Market Matters Report / Market Matters Weekend Report Sunday 20th August 2017

By Market Matters 20 August 17

Market Matters Weekend Report Sunday 20th August 2017

Market Matters Weekend Report Sunday 20th August 2017

Volatility abounds on the stock level and to a lesser extent in overseas indices but the local ASX200 remains range bound as it commences the 14th week of trading between 5629 and 5836 i.e. an extremely tight 3.5% range. Last week the local market put in a solid performance gaining +0.95% compared to the US S&P500 which fell -0.6% and the Dow -0.8%. Our main lead currently from the US is only for the opening each day while overall we remain far more correlated to Europe and Asia who both managed small gains for the week. The real action last week was on the stock level as reporting season helped throw up some big surprises in both directions, the intra-day volatility in some stocks was simply enormous although volume was usually extremely thin at the respective extremes. By Fridays close, ignoring some huge intra-day swings, we had some big standouts for the week:

Winners : Bendigo Bank (BEN) +9.5%, TABCORP (TAH) +8.4%, Origin Energy (ORG) +8.4%, Treasury Wine (TWE) +7.5%, Cochlear (COH) +12.4%, Primary Healthcare (PRY) +5.5%, Adelaide Brighton (ABC) +7.2%, Alumina (AWC) +5.7%, REA Group (REA) +6%, Mirvac (MGR) +6% and Tatts (TTS) +8%.

Losers : Seek (SEK) -5.1%, Domino’s Pizza (DMP) -12.5%, Challenger (CGF) -5.6%, QBE Insurance (QBE) -8.3% and Telstra (TLS) -6%.

The 2 clear standouts are firstly twice as many stocks in the ASX200 rallied by over 5% compared to those that fell by the same degree and secondly the heavyweight banking sector performed strongly, led by BEN, gaining by almost 3x the overall index. As the ASX200 is made up of 30% banking stocks it’s hard to be too bearish when the banks are reporting well leading to significant local index outperformance. Next week sees reports from Fortescue (FMG), Westpac (WBC), Amcor (AMC), BHP Billiton (BHP), Healthscope (HSO), Woolworths (WOW), Alumina (AWC), South32 (S32) and QANTAS (QAN) to name a few so hold onto your hats, more volatility is expected!

Let’s quickly again look at the ASX200’s “trading patterns” as we enter the back half of August:

Short-term Neutral Pattern between 5629 and 5836 – 14 weeks.

  1. Medium-term Neutral Pattern between 5582 and 5956 – 28 weeks.
  2. August’s range to-date is 5674-5806 i.e. 132-points, compared to July’s of 146-points. 

While technically MM is still ideally targeting a further ~200-point correction towards the 5500 area i.e. ~4% lower in August / September we are very aware the local market has now ignored 2-weeks of weakness from US stocks as buying emerges locally on any strong down days e.g. the last 2 Fridays. The MM Platinum Portfolio is now holding 16% cash following our planned purchase of Telstra around the $3.80 level, we will update our “shopping last” later in this report plus of course we will be looking for any panic style opportunities from stocks that report.

Huge inefficiencies regularly unfold during reporting so a few alerts next week would not surprise.

ASX200 Weekly Chart

Global Indices

In the bigger picture while we believe the bull market for equities which began back in early 2009 is very mature but we still don’t believe it’s yet time to jump ship. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term targets – just like the last 2 weeks!

However while we are very confident that US stocks are looking for / have found a decent top at least for for now we always have to give bull markets the benefit of the doubt that they can push higher for just one more time….…the next few days feel critical short-term..……..see standout chart of the week.

NB We have been bullish the S&P500 since early 2016 but our long-term target of ~2700 is approaching fast hence we are being particularly careful on purchasing stocks as this 8-year bull market matures rapidly.

US S&P500 Index Quarterly Chart

Medium-term the US stock market has played along with our forecast (s) for the vast majority of 2016/7, if this continues the last 2-week’s bumps in the road have definitely further to play out. Last week the US S&P500 added to its previous losses with our target of ~2350 for the coming weeks now around 4% lower. The tech NASDAQ chart remains the clearest to us at present and were targeting ~5575 for this volatile index i.e. 3.7% lower.

Importantly for local investors the NASDAQ has now corrected 3.4% over the last 4 weeks but the ASX200 has ignored this weakness, just like we ignored most of its strength during 2016/7.

US S&P500 Weekly Chart

US NASDAQ Weekly Chart

No real change as European stocks have been in correction mode since May, with the German Dax currently 6.1% below its 2017 high. We are only targeting ~11,700 before we would be looking for “backfoot” buying opportunities i.e. we only see another 3.8% downside before we would be become neutral / bullish.

In the bigger picture we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

Asian Indices traded in a very similar manner to both Europe and Australia last week, by regaining a small part of the previous week’s losses without showing any great clarity moving forward. It feels like money is leaving US stocks and is slowly being allocated to other global indices.

Hang Seng Weekly Chart

The biggest talking point last week by a mile was Telstra (TLS) which plunged ~10% on the day it reported, significantly hurting the pocket of its over 1 million shareholders. This is one instance we can definitely crow about for now at least, on the 26th of June MM sold TLS ~$4.35 and switched into Wesfarmers ~$41 - basis Friday TLS has fallen over 10% while WES has rallied 3%. I know at times some subscribers find us too active but please remember the current bull market is now the second longest in history and volatility is likely to keep increasing as it matures fast.

With regard to TLS last week we allocated 5% of the MM Platinum Portfolio into the stock at $3.85 as planned and will add another 2.5% if it falls towards $3.60. This stock is becoming a quasi-bond on a reasonable yield i.e. at $3.85 it will be paying ~5.7% fully franked in FY’18 compared to CBA who is currently yielding 5.4% fully franked hence we’ve left some ammunition to average nearer $3.60 where the yield would be over 6%.

Telstra (TLS) Monthly Chart

One interesting chart that we saw a version of last week is the $US Index against copper, these two have moved together for a while but have diverged noticeably in the last few months. The recent strong copper price implies growth and hence higher interest rates which we would normally aid a strong $US but that has not unfolded.

Our preference is for a pullback in copper and a bounce in the $US, either way we feel a correction for resource stocks is a strong possibility hence we recently took profit on RIO.

$US Index v Copper since mid-2016

“Shopping List”

As we said last week preparation is everything, especially when we are looking for a spike lower as a buying opportunity. Market bottoms / excellent buying opportunities are often gone within 24-hours as we may have witnessed with Challenger (CGF) when it briefly traded around our $11.50 buy zone last Wednesday. Below is our current shopping list of stocks plus ideal levels which has been updated from last week.

  1. Banks – We like the banks but our 37.5% exposure is currently enough.
  2. Consumer Services – Aristocrat (ALL) ~$20.
  3. Diversified Financials – IOOF Holdings (IFL) if it corrects to around $10.80 and Challenger (CGF) ~$11.50.
  4. Energy – No interest currently.
  5. Food and Beverage – Treasury Wines (TWE) ~ $11.75.
  6. Healthcare – Not a sector we currently love but Healthscope (HSO) ~$2.13 looks good.
  7. Resources – We like OZL Minerals (OZL) as a trade ~$8.20.
  8. Real Estate – Another sector we are not keen on but Lend Lease (LLC) under $15.50 looks great.
  9. Telco’s – We are now buyers of Telstra (TLS) under $3.70 to average our position.
  10. Leisure – We like Ardent Leisure (AAD) under $2 as a more risky play.
  11. Retail – We still like Harvey Norman (HVN) under $4.20.
  12. Packaging – Orora (ORA) under $3 following its great report.

Standout technical chart (s) of the week

It’s not often we look at 60-mins charts preferring the distinct lack of noise that’s obtained by considering stocks / indices on a weekly basis but there always exceptions. The S&P500 looks poised to generate a very important signal early next week:

  1. Either it will accelerate under 2420 targeting ~2350 minimum, i.e. a ~4% correction.
  2. Or, it will hold 2420 and close back over 2437 targeting yet another new all-time highs.

We are likely to refer to this chart in the next few days morning report as clarity should emerge. We wish the ASX200 would sometimes provide such a straightforward set-up!

US S&P500 60-mins Chart

Investing opportunities for the coming week(s)

Refer to the “shopping list” earlier in the report.

Ideally we are looking to allocate a significant portion of our cash into the market ~5500 basis the ASX200 and probably earlier into any decent weakness if it eventuates.

ASX200 Monthly Chart

Trading Opportunities on our radar

We again have 2 trading situations on our radar:

  1. Orocobre (ORE) is a mineral exploration company that pays no dividend putting it firmly in the speculative bucket. However its focus is a lithium-potassium project in Argentina – currently a hot space. We are bullish ORE under $3.40 with stops under $3.
  2. For the sophisticated trader taking into account the set-up of the S&P500 buying an option straddle makes sense i.e. get positioned for a decent move in one direction by the ASX200 after 14-weeks of no movement.

Orocobre (ORE) Monthly Chart

Summary

We are short-term bearish ideally targeting a correction back towards the 5500 support area, however the ASX200 is currently enjoying one its rare outperformance periods over recent years making the drop “feel” unlikely at present.

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 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 19/08/2017. 4.00PM.

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