Market Matters Report / Market Matters Weekend Report Sunday 21st January 2018

By Market Matters 21 January 18

Market Matters Weekend Report Sunday 21st January 2018

Market Matters Weekend Report Sunday 21st January 2018

Last week unfortunately gave us more of the same with the local market generally opening ok, helped by strong offshore indices, only to drift lower intraday – the ASX200 actually closed near its lows on every day last week. The local index is now -1% down for the month / year and is a disappointing -2.4% below the high of just 2-weeks ago, conversely the Dow is up an impressive +5.5% since we kicked off 2018. The US Government shutdown next week may lead to some volatility, it will be interesting.

As we have been expecting the worst performing sectors in Australia remain the interest rate sensitive sectors with over the last month Real Estate falling -6.2%, Utilities -6.9% and Transport -5.3%. The theme is a global one, with even on the booming US bourse interest rate sensitive stocks are still falling i.e. Real Estate -6.3% and Utilities -7.9% over the last month. However, the main sector holding us back on a relative basis is the banks who are not following their international cousins higher – we will look at this in more detail later.

We reiterate the 1-2 years ahead will provide a very different investment landscape to the last decade, as interest rates rise, people need to be very open-minded to switching stocks / weightings within their portfolio’s.

Last week’s list of major winners / losers from the ASX200 does not show us a great deal except that the previously “hot” energy sector has given back some of its recent gains:

Winners : Flight Centre (FLT) +7.6% and A2 Milk (A2M) +13%.

Losers : Santos (STO) -6.9%, Origin Energy (ORG) -6.5%, Alumina (AWC) -6.6% and Vocus (VOC) -8.1%.

Today’s report will mainly focus on potential buying opportunities for the healthy 20.5% cash position in our Platinum Portfolio – last week we bought BHP following its 5% pullback and Orocobre (ORE) when it plunged almost 10% on Friday.

ASX200 Daily Chart

So far this year the ASX200 rallied early up +1.4% only to give back all the gains and closing -1.1% in the red for 2018 on Friday.

  • Seasonally its common for the ASX200 to be weak into late January before rallying into the seasonally dangerous late April period.

From a technical perspective on the index we are currently keen buyers around the 5950 region.

When we looked closely at January / the first quarter’s trading for the ASX200, since the post-GFC bull market began in 2009, 2 characteristics caught our eye: 

  1. When the low for January is at the start of the month it usually becomes the low for the quarter – except 2011 when it fell in mid-March.
  2. When the ASX200 falls / drifts in January, like this year, the January low is around now as the below chart illustrates but the quarter low is 80% of the time in the first 5-10 calendar days of February.

Hence we are comfortable having put 6% of our cash position to work last week but we see no reason to chase strength at this point in time.

ASX200 Seasonality Chart

Interest Rates

Last week we saw global bond yields kick higher:

  1. American 10-year bond yields rallied to 3-year highs and look potentially very bullish.
  2. Australian 3-year bond yields also rallied to 3-year highs and also look potentially very bullish.

Until we are proven incorrect MM will be investing during 2018/9 with the major assumption that interest rates are going to rise, with potential surprises to the upside.

US 10-year Bond Yields Weekly Chart

Australian 3-year Bond Yields Weekly Chart

Assuming we are correct and the multi-decade bear market for interest rates is behind its important to remain aware of the historical best / worst sectors when interest rates rise:

Winners - Cyclical stocks like energy, resources, financials, industrials and information technology.

Losers - Defensive stocks likes healthcare, real estate investment trusts (REITs), utilities and consumer staples.


Following on from the “winners” stocks, we remain bullish resources stocks into 2018/9 but considering the sectors bull market is now 2-years old jumping into a strong market could easily prove painful short-term. There are some clear warning signs being generated by the highly correlated Emerging Markets Indices led by retail investors who poured a record $100bn into Emerging Markets last year and as a group their track record is mixed at best!

Since the bull market in the sector commenced back in early 2016 we’ve witnessed some excellent corrections / buying opportunities e.g. Heavyweight BHP has corrected -18.9% / -21.1%, plus a smaller 6.5% at the end of last year, with the smaller more volatile stocks often pulling back much further. Our simple thought at the start of 2018: 

  • Resource stocks are going higher but after a 2-year rally investors must expect / be prepared for some decent pullbacks in 2018.

Copper may set the trend for base metals in Q1 of this year, we are 50-50 following last week’s drift lower but would be keen buyers back around Decembers $US292lb low i.e. ~8% under Fridays close.

Bloomberg Base Metals Index Weekly Chart

Emerging Markets ETF Weekly Chart

Copper Monthly Chart

Currently our preferred resource stocks, plus ideal buying levels, are:

  1. Diversified miners - BHP and RIO - around 2% lower.
  2. Pure iron Ore – Fortescue Metals (FMG) – close to $5.
  3. Copper – OZ Minerals (OZL) and Sandfire (SFR) – entry, or not, is tricky and will be determined by the copper price.
  4. Aluminium – Alumina (AWC) – ideally under $2.10.
  5. Nickel – Western Areas (WSA) and Independence Group (IGO) – levels are hard to determine, we will watch the nickel price for clues.
  6. Minerals sands / titanium – Iluka (ILU) – ideally around $9.
  7. Lithium – Orocobre (ORE) – we may average around $5.50.

There are not many surprises in the above list but as we mentioned earlier “buy levels” will have an enormous impact on a portfolio returns over the next 12-24-months – at this stage we advocate patience, opportunities will come along as we saw in both BHP and ORE Last week.

On Friday we allocated 3% of the MM Platinum Portfolio into ORE as the sector was literally dumped on Lithium supply concerns. We may consider averaging with a smaller volume if the sell-off continues towards $5.50.

Orocobre (ORE) Monthly Chart


The Australian Banking sector has simply not participated in the global banking party which has embraced rising interest rates in an extremely positive manner. In fact our banking sector has been declining while others continue to make multi-year highs but value will present itself when the majority become bearish.

While local banks may not offer significant growth over the coming years their yield should remain pretty solid hence NAB currently paying 6.79% fully franked is undoubtedly attractive to many Australian even as interest rates tick higher.

  • MM will consider adding to our NAB position ~$28, where the stock will be yielding over 7% fully franked per annum.

Banking Indices Weekly Chart

National Australia Bank (NAB) Weekly Chart

We’ve been watching CBA carefully since Christmas with its looming dividend in February, technically a pullback towards $78 would not surprise i.e. -2.2% lower.

  • MM is considering adding to our CBA under $79 if they opportunity arises before its February dividend.

Commonwealth Bank (CBA) Daily Chart

Australian stocks / sectors


As mentioned earlier we are now bullish the resources space looking to again buy the sector. Last week we bought the “Big Australian” BHP following its 5% correction, we will consider adding to our BHP position around $30.

The second stock in the sector that feels like its quickly approaching our buy area is Iluka (ILU), MM is a keen buyer of ILU around $9.

BHP Billiton (BHP) Weekly Chart

Iluka (ILU) Weekly Chart


No change, we remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits have been targeting the $US60/barrel area. However as we saw last week at these levels investors are becoming ever increasingly concerned around US shale production picking up aggressively; last week a -1.4% pullback in crude oil led to a comparatively sharp -4.6% fall in our Energy Sector.

  • We still remain very comfortable with our exposure via Woodside Petroleum (WPL).

Crude Oil Monthly Chart


We still hold 7.5% of the MM Platinum Portfolio in Newcrest (NCM) which is currently showing a small -3.8% paper loss.

The $US has broken its 2017 lows, which we targeted in December, which has helped gold rally $US100/oz. from its December lows. However, if we are correct and the $US is close to a decent low then gold maybe ready to underperform, especially as traders have been going long the most liquid ETF’s implying a short-term bullish view which could subsequently see some selling hit the sector very easily moving forward.

Newcrest Mining (NCM) Weekly Chart

Banks and bond yields / interest rates

As discussed earlier we remain mildly positive the banking sector but from lower levels and we do not expect any fireworks in 2018, our view is selling strength and buying weakness will be the correct strategy. Short-term they actually look average and we are glad that MM sold 50% of our Westpac (WBC) holding in late December as planned.

CYB – MM is currently targeting ~$6.20 for CYB for our long position.

CYBG (CYB) Weekly Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher and last week was encouraging closing mildly positive in a weak market.

  • Macquarie Bank (MQG) would be interesting under $96, around its December lows.

Macquarie Bank (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises, especially those not heavily exposed to on-line threats. The recent rally in the likes of JB Hi-Fi may unfortunately appears to be a case of this horse has bolted.

We reiterate that MM will not be “bottom fishing” in Myer (MYR) although we noted last week that the massive short position looks to be slowly covering, perhaps suggesting it cannot get much worse!

Myer (MYR) Weekly Chart

Healthcare sector

We remain neutral the US Healthcare Sector, looking for sell signals, as interest rates rise – the US and Australian Healthcare Sectors are highly correlated.

US Healthcare Index Quarterly Chart

Global Indices

We may be seeing a blow-off top evolving in global equities although investors should remember that tops usually take 2/3 times longer to unfold than bottoms and they are MUCH harder to pin-point – we certainly have seen no sell signals / warnings in 2018.

Sceptics that cannot imagine a decent correction should simply stand back and look at the 3 main pullbacks by US stocks since 2007 i.e. 58%, 23% and 17% - the S&P500 has not even experienced a 5% correction for 2-years, i.e. since Brexit!

We all should remember that the US is in the longest streak in history without a 5% correction and we all know it will come to an end one day!

MSCI World Index Quarterly Chart

US stocks have now exceeded our targeted area of the last 2-years courtesy of Donald Trump’s tax package. We still expect a decent correction this year but more pain for the bears feels likely first.

US S&P500 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 20.5% of the MM Platinum & 7% of the Income Portfolio in cash so we can buy areas where we see value: 

  1. Banks – We are comfortable with our exposure at present but like CBA ~$78 and NAB ~$28.
  2. Consumer Services – We are comfortable with our exposure at present.
  3. Diversified Financials – We are comfortable with our position at present but like MQG under $96.
  4. Energy – We are long WPL which feels good.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels correct.
  7. Resources – We are considering a number of buys here, see earlier in the report.
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – No investment buying at this stage.
  10. Retail – No investment buying at this stage.
  11. Gold – We have enough exposure at this time with NCM.

Standout technical chart (s) of the week

We are keen on the resources sector as discussed earlier and one stock where we have enjoyed some success during recent years is Alumina (AWC), if AWC closes here or lower in January it will generate a short-term sell signal. 

  • MM is a buyer of AWC under $2.10, over 10% lower and ~20% below this month’s high.

Alumina (AWC) Monthly Chart

Investing opportunities for the coming week(s)

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

  • We are looking to accumulate resource stocks and to a lesser degree CBA or NAB into weakness.
  • We have nothing close to our sell areas at present.

Trading Opportunities on our radar

No major change this week but different buy levels after FMG made the fresh high we had targeted last Monday: 

  1. Buy Fortescue (FMG) around $5 targeting a rally up towards $6.

Fortescue Metals (FMG) Daily Chart


No change, this year is all about sectors as interest rates rise. 

  1. We are keen on resources at present i.e. cyclicals.
  2. We have no interest in any “yield play” / bond proxy stocks.

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

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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 19/1/2018. 4.00PM.
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