Market Matters Report / Market Matters Weekend Report Sunday 19th February 2017

By Market Matters 19 February 17

Market Matters Weekend Report Sunday 19th February 2017

Market Matters Weekend Report Sunday 19th February 2017

Overview

Last week the ASX200 rallied a solid 1.5% as generally the heavyweight stocks performed well during reporting season, as would always be expected there were a few notable exceptions. The local market may stall around this 5800 area in the short-term as some major local stocks go ex-dividend in coming weeks, the equivalent of around 50-points off the ASX200 by mid-March. Overall we still expect equities to continue moving higher but we should slowly see some volatility return to the market as our anticipated major top slowly comes into view, hence for now continue to adhere to our current mantra "buy weakness and sell strength".

Some reporting season movers at a glance from the ASX200 over the last 5-trading days:

Winners:  ANZ Bank (ANZ) +4.3%, Commonwealth Bank (CBA) +3%, Seek (SEK) +7.2%, Wesfarmers (WES) +2.9%, South32 (S32) +2.3%, Newcrest (NCM) +2%, Boral (BLD) +4.1% and CSL Ltd (CSL) +5.2%.

Losers:  Bendigo Bank (BEN) -1.6%, Domino's Pizza (DMP) -12.4%, IOOF Holdings (IFL) -7.7%, Magellan (MFG) -2.7%, Origin Energy (ORG) -4.8%, Medibank Private (MPL) -3.9% and Telstra (TLS) -5.3%.

ASX200 Daily Chart

Slowly but surely the pieces of the puzzle for our predicted major top for stocks are coming together, ideally we will see US stocks squeeze higher by another ~7% before our 25% correction - please note we are only calling the market back toward the lows of 2016, which would equate to a 40% correction of the huge bull market rally since early 2009. The correction we are confident will unfold would be regarded as healthy pullback by many after an almost 300% appreciation by the broad US share market from the panic GFC lows BUT it will be very painful particularly for 2 groups of investors / traders:

  1. People who have chased this final surge higher in stocks since Donald Trump's victory in November, especially over recent times as the market continually makes fresh all-time highs.
  2. People who will panic when / if the pullback unfolds and exit perfectly good stocks / businesses after many stocks have experienced a deep correction - the is a sad common occurrence when stock markets have a pullback.

Last week the Bank of America Merrill Lynch's highly respected survey of 175 fund managers told us these major investors are turning increasingly bullish on growth with the number of managers who anticipate secular economic stagnation having halved over the last year. We need economic / market optimism to form major equity tops.

However, cash holdings are still above the 10-year average of 4.5%, falling this month to 4.9% from 5.1%. Slowly this cash is being "squeezed" into stocks and we will be very confident of an imminent top if US stocks are trading ~7% higher later in 2017 and these cash holdings are under 4.5%.

Russell 3000 Index Quarterly Chart

Not surprisingly to us another take from the report was the "buy $US" view is the most popular. A huge 81% of the respondents expect an increase in US inflation and subsequently higher US interest rates, yet interestingly 34% believe gold will be a strong performer which is generally correlated to a falling $US.

We continue to believe that the $US will fail in 2017/8 and probably fall back ~10%, however a grind higher towards remains a strong possibility. Any pullback in gold and related stocks if / when the $US does break towards 105 we believe will be an excellent buying opportunity for the precious metal sector.

NB The crowd is often wrong on big investment themes.

The $US Index Monthly Chart

A few subscribers have asked why we chose last week to initiate a short trade on Fortescue Metals (FMG) when the stock was trading around $7. Hopefully the below simple 3 points answer the question clearly:

  1. Firstly, we believe a number of the Australian Resource stocks have gotten ahead of themselves primarily because investors found themselves very underweight the sector which has outperformed massively since early 2016, leading to buyers chasing the sector at elevated prices which we believe show very limited upside for now.
  2. Secondly, we believe that commodities are ready for another 7-8% correction after reaching fresh recent highs, there has already been 2 similar pullbacks since the resources rally started in early 2016.
  3. Thirdly, the technical picture for FMG is almost identical now as back in mid-2016 when the stock fell 84c / 23%, we are targeting ~$6 by the end of May hence the May option put spread.

The Base Metals Spot Index Weekly Chart

The below chart of FMG illustrates the chart patterns mentioned in point 3.

Fortescue Metals (FMG) Weekly Chart

Finally to most subscribers largest sector holding, the now relatively back in favour banks. We bought ANZ in late January and pleasingly the position is already showing 5.6% paper profit but more importantly after its strong result positive upside momentum has clearly returned. We remain positive the sector for now especially with so much negativity in the press around property seemingly having no impact on their current profitability. If the ASX200 is going to get over 6000 in 2017 the banks will need to do some of the heavy lifting.

ANZ Bank (ANZ) Monthly Chart

Standout technical chart (s) of the week

BHP looks set to open ~$26.28 on Monday morning, down 36c / 1.4%, following weakness in the US Materials and Energy sectors. The "abc" target is coming into play for BHP under $24.30.

We are buyers of BHP under $24.50.

BHP Billiton (BHP) Weekly Chart

Summary

On balance we now feel that US and local stocks will now consolidate recent gains around current levels over the coming few weeks, with outperformance from the "unloved" stocks / sectors but underperformance from the recently high flying resources.

Medium term no change, after a rally of ~6-7% by US stocks we are targeting a 25% correction over a few years.

What Matters this week

The ASX200's is set to open unchanged on Monday, short-term we need a break of 5580 by the ASX200 to lose our net bullish view for the overall index.

Potential Investing opportunities for the coming week(s)

We continue to hold 20% in cash and are still wearing our sellers hat into strength BUT our buyers hat into weakness = the theme of Q1/2 of 2017. We are close to our sell region but it does not feel right yet i.e. ideally the sellers hat will come back out over 5850, with a buyers stance under 5600.

* Watch out for trading alerts.

Potential Trading opportunities for the coming week

On the index front we still like the German DAX and Japan's Nikkei over coming months.

We unfortunately see no obvious trades locally this week but we do like our short FMG position. The TPG position is likely to have its fate in VOC's hands short-term who report soon.

* Watch out for trading alerts.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 17th February is below:

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-17th-february-2017/

We still hold 20.5% in cash, plus we added a short FMG position via options. We remain sellers of strength and buyers of weakness until further notice.

* Watch out for trading alerts.

Australian ASX200

The ASX200 could easily break over 6000 in 2017 before the significant correction we are targeting unfolds over the coming few years - the key remains to be open-minded.

Considering recent monthly ranges we may have seen it for February with a low at 5582 and high of 5833 - especially considering a number of stocks go ex-dividend in coming weeks.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 – March Share Price Index (SPI) 60-mins Chart

American & Canadian stock market indices

US stocks have surged over 15% since Donald Trump's victory with the Dow, Russell 2000, Russell 3000 and finally the NYSE Composite making fresh all-time highs. We remain more cautious on stocks, our best "guess" at present is ~6-7% higher.

Importantly US indices are in a very clear final "Phase 5" of a major bull market since early 2009. We see further upside in what should be a choppy / volatile year prior to a major downturn that is likely to last a few years and correct ~25%.

Chart 5 – Dow Jones Index Monthly Chart

Chart 6 – Dow Jones Index Daily Chart

Chart 7 – S&P500 Index Monthly Chart

Chart 8 – S&P500 Index Daily Chart

Chart 9 – Russell 3000 Quarterly Chart

Chart 10 – NYSE Composite Index Monthly Chart

Chart 11 – Russell 2000 Index Monthly Chart

Chart 12 – US NASDAQ Index Monthly Chart

Chart 13 – The Canadian Composite Index Monthly Chart

European stock market Indices

European indices have broken out to the upside and technically look more bullish than US stocks from current levels with targets for the German DAX of ~10% and Swiss SMI ~15% - potentially fund managers that have been caught overweight cash are searching for value in previously weak markets. However, on a fundamental basis we may need to wait for some election results later in the year that do not favour extremists for this strength to unfold.

Chart 14 – Euro STOXX 50 Index Monthly Chart

Chart 15 – UK FTSE Index Weekly Chart

Chart 16 – German DAX Index Monthly Chart

Chart 17 – Swiss SMI Index Quarterly Chart

Chart 18 – Spanish IBEX Index Monthly Chart

Asian & Emerging stock market indices

Asian indices remain bullish with the Hang Seng index looking poised to rally ~4% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher. Similarly the Emerging Markets remain in a positive uptrend, generating no sell signal.

Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Weekly Chart

Chart 21 – Japanese Nikkei 225 Index Monthly Chart

Chart 22 – Emerging Markets MSCI ETF Weekly Chart

Interest Rates & volatility

Short-term interest rates in the US have moved sharply higher since the Trump election win, the move has been assisted by the Fed forecasting 3 interest rate rises in 2017 plus strong wages growth fuelling inflation fears - markets are pricing in only 2 rate hikes as more likely.

Beware, we believe this move higher for interest rates has only just commenced, however short-term we can see further consolidation at current levels e.g. Australian 3-year bonds have reached the psychological and technical 2% support area i.e. a 98.00 bond price.

Chart 23 – Australian 3-year bonds Weekly Chart

Chart 24– The US 10-year Interest Rate Monthly Chart

Chart 25 – The US 2-year Interest Rate Monthly Chart

Chart 26   Volatility (VIX) Index Weekly Chart

Australian stocks & sectors

The Australian stock market rallied 1.5% last week, following another strong lead from both Asia and the US. Short-term we have seen the targeted test of the 5800 area, some consolidation now feels likely.  Ongoing significant stock / sector rotation is our view for coming weeks at least.

Banking sector

The local banking sector is looking strong which makes sense as it becomes more profitable as interest rates rise and Donald Trump considers removing onerous / costly regulations - the Dodd-Frank reform. Recent strong reports from both ANZ and CBA has help support the sector.

Chart 27 ASX200 Banking Index Monthly Chart

Chart 28 US S&P500 Banking Index Monthly Chart

Chart 29 – Commonwealth Bank (CBA) Quarterly Chart

Chart 30 – Commonwealth Bank (CBA) Daily Chart

Chart 31 – ANZ Bank (ANZ) Weekly Chart

Chart 32 – Westpac Bank (WBC) Weekly Chart

Chart 33 – National Australia Bank (NAB) Weekly Chart

Chart 34 – Bank of Queensland (BOQ) Monthly Chart

Chart 35 – Bendigo & Adelaide Bank (BEN) Weekly Chart

The Insurance sector

We remain bullish and comfortably long SUN within the insurance sector. QBE has enjoyed a strong move with the $US and rising interest rates, further consolidation feels likely short-term.

Chart 36 – Suncorp Group (SUN) Monthly Chart

Chart 37 – Insurance Australia (IAG) Monthly Chart

Chart 38– QBE Insurance (QBE) Monthly Chart

Diversified Financials sector

The Financials Index remains  bullish, our target is over ~10% higher, with CGF leading the way over recent weeks.

Chart 39 – ASX200 Financials Index Quarterly Chart

Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart

Chart 41 – Platinum Asset Management (PTM) Daily Chart 

Chart 42 – Henderson Group (HGG) Weekly Chart 

Chart 43 – Challenger Ltd (CGF) Monthly Chart 

Chart 44 – IOOF Holdings (IFL) Monthly Chart 

Resources / Materials  sector

Copper remains in a negative downtrend long-term, even after the recent months fireworks, we are eventually targeting the 150 area.

Iron Ore has significantly exceeded our initial $US70/tonne target, technically we now neutral after the "abc" target of ~$US80/tonne was exceeded. Importantly the forward prices for iron ore are in a pronounced backwardation e.g. The February 2020 price is trading at a whopping 40% beneath today's price.

NB Backwardation - A situation in which the spot or cash price of a commodity is higher than the forward price, generally associated with short-term supply shortage. Contango is the opposite scenario.

Heavyweights BHP and RIO look still positioned for short-term consolidation / weakness. We have taken a trading short position, via options, in FMG.

Chart 45 – Copper Monthly Chart

Chart 46 – Iron Ore Monthly Chart

Chart 47 – BHP Billiton ADR ($US) Monthly Chart

Chart 48 – BHP Billiton (BHP) Weekly Chart

Chart 49 – RIO Tinto Ltd (RIO) Weekly Chart

Chart 50 – Fortescue Metals (FMG) Monthly Chart

Chart 51 – Independence Group (IGO) Weekly Chart

Energy sector

Our target for Crude Oil of +$US60/barrel remains a real possibility after the OPEC decision and a close over the $US52/barrel area. Our main concern for the energy stocks is the overall optimism in the market. Recently we took an excellent profit on our Origin position and feel comfortable square the sector for now.

Chart 52 – Crude Oil Monthly Chart

Chart 53 – Woodside Petroleum (WPL) Monthly Chart

Chart 54 – Origin Energy (ORG) Weekly Chart

Chart 55 – Oil Search (OSH) Weekly Chart

The Gold sector

Cracks appeared in gold in mid-2016 as it fell hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which is where gold is now hovering.

We believe there will be some excellent trading opportunities in 2017 within the gold sector sector primarily on the long side as we continue to look for a major top in the $US.

Chart 56 – Gold Monthly Chart

Chart 57 – Newcrest Mining (NCM) Monthly Chart

Chart 58 – Regis Resources (RRL) Weekly Chart

Chart 59 – Evolution Mining (EVN) Daily Chart

Chart 60 – Market Vectors Gold ETF Monthly Chart

The "yield play" stocks

We have been bearish bonds / bullish interest rates since mid-2016 and this view has not wavered. Hence we will only consider buying the "yield play" stocks as a trade when they are under severe pressure, as we did in late 2016 with both Transurban (TCL) and Westfield (WFD).

Chart 61 – Sydney Airports (SYD) Monthly Chart

Chart 62 – Transurban Group (TCL) Monthly Chart

The Property sector

A confusing picture short-term with the overall sector remaining mildly positive at current levels which theoretically contradicts our higher interest rates forecast. Hence we will avoid the sector in 2016 except WFD as an aggressive play if an opportunity arises well under $9.

Chart 63 – Westfield Corp. (WFD) Monthly Chart

Chart 64 – Mirvac Group (MGR) Monthly Chart

Food & retailing  sector

Some interesting signals are now unfolding within the sector, we believe both JBH and now WOW look interesting at present levels but only for relatively small moves.

Chart 65 – Wesfarmers Ltd (WES) Weekly Chart

Chart 66 – Woolworths Ltd (WOW) Weekly Chart

Chart 67– JB Hi-Fi (JBH) Monthly Chart

Chart 68– Harvey Norman (HVN) Monthly Chart

The internet / Technology sector

The Australian Tech. sector had a relatively tough 2016, we may have interest this year but still only into further weakness.

Chart 69 – Seek Ltd (SEK) Monthly Chart

Chart 70 – REA Group (REA) Monthly Chart

Chart 71 – Carsales.com (CAR) Monthly Chart

The Telco sector

The Telco sector endured an awful 2016 falling ~20% after spending many years in the limelight. Changes within Broadband have made it extremely tough to value stocks within the sector which helped create the panic selling in both Vocus and TPG Telecom.

Telstra had a shocking result last week sending the sector down 5.3% for the week after is had recently been showing signs of a decent bounce.....Vocus report next week and the picture could easily change again.

Chart 72 – Telstra Corp. (TLS) Monthly Chart

Chart 73 – Vocus Communications (VOC) Weekly Chart

Chart 74 – TPG Telecom (TPM) Weekly Chart

The Healthcare sector

After being the perfect place to be invested since the GFC last year saw some clear "wobbles" within the sector as bond yields rose and excessive valuations, without clear growth / performance, were no longer tolerated by investors. While we see reasonably higher levels from the sector in years ahead we are 50-50 whether they can be achieved this year, or further weakness is likely first.

CSL  has shown us how a stock performing well in the sector can rally to fresh all-time highs.

Chart 75– US S&P500 Healthcare sector Quarterly Chart

Chart 76– CSL Ltd (CSL) Monthly Chart

Chart 77 Ramsay Healthcare (RHC) Monthly Chart

Chart 78– Healthscope (HSO) Weekly Chart

Chart 79 - Ansell (ANN) Monthly Chart 

Chart 80 - Sirtex Medical (SRX) Weekly Chart 

Chart 81 - Cochlear Ltd (COH) Monthly Chart 

The Gaming / Tourism sector

This sector had a volatile an overall pretty average 2016. However, we currently like Star City (SGR) targeting ~$5.50 minimum - note MM holds SGR.

Chart 82 – Crown Resorts (CWN) Monthly Chart

Chart 83 – Star Entertainment (SGR) Weekly Chart

Chart 84 – Mantra Group (MTR) Daily Chart

The China speculative sector

Significant wealth has been destroyed in this area over recent times as crazy valuations came down to earth with a huge thud. Bellamy's return after suspense confirms our current view that it's all too hard!

Chart 85– Bellamy's (BAL) Daily Chart

Chart 86– Blackmore's (BKL) Monthly Chart

Australian Dollar (AUD) / FX Markets

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region but a test of 82c first feels likely.

The $US remains firm after Donald Trump's victory as the market adjusts for higher US rates. We have been targeting ~105 but short-term feel the bullish $US view is becoming crowded hence any rally is liekyl to lack strong momentum.

Chart 87– Australian Dollar (AUD) / FX Monthly Chart

Chart 88– The $US Index Monthly Chart

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 19/02/2017.  9.00AM. 

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

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