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

By Market Matters 19 November 17

Market Matters Weekend Report Sunday 19th November 2017

Market Matters Weekend Report Sunday 19th November 2017

The ASX200 experienced an overdue consolidation week, falling -1.2%, nothing unexpected following its impressive +7% rally from early October. The timing of the pullback illustrates perfectly why MM watches the seasonal influences on indices, sectors and stocks so closely. So far this November the ASX200 has formed a top at 6052 on the 11th, right on seasonal cue! This time Shells’ sale of its $3.5bn stake in Woodside (WPL) was the catalyst for the local weakness but it cannot be ignored that every year something appears to stop Australian equities in their tracks around this time. The local market has since retreated 136-points / 2.25% over 6 days i.e. approximately half of the usual correction in both price and time.

Not surprisingly we will continue to keeping the follow strong statistics firmly at the front our mind as continued weakness over the next week theoretically will generate an excellent buying opportunity for the overall market:

1. Since the GFC there has been an average correction in November by the ASX200 of -5.3%.

2. Historically the correction usually lasts round 11-days and commences on the 10th.

3. Similarly since the GFC Commonwealth Banks’ pullback in November has been over 6% - unlike the ASX200 the banks have remained firm to-date.

Hence while MM remains bullish the ASX200 targeting a significant break over 6000 in 2017 / 2018 a short-term correction down towards the 5850 area feels underway. It felt like fund managers pressed the “buy Australia” button in early October with their motivation probably a combination of “fear of missing out” and buying the underperforming global index looking for some simple mean reversion. The later has definitely played out since October with the ASX200 up +5.4% compared to the US S&P500 up only +1.1% over the same period.

Last week’s list of major winners / losers shows another relatively balanced result as the winners actually notched up another victory, even in a down week, but this time 5 to 3 with the moves stock related as opposed to sector, or market influenced

Winners : TABCORP (TAH) +8.5%, Santos (STO) +11.6%, Dulux (DLX) +7.5%, Harvey Norman (HVN) +5.1% and Computershare (CPU) +7.6%.

Losers : Downer (DOW) -5.7%, Woodside (WPL) -5.5% and Orica (ORI) -5.2%.

Today’s report will continue to focus on how best to play what we believe is undoubtedly a rapidly maturing bull market.

ASX200 Daily Chart

MM’s outlook for markets.

We still believe the current late cycle optimism has further to run with an upside target for the ASX200 around the 6500 not unrealistic, especially if our influential banking sector can maintain its current strength. A strong ~300-point rally is commonplace in the second half of December as classic “window dressing” usually unfolds so the obvious key to what level the ASX200 can attain in 2017, early 2018, will be how deep will the current pullback become.

Following recent comments from the ECB and BOJ it appears we still have at least another 6-months of major Central Bank liquidity in markets which is likely to continue to support asset prices. Obviously the US has commenced raising interest rates at a moderate pace and shrinking their balance sheet but for now it has not been a major concern to the currently optimistic global stock markets. This should assist our bullish outlook into 2018.

ASX200 Monthly Chart

Last week we had a few questions around our target for this current bull market and of course when / if will a pullback occur. Obviously we do not unfortunately own a crystal ball, although if we did writing these reports would not be as much fun! We simply follow our anticipated road map until the market tells us we are wrong, and then we reassess. Let’s look at the broad US Russell 3000 index which we follow closely:

  1. We turned extremely bullish in early 2016 targeting the 1500-1550 area – many called us crazy at this time!
  2. In the last 2 years we have had no reason whatsoever to change this overall view – hence we still have over 90% of the MM Platinum Portfolio in stocks.

As should be expected we have applied a few “tweaks” as the rally continues to unfold:

  1. We now believe the market is more likely to end between 1550 and 1600 i.e. ~3% higher.
  2. We now believe a top is likely in 2018, not 2017 as previously thought.
  3. Ideally we will see a 5% pullback prior to one final push to new highs before its time to get off the train!

The strong ~15% rally from US stocks in 2017 has obviously been fuelled by a number of factors but earnings growth of ~12% we believe is by far the most important and it’s undoubtedly been good.  Equities are pricing in more growth moving forward and if this fails our targeted ~20% correction will probably occur rapidly but for now we will continue to watch both how the stocks trade and the forthcoming economic data as we strive to pinpoint when to become aggressive sellers – we are going for the hat-trick, we nailed both the major 2015 high and 2016 low! I know we sort of sound like PM Turnbull ungraciously claiming the same sex marriage victory, however our claims do have some substance! 

Last week saw both the largest daily rally and fall for US stocks in 2 months i.e. the increased volatility we have been anticipating. Donald Trump’s Success with his Tax Reform is becoming built into stock prices but advances are being sold and we believe a 5% pullback is getting closer – from a trading perspective we like the thought of selling fresh all-time highs in US stocks moving forward.

One clear takeout from the Russell 3000 chart is we fall faster than we rally, hence when a market starts to fail do NOT be too fussy when selling.

  1. In 2011 we corrected over 3 quarters after rallying for 10.
  2. In 2015-6 we corrected over 4 quarters after rallying for 15.

Russell 3000 Quarterly Chart

As subscribers know we believe interest rates have bottomed and the break of the 35-year bear market for the influential US 10-year bonds is just a matter of time  however a lot is also happening under the hood of bond markets.

1 – Junk Bonds just experienced a pretty savage 2-3 weeks sell-off before recovering well – traders bought the dip, sounds like the equity market. A follow through lower by bonds may well have taken stocks with them.

2 – The US 2-year / 10-year bond yield spread has flattened as the short dated 2-year rate has increased in anticipation of further Fed hikes but the 10-year has hardly moved as inflation remains muted at best. This usually implies no growth and clearly disagrees with the Fed’s interpretation of the economy, however the ECB and BOJ “pumping money into the system” is very probably having an impact but it’s hard to quantify.

Six times in history the spread between US 2/10 years has been under 100-points and how equities performed during these periods may surprise many:

  • Energy and technology sectors were the best performers while the “yield play” was the worst.

US 10-year bond yields Quarterly Chart

Barclays high yield (Junk Bond) ETF Weekly Chart

US 2-10-year bond yield spread Monthly Chart

This week we enjoyed reading Goldman Sachs major predictions for 2018, we basically read what everybody writes because occasionally it can produce a “light bulb moment”. The below 5 thoughts caught our eye, although they are pretty interconnected it looks like they have been reading MM over recent months:

1 - US 10-year bond yields will rise over 3% in 2018 – we agree and this is theoretically good news for the financial sector.

2 - The Euro will rally against the $US next year – on balance we agree here but not with conviction. NB GS got the $US very wrong in 2017.

3 – Buy Emerging markets over developed ones – we agree here and it should be good news for the ASX200 on a relative basis.

4 – Buy the European reflation story – we agree totally.

5 – Buy Industrial metals – we again agree totally and are looking for a little more weakness to become buyers.

Were also glad that they are not targeting a major top in 2018, they never occur when too many people are looking for them.

Bloomberg Base Metals Index Weekly Chart

Australian stocks / sectors

Resources

We have remained patient in adding to our IGO / NCM position within the Australian resource stocks. However there remains no change to our overall outlook:

1. We are positive the reflation trade hence are keen on the likes of BHP, OZL and RIO into weakness but still do not plan to chase strength. OZL around $8 looks attractive i.e. ~4% lower.

2. We currently prefer the base metals over the more volatile and currently weaker iron ore sector. Ideally the spot index will correct ~7% again allowing us a decent risk / reward buying opportunity.

OZ Minerals (OZL) Daily Chart

Energy

We remain bullish crude oil for now and an extension towards ~$US70/barrel would not surprise, especially as many pundits are targeting the $US60/barrel area.

This was the most influential sector in the ASX200 last week as we saw Shell sell its $3.5bn stake in Woodside (WPL) and Big American oils $11bn play for Santos (STO). In a nutshell:

1 We took advantage of the fall in WPL to buy for both the MM Platinum and Income Portfolios targeting well over $35 once the dust has settled.

2 We believe the play for STO is too cheap and unlikely to go ahead plus the major Chinese shareholders should not be underestimated in the equation.

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a small paper profit of ~+1%.

However, if we are correct the $US has a good chance of making one final low in the relative near term around the 90 level and we then should be able to crystalize a profit from this position well over $25.

The $US Index Weekly Chart

Newcrest Mining (NCM) Monthly Chart

Banks and bond yields / interest rates

We remain both positive and now mildly overweight the banking sector as remain in this seasonally weak period for the sector but its not yet playing out. Obviously as this report outlines we are bullish bond yields which should help banks profitability hence our portfolio skew towards the sector.

We continue to keep 4 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is just another ~8% higher.
  2. Between the 10th & 20th is usually a poor time for our banks as investors take some money from the table following some large dividends and healthy gains – not yet!
  3. Seasonally CBA usually falls ~6% over the next few weeks (since the GFC) and then rallies over +4% in December hence we may increase our CBA position back towards 10% if we see decent selling in November and / or rebuy CYB but if others in the “big 4” underperform we obviously may switch our attention.
  4. Following its 46c fully franked dividend on the 2nd Bank of Queensland (BOQ) is a switch target if it performs well over coming weeks.

Commonwealth Bank (CBA) Seasonality Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~13% higher. Recently we executed the planned purchase of IFL within the sector and still not hesitate to take profit on CGF at our target: 

  • Our profit target for CGF is ~$14 where we are likely to take profit.
  • Conversely we still like MQG and PTM into any weakness, especially if its broadly across the banking sector.

Challenger Ltd (CGF) Monthly Chart

Macquarie Bank (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will consider buying panic weakness in some select stocks if the opportunity arises i.e. HVN under $3.50.

We remain net bearish Woolworths with an eventual ugly target under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly has now fallen almost 5% from its October all-time high.

However, we are happy with our purchase of Nanosonics (NAN) in the short / medium-term with a close over $3.05 required to improve the technical picture.

Nanosonics (NAN) Monthly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s) – this was definitely the case last week.

Since Donald Trump’s US election victory the S&P500 has rallied an impressive ~25% with only one small -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip” is approaching. We now feel aggressive traders can sell any strong days as pullbacks are likely to become both far more common and larger.

US S&P500 Weekly Chart

We are now short-term bearish European stocks with last weeks “gut feel” looking on the money. A close by the German DAX back under 12,900 / 1% lower will increase our bearish view from a short-term technical perspective.

German DAX Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 10% of the MM Platinum Portfolio in cash:

  1. Banks – We like our mildly overweight banking position  but may increase our “big 4” position if we see any seasonal weakness, plus we like CYB  at lower levels.
  2. Consumer Services – Nothing is close at present.
  3. Diversified Financials – We recently purchased IFL plus we do like Macquarie (MQG) into weakness and Platinum (PTM) around $7.
  4. Energy – Were now long WPL which feels enough for now.
  5. Food and Beverage – We like our A2 Milk (A2M) position but are unlikely to add to the pretty volatile position.
  6. Healthcare – We still like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We are likely observers this week unless weakness unfolds late in the week.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage, as a trade VOC / TPM look interesting for the brave!
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

The same 3 stocks in our MM Platinum Portfolio are in striking distance of to our current sell targets:

  1. Challenger (CGF) around $14.00.
  2. Telstra (TLS) over $3.60.
  3. Aristocrat (ALL) between $24.50 and $25.

Standout technical chart (s) of the week

What many local investors miss when they look at gold is the price in $A i.e. what the local producers receive. Of course they sell forward / hedge but if the price keeps going up so does the price they receive:

Gold is close to its decade high in $A but has corrected over 30% in $US!!

This is clearly positive for our gold sector and one of the reasons we can see Newcrest (NCM) well over $25 in the coming months.

Gold in $A Monthly Chart

Investing opportunities for the coming week(s)

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

  • Nothing imminently close while I’m typing although if CGF and ALL have a good week we may sell.
  • Also, we are buyers of CBA, CYB (banks) and MQG into any decent seasonal weakness. 

Trading Opportunities on our radar

After last week’s pick of Santos (STO) as trade we are under pressure to match it this week!

We only have 1 trading idea this week which is in PTM, after a huge short squeeze the fund manager has corrected 7.4% to-date, if this continues under $7 we feel it’s a good buying opportunity.. 

  • Buy PTM around / under $7 with stops under $6.50  targeting over $8 i.e. ok risk / reward.

Platinum (PTM) Daily Chart

Summary

We are now confident in our medium-term forecast of the ASX200 breaking well over 6000 in 2017/8  with a “guess” target of over +6200. However short-term we are now cautious at least for a few weeks with 5850 a logical target.

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 17/11/2017. 4.00PM.
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