Market Matters Report / Market Matters Weekend Report Sunday 19th August 2018

By Market Matters 19 August 18

Market Matters Weekend Report Sunday 19th August 2018

Market Matters Weekend Report Sunday 19th August 2018

Last week we saw the ASX200 continue to grind higher, following the US S&P500, and shrugging off the majority of bad news in its wake. We are set to make fresh decade highs on Monday, an especially impressive result considering some heavyweight stocks including Commonwealth Bank (CBA) and Suncorp (SUN) traded ex-dividend last week.

Our market is up around 1% for the calendar month with 10 trading days remaining, however over the last decade August & September have combined to fall an average of around 2%, making it the second worst period of the year for Australian equities from a seasonal perspective i.e. this has been the characteristic of the bull market since the GFC. Hence we thought this was an opportune time to delve into these statistics to try and unveil a more time specific point of inflection:

  • Sine the current bull market commenced in March 2009 only once, in 2013, did the ASX200 not experience a reasonable correction during August / September although in that one instance,  there was still a 140-point hiccup during the period.
  • The average pullback, from top to bottom, during August / September is 340-points, or over 6% with ~3% the minimum end of the range.
  • Unfortunately there is no standout periods of August or September for these corrections to commence although the latest was the first week of September.

So far this August the ASX200 has rallied 117-points from its low in a pretty quiet month, the above seasonal numbers tell us that caution is warranted, especially as the biggest pullback to-date this month is a measly 74-points.

Undoubtedly the combination of reporting season and to a lesser extent sector rotation has been the focus of the local market over the last few weeks with the below stocks catching our eye this week:

Winners: Seek (SEK) +9.1%, Domino’s Pizza (DMP) +8.9%, Wesfarmers (WES) +4.35, Treasury Wine (TWE) +5.4%, QBE Insurance (QBE) +8%, CSL Ltd (CSL) +6.5%, Goodman Group (GMG) +6.8%, Harvey Norman (HVN) +8.3%, REA Group +9%, and Telstra (TLS) +8.4%.

Losers: Challenger (CGF) -7.5%, Origin (ORG) -7.7%, IAG Insurance (IAG) -5.6%, Iluka Resources (ILU) -16.3% and South32 (S32) -7.4%

When we simply glance at the above its no great surprise the week closed in the black.

  • While we continue to anticipate a pullback in stocks no sell signals have been generated locally, or in the US, at this point in time.

ASX200 Index Chart

The press are enjoying telling its readers that the ASX200 is making fresh decade highs but as is often the case its only half the story.

  • If we include dividends the local share market is soaring to fresh all-time highs.

Over the long-term the stock market has proven itself to be an excellent form of investment, especially when dividends are compounded. The brave who bought local stocks directly after the GFC have more than tripled their money, significantly outperforming that much heralded beast “property”.

ASX200 Accumulation Index Chart

1 The “EW” Chart Pattern we believe is “controlling”.

At MM we use a combination of fundamental and technical analysis to make our decisions, plus occasionally some pure “gut feel”. One of the technical analysis methods that we consider is Elliott Wave (EW) – a subjective method that can often help us, especially when combined with ranges, statistics, seasonality etc.

  • We believe it’s critical as with all methods of technical analysis that if it’s not a “clear picture” ignore it, do not try and force opinions i.e. curve fit.

Markets are relatively random, especially over the shorter-term but because they are driven by human emotions, including “Fear & Greed”, patterns do regularly repeat and this can be very useful to investors.

Firstly let’s consider what we look for in a chart to interest us from an EW perspective, remember it must be simple & clear!

  1. The advance should be in the form of “5-waves” as labelled below on the monthly chart for SUN, one we’ve regularly quoted for over 2-years.
  2. Waves 1-2 and 3-4 are the corrections, within the trend, and they should be of similar magnitude with 3-4 usually the larger.
  3. The rally from 2-3, usually referred to as the 3rd wave, should be the acceleration / longest wave.
  4. The 3rd wave can often be sub-divided into 5-waves itself – again SUN fits the bill almost perfectly below.

As the subdivided 3rd wave for SUN illustrates that markets usually correct back towards / past the “4-point” when the 5 waves are complete. i.e. in the below chart the 5 and 3 points are one and the same.

Somewhat of a mouthful however the following applications should be a lot easier to comprehend.

  • If we are correct and SUN has formed, or is close to, reaching its “5-point” then the next 20% for SUN is down hence we have been lightening our position into strength.

NB EW is just as useful in down moves as up, also investors need to be a touch flexible when dividends are paid e.g. SUN traded ex-dividend 41c fully franked last week

Suncorp (SUN) Chart

The following 3 stocks from an EW perspective need to make fresh 2018 highs to potentially complete a “5-wave” advance – alternatively they could of course surge higher and unfold as a 3rd wave. There are a number of other companies in a similar position to the below 3 examples, while some others appear to have already completed their 5-way advance e.g. SUN above and Fisher & Paykel (FPH).

However we believe the high growth / valuation sector of the market are nearing a fairly imminent decent top before a 10-20% correction. Hence we have 2 major takeout’s at this stage:

  1. The market should have a little more upside so these growth stocks can make their fresh highs for 2018.
  2. The risk / reward remains firmly with selling strength at this point in time.

Treasury Wines (TWE) Chart

XRO (XRO) Chart

REA Group (REA) Chart

2 US stocks maybe giving us some clues.

The US market gave us some fascinating divergence signals last week, note I did not say sell signals. The S&P500 finished the week up +0.6%, the Dow + 1.4% while the high flying NASDASQ was down -0.4% - this is a complete roll reversal for the 3 indices since the 2016 low in US stocks.

Subscribers should remember the below two S&P500 charts have basically followed the MM roadmap step for step in 2018 which if continued should be very exciting over the coming few weeks.

  • Ideally MM is initially looking for a test ~2900 for the S&P500 and 26,750 for the Dow i.e. 1.8% and 4% higher respectively – maybe a step too far for the Dow however it is the more ‘boring industrials’ that are starting to shine.

Once the US indices have made fresh 2018 highs we are looking for a ~12% correction – this is a very similar pattern to that discussed in point 1 for the Australian high growth / valuation stocks.

  • MM intends to increase our BBUS, negative US stocks ETF, into fresh highs for the S&P500.

At this stage we will remain open-minded as to whether the correction is between 10-15%, or in fact deeper BUT our preference is 10-15%.

The US S&P500 Chart

The US S&P500 Chart

The index that’s enjoyed Donald Trump’s Presidency the most is arguably the small cap Russell 2000 Index (RTY) whose stocks theoretically benefit the most from the “Trump Tax Cuts”.

Our EW interpretation of the Russell 2000 is pretty unsettling short-term but we believe it’s a particularly clear “picture”.

  • MM is expecting the RTY to pop above 1710 before correcting at least 15%.

Very unappealing risk / reward for the bulls i.e. 1% up before 15% down!

Russell 2000 Index (RTY) Chart

3 MM’s plans moving forward

As a number of our subscribers will recall we moved aggressively into cash (over 50%)  the week the ASX200 made its test of 6000 back 2015. Currently we hold:

  • 17% cash in the MM Platinum Portfolio plus 8% in negative facing ETF’s – one of which is leveraged which equates to about an ~11% short exposure
  • 1.5% cash in the Income Portfolio however only 51% of the portfolio is exposed to stocks. 

Hence we anticipate some “action” through both portfolio’s in the coming weeks with some potential thoughts below:

1 Platinum Portfolio – We anticipate an increase in our BBUS position, IRESS is close to our profit target, we may trim SUN and QBE holdings, A2M, NCM, HSO & IRE all report next week which may lead to some exits, also BHP reports next week, we remain buyers under $30.

2 Income Portfolio – We may trim SUN further into strength and we may hedge a portion of the portfolio via a negative facing ETF however this portfolio is about income hence there will not be large cash holdings here.

ASX200 Index Chart

4 Bond yields (interest rates) & the economic / market cycle - Part 3.

No major change from last week, we have discussed why many economists / market players are watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends – currently the differential is only 0.2546%.

  • Historically stocks will fall when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

The contraction of the bond yield differential implies to us that the US is heading towards a recession in around 2020, hence our phrase that the global asset / equity bull market since the GFC is very mature feels on the money. We reiterate investors should be looking for “late cycle positions” in stocks / sectors, this is very similar to the views we outlined in points 1 & 2.

When we consider history one of the standout messages for this stage of the cycle is be extremely careful paying up for growth i.e. We want GARP (growth at reasonable price) not GAAP (growth at any price).

To keep things simple (KISS) its time for the below:

Seek – solid / predictable profitability (ROE – return on equity) with relatively low debt levels at of course a reasonable price / valuation.

Avoid – high valuation growth stocks who are often unlikely to live up to expectations / hopes if the economy becomes a major headwind.

MM believes the time has arrived for the “boring quality blue chips” compared to the growth stories that have excelled over the last few years – this worked last week with both Telstra and Suncorp.

US 2/ 10-year yield curve Chart

Conclusion

Again no major changes.

  • We are now neutral while the ASX200 can remain above 6240 and we still expect US stocks will make fresh all-time highs shortly.
  • We remain comfortable sellers of strength but not weakness, just yet.
  • We will continue to slowly increase our cash / short ETF positions and are still firmly wearing our “sellers hat”.

Standout technical chart (s) of the week

Fisher & Paykel (FPH) has enjoyed a phenomenal 5-6 years but technically it’s starting to look tired, although no sell signals have yet emerged.

  • FPH looks tired and although another high would not surprise we can see a test below $12 looming on the horizon.

Fisher & Paykel (FPH) Chart

Trading Opportunities on our radar

IOOF has endured a shocking 2018 with the Hayne Royal Commission a large nail in the coffin. However IFL has reached our initial target and we expect a sharp, short term bounce

  • The upside target for IFL short-term is the $9.50 area, or ~6% higher.

IOOF Holdings (IFL) Chart

Investing on our radar

The “Big Australian” reports next week and we’ve been patiently looking to buy back into BHP below $30 after selling earlier in the year ~$34, however the stock has remained stubbornly strong. Even fellow goliath RIO has corrected 18% but BHP continues  remain firm and our “Gut Feel” is investors have become complacently bullish which can be dangerous.

  • We remain buyers of BHP sub $30, of course assuming no particularly nasty surprises in its report next week

BHP Billiton (BHP) 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.

Disclosure

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.

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 18/08/2018.

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