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

By Market Matters 18 November 18

Market Matters Weekend Report Sunday 18th November 2018

Market Matters Weekend Report Sunday 18th November 2018

After a surprising rally on Monday the ASX200 was sold off aggressively last week to finally close down -3.2% with only the safe haven of the Utilities Sector closing in the green while losses were led by the heavyweight Financials, Materials (largely resources) and Consumer Staples although we should remember that Macquarie Bank (ASX: MQG), ANZ Bank (ASX: ANZ) and Westpac (ASX: WBC) all traded ex-dividend. “Under the hood” only 14% of the ASX200 managed to close up on the week as we underperformed across the global landscape e.g. for the week: MSCI Emerging Markets index +0.1%, Dow Jones -2.2%, China Shanghai Composite +2.9%, UK FTSE -1.3% and NZ 50 Index -1.4%.

The selling was particularly aggressive in Australia on both Wednesday and Thursday from around 11am, just as Asian markets were starting to trade. Our opinion is the aggressive selling via the SPI futures was primarily “spread based”, as fund managers / hedge funds bought markets like China and Hong while simultaneously selling Australia.

When you stand back and look at the relative performances of these indices in 2018 it’s easy to comprehend their thinking as optimism starts to surface on the US – China trade war i.e. In 2018 even after last week’s reversion the ASX200 is -5.5% while China is -19.2% and Hong Kong’s Hang Seng -12.5% - see chart below. We actually believe it was more likely the activity was profit taking by traders who had shorted Asia on trade concerns and used Australia as a quasi-hedge. If this view is correct the SPI selling should be largely absent this week.

Every SPI contract sold is worth at Fridays close $143,050 i.e. 5722 x $25. Hence when we see an extra 20,000 lots sold into the market it has a very meaningful impact on the market i.e. approaching $3bn!! This selling pushes the SPI below fair value against the ASX200 leading to arbitrage i.e. traders buy the “cheap” SPI and sell a basket of stocks equivalent in value to the SPI they’ve bought, which in turn smacks the index and especially the large caps who have the most weighting within the ASX200.

The Australian, China and Hong Kong’s Indices Chart

In hindsight we were too conservative with our domestic outlook due to the above, although Europe and the US unfolded largely as we expected.

We remain net bullish the ASX200 into Christmas / 2019 but a spike under 5600 would not surprise and we believe this would present a great risk / reward buying opportunity.

Of the 2 likely scenarios we outlined last week obviously B is now looking the most likely:

A – The market experiences a corrective pullback towards 5800 prior to an assault well above the psychological 6000 area.

B – The October weakness returns with a vengeance and stocks retest, and probably break, the 5600 area.

The ASX200 is set to open up around 10-points on Monday assisted by BHP which gained 0.7% in the US.

ASX200 Chart

Global Indices

Global equity markets were a touch weaker last week courtesy of the US, our impact unfortunately is not that large but the technical picture remains bullish, especially if they can make fresh monthly highs only ~1.5% above Friday’s close. Remember our comments from last week:

1 – The bullish uptrend from its 684 low back in March 2009 remains clearly intact.

2 – The chart pattern has been literally copybook stuff since the GFC low including two exact retracements of 355-points.

3 – The market traded in a perfect Neutral Pattern (normal distribution) between January 2018 and October 2018 before the spike down to 1958.

4 – The close back above 2040, in the direction of the trend, is very bullish targeting almost 10% upside, and probably more.

MM is bullish global equities from a risk / reward perspective with stops below 1950 i.e. around 4% below Fridays close.

NB As we saw last week if the above does unfold and the Global World Index rallies say 10% there’s no guarantee that the ASX200’s gains will be in the same league but some stocks / sectors most certainly will.

MSCI World Index Chart 

US stocks closed mostly positive on Friday with the broad based Russell 3000 Index finally closing down -1.6% for the week but 2.4% above the weekly low, and well above the mid-point for the week.

If stocks believe Donald Trump’s rhetoric around trade discussions / progress with China next week should continue the last few days positive bias and a close only 2% higher would position us bullish technically.

US Russell 3000 Chart

Europe was fairly quiet last week, especially considering the ructions around BREXIT and the Pound. Technically we still need to see the Euro Stoxx 50 close over 3% higher to become bullish.

We will look at Emerging Markets / Asia in more details later but in a nutshell they look good implying the trade war may soon become old news.

Euro Stoxx 50 Chart

Updated Macro Outlook

The major economic / political influence which drives markets both up and down generally evolves month to month, over recent times we’ve had Trump’s tax cuts, increasing bond yields, BREXIT, North Korea and the US-China trade war but the focus since October is the US is heading for a recession in 2019 / 2020.

On Friday night the news that President Trump was upbeat about a trade deal with China helped rally the Dow over 250-pooints from its intra-day low but the major concern now firmly appears to be a looming recession for the US in 2019/ 2020.

Last week in the US was very tough on retailers with bad narratives from the likes of Macys, Walmart and Nordstrom who are being forced to spend more $$ to get shoppers in the door / on their sites to maintain decent revenue.\

MM is neutral / negative the US Retail Sector with the picture looking similar locally – Myer’s sales have plunged 4.8% in Q1 of 2018-2019 sending the stock into a trading halt on Friday.

US Retailing Index Chart

Last week we saw a pullback in US bond yields as some economists start to question if the Fed may be forced to delay / reduce its planned path of rate hikes into 2019.

We feel after the charge higher in bond yields over the last year a period of consolidation is likely, similar to 2017.

This is implies we may see some calm in financial markets during the months ahead – this feels like a contrarian thought at the moment.

US 2-year bond yields Chart

1 The $US looks bearish

The $US has arguably been MM’s best call of 2018 year and it appears to have again shown its hand – we are now bearish the $US targeting a ~3% decline in the short-term, back to its late September lows.

The implications if we are again correct are fairly wide reaching:

Firstly the $US received a “safe haven” bid when stocks tumbled in October, a weaker $US implies equities will recover, or at least not fall aggressively, into 2019.

$US Index Chart

The next step is to consider correlations and there are a few standouts illustrated by the 3 charts below:

1 – If the $US Index corrects it should be good news for our resources holdings as the Bloomberg Base Metals Index is inversely correlated to the $US.

2 – If the $US Index corrects it should be good news for our Newcrest Mining (ASX: NCM) position as gold is inversely correlated to the $US – our current target for NCM is ~$21.75, around 6% higher.

3 - If the $US Index corrects it should be good news for the Emerging Markets (EEM) which are inversely correlated to the $US and especially so in 2018 due to the escalation of fears around serviceability of EEM debt denominated in $US.

1 $US Index v Base Metals Chart

2 $US Index v Gold Chart

3 $US Index v Emerging Markets Chart

2 The Emerging markets look very constructive.

As touched on above we are now bullish Emerging Markets targeting at least a 5-6% bounce, perhaps President Trump will start to appease the world after the tough mid-terms – he knows he must do something to win the next election as comfortably as in 2016.

Region heavyweight Tencent makes up 4.5% of the Emerging Markets Index and following an excellent profit report is looks set to bounce at least another 7% i.e. over 20% above last month’s low – a large plus for the index and region.

Lastly and importantly as discussed in Point 1 weakness in the $US is very constructive EEM and we like this call.

Unfortunately as we witnessed last week with the strong SPI selling its no guarantees for the ASX200 with some stocks liking a weak $US but some stocks who have decent earnings in the US benefitting from a stronger greenback.

Our target for MM’s long exposure to the EEM via the iShares ETF (ASX: IEM) is around 5% higher – watch for alerts.

Emerging Markets ETF (EEM) Chart

Tencent Holdings Ltd (700 HK) Chart

3 Three stocks we like into weakness.

Last week we found 3 stocks we regarded as buying opportunities, 2 of which are now in the MM Platinum Portfolio – Challenger Ltd (ASX: CGF) and  Orica (ASX: ORI), let’s hope they perform.

This week we found 3 stocks that we like into a touch further weakness, not particularly exciting for the ASX200 right now but still companies to watch very carefully.

There were 3 other stocks which are catching our eye but they have been mentioned recently in MM reports:

CYBG Plc (ASX: CYB) into fresh lows below $4.50, Pact Group (ASX: PGH) into weakness back towards $3 and Harvey Norman (ASX:HVN) below $3 - around 8% lower.

1 Whitehaven Coal (ASX: WHC) $4.56

Coal miner WHC is in the materials sector that we like moving into 2019 assuming the $US falls plus the stock is yielding almost 6% not including the special dividend that the company returned to shareholders in August.

Technically MM likes WHC around 4-5% lower

Whitehaven Coal (WHC) Chart

2 ResMed (ASX: RMD) $14.08

Sleep device business RMD has now corrected around 12% from its recent high, significantly outperforming the likes of CSL Ltd (ASX: CSL) and Cochlear (ASX: COH).

We like the business and have had the stock on our radar for months but its simply been too expensive.

MM likes RMD under $13, around 8% lower.

ResMed (RMD) Chart

3 Star Entertainment (ASX: SGR) $4.43

We sold the casino operator SGR for the Platinum Portfolio, as it rallied towards $6, back in July 2017, and have sat back believing there was a strong possibility of re-entering close to $4 – the time is nigh.

MM is looking to buy SGR ~4-5% lower.

Star Entertainment (SGR) Chart

4 Some stocks we are bearish today.

Unfortunately there are a number of stocks we don’t like at current levels, outweighing those that we do which is probably an overall poor sign into 2019/2020. Stocks on the list include:

APA Group (ASX: APA), QANTAS (ASX: QAN), Seek (ASX: SEK),  Steadfast Group (ASX:SDF) and Harvey Norman (ASX: HVN) at least short-term.

Plus Lendlease (ASX: LLC) but most of the damage has clearly been done here with the stock down almost 40% in the last few months.

Wesfarmers (ASX: WES) $44.39

Coles and Bunnings owner WES has performed strongly since the GFC but we believe its poised for a 15-20% correction – not that big in today’s market!

However this is a “messy” view with the Coles demerger having just been approved by shareholders and the supermarkets shares are due to begin trading on a deferred settlement basis in the near future.

Wesfarmers (WES) Chart

5 Why switch?

MM promotes itself as an active investor and in recent weeks we fell into the trap of being too passive,  much to our frustration to say the least.

We got great buy signals in Kidman Resources (KDR) a company we like, these were covered in a number of reports.

We didn’t take the position because we already had lithium exposure via Mineral Resources (MIN), in hindsight we should have switched to the one we preferred.

KDR doubled while MIN bounced ~15%, around 6x times outperformance by KDR.

This is  a great illustration that we are in an active investors dream – note I did not say traders.

Obviously this degree of relative performance is extremely rare within a sector it brings us to how we believe an investors thoughts should be unfolding:

1 - Am I bullish, is my market exposure too low / high?

2 – What sectors do I like / dislike, have I got the correct exposure to those sectors?

3 – If I a like a particular sector do I own the correct stocks in that sector at today’s prices.

If the answer is no to any of the above its time to change / switch.

NB While we may not switch for ~1% but if you add alpha / value of just 1% pm your 12% ahead of the pack at years end!

Kidman Resources (ASX: KDR) v Mineral Resources (MIN) Chart


As subscribers know bigger picture we are looking for a more defensive portfolio at this point in time i.e. stocks that provide a constant dividend and stable earnings regardless of the state of the overall stock market.

We remain mildly positive moving into Christmas but a spike under 5600 feels likely, remember we do intend to increase our cash holdings into strength, ideally a Christmas rally towards 6100.

Moving into Christmas we like stocks that benefit from a weak $US I.e. the resources.

In the bigger picture we believe we are entering an active investors dream i.e. buy weakness and sell strength.

Chart of the week.

On Friday night copper rallied almost 2% as it enjoyed a softer $US, in line with our bearish outlook for the Greenback we are bullish copper short-term at least targeting 5% upside.

MM is bullish copper short-term initially targeting ~5% upside.

December Copper Futures Chart

Investment of the week.

At current prices nothing jumps out but I like the “3 Three stocks we like into weakness.” discussed earlier, if the opportunity arises.

Trade of the week.

No change from last Sunday but a lot of water has gone under this particular bridge with the stock trading in a 63c / 14% range last week.

CYB looks close to finding a decent low following its 30% decline, we expect the stock to rotate between $4.40 and $5.10 into 2019.

MM likes CYB into weakness ideally below $4.40.

A potential switch for part of our banking holdings.

CYBG Plc (CYB) 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 17/11/2018

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