Market Matters Report / Market Matters Weekend Report Sunday 18th March 2018

By Market Matters 18 March 18

Market Matters Weekend Report Sunday 18th March 2018

Market Matters Weekend Report Sunday 18th March 2018

What a difference  a week makes, last weekend we were excitedly waiting for Mondays open following the Dow soaring well over 400-points (+1.77%) but today we’re hoping that some overseas strength by our heavyweight resources can allow us to at least regain last week’s small losses. Overseas markets have been very quiet of late which follows our preferred path we outlined in our 2018 Outlook Report, and again following Februarys global equities plunge. Ideally we will now see stock markets regain their 9-year bull markets optimism and make fresh all-time highs from here.

Equities are following the path we have forecasting since the major market correction in 2015-6 and hence until further notice our strong view remains intact:

  1. Stocks will form an important top ideally in March / April with the S&P500 likely to make an attempt on the psychological 3000 area i.e. 6-8% higher.
  2. MM is still looking for a +20% correction to commence in 2018/9 – goldilocks scenarios do not / cannot last forever.

After Februarys ~12% plunge by most major indices its now fairly easy for subscribers to comprehend a correction of say 25% over the coming 1-2 years, in the grand scheme of things not a big deal when we consider the S&P500 has rallied over 330% since March 2009, even the local ASX200 has rallied close to 100% before dividends.

  • Importantly remember MM is now an overall seller of strength as opposed to buyers of weakness.

US S&P500 Chart

When many investors look at the performance of the Australian market they simply look at the ASX200 and forget we are essentially the highest yielding global stock market i.e. we should compare apples with apples! The ASX200 Accumulation Index is calculated as if all the company dividends are reinvested on the ex-dividend date, suddenly the local picture is far more attractive showing a return of ~190% since the GFC. The ASX200 has a dividend yield of ~4.5% compared to the S&P500 which is ~2.5%, over time 2% p.a. can have a significant impact on returns when compounded.

Obviously there are a number of cogs in the wheel when we compare markets including yield, currencies and of course corporate growth. Our local market has certainly lacked the corporate growth of the likes of Amazon, APPLE and Facebook which has propelled the tech based NASDAQ up an impressive +600% since March 2009. Hopefully our politicians will focus on stimulating progressive industries moving forward rather than protecting ones who clearly will not exist in 10-years’ time e.g. think of the job losses when driverless electric cars become the norm.

We’re looking at the ASX200 accumulation index today because its been very clear on a technical basis since the GFC. Moving forward it should be an excellent roadmap for local stocks as MM swings between high and low cash levels.

  1. Short-term– We are marginally bullish Short-term, we can easily see the ASX200 challenging the 6250 area in March / April but we need a close over 6030 to reaffirm this view.
  2. Medium – term – We continue to believe a significant correction of over 20% will commence this year for the ASX200 / ASX200 Accumulation Indices back towards their respective 2016 lows.
  3. Long-termWe believe that a pullback back towards the lows of 2016 will present the best buying opportunity for stocks for many  years.

ASX200 Accumulation Index Chart

MM is now holding 11.7% and 4.7% cash in our Platinum and Income Portfolio’s respectively following last week’s excellent realised profit in Kidman Resources (KDR) and the rights we took up in Woodside Petroleum (WPL). We remain pretty heavily invested considering our medium-term outlook for global stocks. Our current plan remains to significantly increase our cash levels into market strength, ideally around 6250 for the ASX200 but don’t be surprised if we commence lightening our market exposure earlier.

Last week’s list of major winners / losers (+/- 5%) in the ASX200 illustrates how quiet things were and how the “trend is so often your friend” with serial underperformer Newcrest Mining (NCM) again extremely weak.

Winners : Flight Centre (FLT) +5.6%, Wesfarmers (WES) +7% and South32 Ltd (S32) +5.6%.

Losers : Newcrest Mining (NCM) -8.6%.

Following Friday nights strength by our large cap resource stocks (e.g. BHP +1%) the ASX200 is set to open up 15-points on Monday, a close above 6030 will re-establish our short-term bullish bias targeting ~6250.

No change, we remain short-term bullish the local market with a close over 6020 required to reaffirm this stance.

ASX200 Chart

1 Seasonality / Statistics

We will continue to evaluates the seasonality of the ASX200 because the statistics are usually very consistent this time of year BUT are a combination of Bill Shorten, Donald Trump and the Banking Royal Commission going to end the party? 

  • The average rally for the ASX200 from the Q1 low into the April / May danger time is over 500-points / 10.7%.
  • Assuming that we have seen the low for Q1 at 5786 that extrapolates to a target of ~6300, sometime in March / April, taking the more conservative of the above 2 statistics.
  • Historically the top usually kicks in between mid-April and early May as the below seasonal chart clearly illustrates.

With the ASX200 struggling to break clear over 6000 so far in 2018 it’s pretty hard to comprehend the market soaring up towards 6250-6300 but as we regularly say “investors must remain open-minded”.

ASX200 Seasonality Chart

As subscribers know we’re bullish the banks but the Royal Commission is certainly pressurizing this view at present. Just look at where we are today with 2-weeks of March remaining compared to the average of the last 10-years: 

  • Over the last 10-years CBA has rallied on average over +6.5% over March / April, with March being noticeably almost twice as strong as April – so far CBA is -1.4% this March.
  • When we look at the other big 3 banks the average gain is on average actually higher e.g. NAB +5.4% in March and +2.7% in April, for a total of over +8% with the worst March return still returning +0.6% - so far this March NAB is -2.2%.

Hence if the “big 4” banks can vaguely emulate their normal March / April performance they will represent excellent value into further weakness.

When we look at CBA on daily basis a spike down towards $73 would not surprise, especially with the news flow from the Banking Royal Commission, if this does unfold we believe it will represent excellent buying opportunity in the short-term from a risk / reward perspective.

Commonwealth Bank (CBA) Chart

2 Overseas Indices

No change, when we stand back and look at some major international indexes on a weekly basis they look relatively constructive for a rally into a potentially important April / May top, but what appears to come next remains scary: 

  • The German DAX looks clear technically, an assault on fresh all-time highs towards 14,000 before a ~25% correction – this would be the 4th pullback of this degree since the year 2000 so they do happen!
  • The Emerging Markets remains solid on a weekly basis ideally targeting an advance of ~10% before major concerns will evolve technically.
  • The US small cap Russell 2000 is less than 2% below its all-time high and looks well positioned for a bullish breakout over the coming weeks.

German DAX Chart

Emerging Markets (EEM) Chart

Russell 2000 Index Chart

3 Interest rates / bond yields

Last week US 2-year bond yields again managed small gains but the Australian 3-year bond yields drifted lower. We can see this trend continuing longer-term which is bad news for the $A but conversely excellent for companies with large $US earnings.

At MM we remain bullish US bond yields but following the recent strong gains over the last 6-months a period of consolidation would not surprise.

US 2-year Bond Yields Chart

Australian 3-year Bond Yields Chart

4 The $A and  $US

We’re watching the $US like a hawk – remember it was one of the cornerstones of our MM Outlook piece for 2018. No change, we are looking for a decent swing low in the $US, ideally just under 88, but it’s very close – just like a major top for equities.

  • The $US is close to a bottom which is ultimately likely to be very bad news for the reflation trade i.e. resources.

However we believe the little “Aussie battler” has already shown its hand, aided by weak iron ore prices.

  • We are technically bearish the $A targeting the 65c area.

The Australian Dollar ($A) Chart

$US Index Chart

5 China and iron ore

So far in 2018 iron ore has fallen over -10%, clearly not good news for the likes of BHP, RIO and Fortescue (FMG). We can see a bounce from Fridays fresh low for 2018 but are very wary as to the long-term impact from China’s rhetoric around cleaning up their environment – certainly they have room for improvement!

The Chinese Government enjoys a deserved reputation for aggressive / almost instant implementation of their plans hence when they plan to reduce pollution the impact on steel / iron ore is noticeable - China shut down almost 50% of its steel production this winter in 28 cities as part of its anti-pollution campaign.

We believe that this policy moving forward will put iron ore stocks in the basket of “sell strength and only buy pronounced weakness”. This coincides with our plan to sell our holdings in the above mentioned 3 Australian iron ore producers into strength.

Iron Ore Chart


On balance we still believe that equities found a short-term low in February that should be followed by an eventual rally to fresh all-time highs by many stock indices during March / April – the NASDAQ achieved this last week.

However, we still believe that a +20% correction will unfold over 2018/9 and we must now give a revised higher 20% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

Catching our eye in Australian stocks / sectors

1 $US earners

If we are correct and the $A is headed to ~65c then stocks with exposure to decent $US earnings are well positioned to outperform in the local index. However a large number of these stocks have already ran exceeding strongly over the last few years making decent risk / reward hard to find, for example:

  • James Hardie (JHX), Cochlear (COH), Aristocrat Leisure (ALL), CSL Ltd (CSL), Altium (ALU), Breville (BRG), Computershare (CPU), Janus Henderson (JHG), Macquarie Group (MQG) and ResMed (RMD).

We currently hold MQG and JHG and will certainly consider adding to the later into weakness under $43. Otherwise its hard to see us buying any of these names considering our overall market view but we do see them maintaining their outperformance at least through 2018, hence if / when we do see some major stock market weakness expect to see some of the above on our shopping list.

Aristocrat Leisure (ALL) Chart

Janus Henderson (JHG) Chart

2 Telcos still look interesting to us

No change from last week but the weakness within the sector has brought a few of our “active buy levels” closer. We believe TLS has now become a trading stock which will probably provide one, or two, great opportunities annually, at least for a while.

  • We are buyers of TLS around $3.20 and sellers above $3.75.

At the more speculative end of town both Vocus (VOC) and TPG Telecom (TPM) look attractive from a risk / reward perspective if we get a continued sell-off in the sector:

1. Vocus (VOC) $2.50 – we are buyers into fresh lows below $2.20.

2. TPG Telecom (TPM) $6.13 – We like TPM down towards $5.80.

NB There is no hurry at this stage to chase a sector in such an entrenched downtrend, especially in our case when we are long TLS.

Vocus (VOC) Chart

Telstra (TLS) Chart

3 Diversified Financials

The Financials have experienced an average time recently but Challenger (CGF) and Platinum (PTM) have stood out, both have been smacked for different reasons but in each case we can see short-term jab like buying opportunities looming:

1         Platinum Asset Mgt. (PTM) $6.13 – Looks an excellent risk / reward buy into weakness around $5.50 targeting a 15-20% bounce.

2         Challenger (CGF) $11.99 – CGF looks good buying ~$11.60 targeting at least a 10% rally – how the mighty has fallen, CGF is down 17% from Decembers high.

In both cases we would only considering “short-term plays” hence PTM looks more attractive.

Platinum Asset Mgt. (PTM) Chart

Challenger (CGF) Chart

4 Wesfarmers (WES) $43.80.

On Friday Wesfarmers announced they planned to offload Coles for ~$19.4bn around 11-years after buying the Coles Group for $22bn. The WES logic is they want to focus on businesses with greater potential earnings growth than retailer Coles – we can understand the logic.

The demerger will result in Wesfarmers’ shareholders being granted shares in the new Coles entity in proportion to their existing Wesfarmers stake (after Wesfarmers keeps its 20%). The conglomerate's remaining businesses will include Bunnings, Kmart, Officeworks, and its industrials portfolio.

If Fridays euphoria continues over the weeks ahead we would become negative WES ~$48.

Wesfarmers (WES) Chart

“Shopping List”

Below is our basically non-existent shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 11.7% of the MM Platinum & 5% of the Income Portfolio in cash, hence we are extremely fussy buyers :

1.       Banks – We are comfortable with current exposure but like the sector over coming 1-2 months.

2.       Consumer Services – We are comfortable with our exposure at present.

3.       Diversified Financials – We are comfortable with our position at present but may be tempted into a short-term play in PTM a touch lower.

4.       Energy – We are long WPL which just feels ok at present.

5.       Food and Beverage – Happily square at present.

6.       Healthcare – Square feels ok.

7.       Resources – We completed a lot of buying in February and are considering our sell levels moving forward.

8.       Real Estate – Another sector we are not keen on.

9.       Telco’s – We believe the Telcos will outperform in 2018/9 but our Telstra holding is enough at current levels.

10.   Retail – No investment buying at this stage.

11.   Gold – We have no interest considering our $US view.

“Selling List”

1.       Resources – At this stage we are looking for another 5-10% from our holdings.

2.       Webjet (WEB) $12.36 – we are targeting $13.50-$14 for our position.

Importantly we still anticipate the resources will be the first section of our portfolios that we move to cash primarily due to our $US view.

Standout technical chart (s) of the week

The US tech based NASDAQ made fresh all-time highs last week but closed -2.3% below that milestone. The index feels like it’s at a “now or never” junction as to whether it can rally meaningfully higher above the psychological 7000 area. 

  • We are bullish the NASDAQ but will become neutral / negative on a break back beneath 6930.


Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. A summary of the most likely activity next week is:

  • We may consider buying Platinum (PTM) into weakness below $5.80 and Commonwealth Bank (CBA) around $73.25.
  • We have nothing particularly close to our sell areas at present but KDR pleasantly surprised us last week, we still anticipate our resources as a sector will be first in the cross-hairs. 

Trading Opportunities on our radar

The ASX200 continues to trade in a choppy / neutral fashion but if its going to embrace its usual seasonal March / April strength it needs to be soon, we will turn short-term bullish above 6030.

  • Buy the ASX200 (market) short-term on a break above 6030.

ASX200 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.


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.


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 16/3/2018. 4.00PM.
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