards the 6600 area, we are watching a few stocks for our Platinum Portfolio to sell into strength while we also consider buying the BBOZ bearish ETF. Also, gold still looks good and we want to regain our exposure to the sector if / when a deeper pullback unfold.

US stocks have triggered a sell signal with the break below the 2960 area by the S&P500, we continue  to believe it’s time to sell rallies in the US.

*Watch for alerts.

Chart of the week.

This week we have looked at NIB (NHF) which MM sold around $8.10 a few weeks ago for a great profit. However the point of todays chart is not to crow about the win but more to review a stock which MM is currently forecasting well. Unfortunately the picture supports our medium term bearish outlook.

MM is bearish NHF targeting another 10% downside.

NIB Holdings (NHF) Chart

Investment of the week.

We  have mentioned gold stocks a few  times today but they are favourite sector into a little weakness hence one of our favourites gets a mention in this slot today.

MM likes NST around $11.50.

Northern Star Resources  (NST) Chart

Trade of the week.

We have discussed NUF a few times this year including some very insightful comments from subscribers in our Monday Questions Report. Today the technical picture looks horrible in the direction of the trend, not a great combination.

MM is bearish NUF targeting fresh multi-year lows.

Nufarm (NUF) 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


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 18/08/2019

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