Market Matters Report / Market Matters Weekend Report Sunday 20th May 2018

By Market Matters 20 May 18

Market Matters Weekend Report Sunday 20th May 2018

Market Matters Weekend Report Sunday 20th May 2018

A similar start to last weeks report given  the statistics seem to be reoccurring + we like reiterating a strong message:

Last week was again fairly quiet until we look under the hood, the small +0.5% fall by the ASX200 yet again masked more huge volatility by many big names within the local market. We again witnessed 15 stocks in the ASX200 alone that ended the week up, or down, by more than 5% i.e. definitely not a quiet week. Three stocks actually fell by over 10%, including 2 of the best performers / most popular of recent years:

Winners – Challenger (CGF) +5.2%, AMP Ltd (AMP) +5.1%, Harvey Norman (HVN) +5.2% and  JB HI-FI (JBH) +6.6%  - Total of 4 names.

Losers – CYBG (CYB) -5.8%, ALS Ltd (ALQ) -6.1%, Brambles (BXB) -6.2%, Cleanaway (CWY) -6%, Treasury Wine (TWE) -11.5%, A2 Milk (A2M) -14%, Evolution Mining (EVN) -7.2%, Newcrest (NCM)  -6.8%, TPG Telecom (TPM) -6.6%, Telstra (TLS) -10.9% and Spark Infrastructure (SK) -7.3% - Total of 11 names.

We are certainly experiencing a market suited to the active investor as opposed to simply buy & hold – we sometimes get accused of being traders but at MM we simply attempt to invest in a manner that suits the market at any period in time.

As I said last week statistics can be dressed up in many ways to tell a 1000 different tales but when I again see our market have 7.5% of its top 200 stocks move by over 5% it makes me feel uncomfortable, just like something is slowly bubbling beneath the surface.

  • The Volatility index (VIX / Fear Gauge) maybe close to post GFC lows but the unpredictability within our market is very high, and clearly growing on the factory floor.

US Volatility Index (VIX / Fear Index) Chart

On Monday the local market looks set to open down around 30-points following some relatively heavy SPI futures selling on Friday night / Saturday morning, plus BHP closed down 26c / 0.8% in the US.

The candlestick chart below illustrates that over the last 2-weeks the market has found some clear selling around / above the 6100 area, an initial pullback towards the 6065 initial support now feels very likely.

  • MM remains bullish the ASX200 short-term initially targeting fresh decade highs around 6250, now only 2.7% higher.

Importantly we will lose this short-term positive stance on a break beneath 5850, or ~4% lower. We remain concerned by the markets internal makeup as it heads towards what we continue to believe will be a major swing high i.e. last week almost 3 times more stocks fell than rallied by over 5% and only strong performance from market heavyweights BHP, RIO and CSL prevented a far worse week.

  • MM remains in “sell mode”, ideally looking to significantly increase our cash position between 6200 and 6250 and / or add some negative facing positions via ETF’s.

ASX200 Chart

We continue to watch the ASX200 Accumulation Index closely as it makes fresh all-time highs while approaching our 65,000 target area, now only 5% away. This index clearly outperforms the ASX200 as it includes dividends but we must remember that it still has endured some major corrections over the last 11-years.

  • In the GFC 49.4%, 2011 20.4% and in 2015 17.6%.

This is not about scaring subscribers but an attempt to maintain open-mindedness, between 2007 and 2016 the index had 3 major corrections, from a timing perspective we are arguably due another one fairly soon.

ASX200 Accumulation Index Chart

Last week US stocks were pretty quiet with the S&P500 remaining 6% below its all-time high while the small cap Russell 2000 interestingly closed above its milestone on Friday night, illustrating who are the main benefactors of Trumps tax cuts.

  • Our current target for the Russell 2000 remains only ~3% higher.

MM is still forecasting a major correction of over 20% in the medium / longer-term, hence the risk / reward is very dangerous for the bulls, even if we are correct with our ideal target of fresh decade highs around 6250 for the ASX200 in coming weeks.

Russell 2000 (small cap) Index Chart

The picture that’s unfolding in Europe continues to add weight to our short-term bullish view, ideally we would love to see a final high to sell aggressively with the FTSE’s already obliging nicely:

  • Our target for the UK FTSE is ~7900, or only 1.6% higher.
  • Our target for the German DAX is ~13,750, or 5% higher.

We still have a “Gut feeling” that the local and European markets will top out before the US, similar to mid-January this year. If this does unfold we will definitely be selling into the strength.

  • MM remains in “sell mode” and will be looking for reasons to increase our cash position.


1 Where to hide when interest rates rise

In the US wage and inflationary pressures are clearly increasing with the only question being asked in town is “how many times will the Fed hike rates over the next few years”?

  • Historically rising inflation, wages and interest rates are bad news for stocks / assets.

However we believe the main question should be what’s the tipping point / uncle point for stocks as interest rates rise, with our answer being very soon. US bond yields have cleared 3% already and the next decent leg up may well be the straw that breaks the camels back for US stocks. Unfortunately we may not have enjoyed the glamorous advances by the Dow and friends but we are highly likely to follow them down e.g. the S&P500 fell 11.8% in Jan / Feb and the ASX200 corrected -6.9%.

  • While we do see the ASX200 outperforming during a US led correction, assisted by a weakening $A, we do not see us being immune to periods of global stock market negativity.

When we look at the effects of rising bond yields on stocks there some clear winners and losers:

Winners – Financials, Energy, Resources plus consumer discretionary assuming the breaks don’t hit the economy too fast / hard.

Losers – The “yield play” sector, Real Estate and Consumer Staples (food & beverage) – already down between 9 & 12% in the US over the last 6-months - we strongly believe it will hit some Australian stocks very soon in those sectors very soon.

Another point of note is higher interest rates costs could reduce the pace of buybacks, though that has yet to happen. In 2017, S&P 500 companies spent more than half a trillion dollars on buybacks. Goldman Sachs analysts expect companies to spend $650 billion this year, overall a colossal positive influence for US stocks i.e. the ducks are slowly lining up for a decent stock market top then correction.

US 10-year bond yields v S&P500 Chart

2 Where to hide when indices fall

Stock markets are cyclical and while they may have enjoyed a phenomenal appreciation over the last 100-years they do endure significant corrections on their journeys, when played correctly these are tremendous opportunities. Just consider the last decade:

  • The ASX200 corrected 54% in the GFC plus 25% in 2010/11 and 21.5% in 2015/6.

As most of you know we are committed to our view that global stocks have another ~20% correction approaching on the horizon. Rather than planning to sit on 100% cash for the next few years we ask the question what stocks perform during market corrections? Over recent decades the S&P500 has experienced 15 non-recession based corrections with an average decline of ~15%.

Corrections have a tendency to bring out the worst in investors as human emotions demonstrate their characteristics of being a shocking investor! However if we are prepared it should be exciting times as quality businesses / companies are on sale, often at crazy prices.

Typically, defensive sectors, such as health care, consumer staples, telecoms, REITs and utilities, hold up better than cyclical ones when markets fall BUT the list is almost a total contradiction to what stocks to hold when interest rates rise!

MM is going out on a limb here but we feel the next correction can be “played” in a slightly more skilful manner and our portfolios will likely be structured accordingly:.

  1. Firstly, hold say 50-60% of our portfolio in stocks that will pay us a healthy, relatively reliable yield e.g. CBA is currently paying a 6.1% fully franked yield – remember financials historically like rising interest rates.
  2. Also, we are extremely keen buyers of CBA into further weakness between $60 and $65 depending on the dividend cycled.
  3. Secondly, be short stock markets  via ETF’s of similar $$ exposure hence we don’t care if market goes up / down 20%, our risk is if stocks being held drop say 10% when the overall market rallies 10% - we are likely to be net short the market.
  4. Assuming we are correct and the market corrects to our target area we will take profit on our short ETF’s looking to buy more cyclical style stocks into the correction with what is likely to be our high cash levels.

How aggressively we play the above as opposed to simply sitting on cash and negative facing ETF’s will depend on respective prices at the time but the Platinum Portfolio is very likely to be positioned to want a decent market downturn.

As a fairly new business we cannot claim to be masters of the last 5 decades but we did sell out of equities close to 6000 in 2014 while not piling back until sub 4800 in 2015 – this can add some serious value / alpha to a portfolio.

ASX200 Chart

3 BHP and iron ore’s looking interesting

We’ve lightened our exposure to the Australian Resources Sector into recent strength which evidently was a touch premature as the anticipated weakness in base metals has unfolded but the $A has tumbled even further cushioning the effect for local miners – we cut our BHP around $34, its due to open marginally lower on Monday ~$33.80.

However as we mentioned last week resources stocks are extremely cyclical and even “bullish” Rocky acknowledged in our recent MM resources video the we are in the mature stages of their bull market.

  • We think there’s a strong possibility that BHP will have another correction back below $30 in the coming months where we are buyers, the impulsive decline in iron ore last week supports this view.

MM continues to like BHP but are currently planning to buy below $29.

BHP Billiton (BHP) Chart

Iron Ore Daily Chart

4 The phones ringing hot again on Telstra (TLS)

Telstra’s been horrible since mid-2016, declining over 50% before dividends. Its so frustrating for us to have sold part of our holding around $3.70 as opposed to all of it!

  • At MM we are going to stick with our TLS position but are not averaging into current weakness.

Note if we had no position be would be cautious buyers around current levels.

Telstra (TLS) Chart

5 Is gold becoming interesting?

Gold’s been fascinating over the last few years and as the below chart of a Major Gold Miners ETF shows its simply traded sideways on a global level but the Australian stocks have fared far better aided by the weakening $A.

  • At MM we are buyers of Evolution Mining (EVN) around $2.90 / ~7% lower but will run stops initially under $2.67 i.e. 8% risk.

We like this on a risk / reward basis targeting above $3.50 plus it fits with our bearish $A and stock market view – gold stocks often perform solidly when stock markets decline.

Vaneck Gold Miners ETF Chart

Evolution Mining (EVN) Chart

6 Consumer Staples Woolworths / Wesfarmers are in favour – concern?

Last week both Wesfarmers (WES) +2.2% and Woolworths (WOW) +1.5% were strong taking there gains for the month to an impressive 9%.

We ask ourselves whether fund managers are looking for some safety to hide? These are stocks that usually struggle when bond yields are rising but outperform when stock markets fall.

It’s a tricky one but when we consider the fact that Australian bond yields have not yet followed their US friends higher we must conclude that it’s a defensive play i.e. investors are struggling to find value elsewhere in today market.

With Australian interest rates feeling on hold for at least another 6-months it makes a logic play for now but we believe a dangerous one moving forward – we will eventually follow the US and raise interest rates. We outlined our negative view on Woolworths in the Income Report 2 weeks ago.

Wesfarmers (WES) Chart


No major changes following last week’s strong market:

  • We remain net positive equities for the coming weeks (just) with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position and are firmly wearing our “sellers hat”.

“Shopping List”

  • None, we are wearing our sellers hat.

“Selling List”

  • General selling is / when the ASX200 challenges the 6250 area.

Standout technical chart (s) of the week

We’ve already discussed BHP earlier with our “intention / hope” to rebuy back into the miner below $29 – “hope” is a very dangerous word when investing. 

  • BHP is usually highly correlated to the Emerging Markets but this is unusually not the case for most of 2018.

Correlations work until one day…… however, we can imagine a snap back between the 2 which would potentially enable us to buy BHP ~$29.

BHP Billiton (BHP) v Emerging Markets Chart

Trading Opportunities on our radar

1 Nickel producer WSA is a volatile stock similar to many in the space. We see good risk / reward on a spike down to / around the $3.20 area / 6% lower, targeting a 10% bounce minimum.

  • Buy Western Areas (WSA) beneath $3.20, with stops under $3.

Western Areas (WSA) Chart

2 We continue to like Origin Energy (ORG) as a sell targeting the low $8 region.

Origin Energy (ORG) 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.


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.


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 19/5/2018. 4.00PM.
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