Market Matters Report / Market Matters Weekend Report Sunday 21st May 2017

By Market Matters 21 May 17

Market Matters Weekend Report Sunday 21st May 2017

Market Matters Weekend Report Sunday 21st May 2017

The ASX200 continues to trade in a very volatile manner which coincides perfectly with our anticipated classic "sell in May and go away" seasonal pullback. The standout from a sector perspective last week was the return to favour of the resources, especially compared to the banks, a rotation we have been looking for over the last few weeks e.g. over the last 5-days while the ASX200 declined 1.9% we saw CBA fall -1.8% but RIO gained +5.8%. Our view at MM is this outperformance from resource stocks is in its infancy and should continue for a number of weeks / months. As most people know last week's wild market gyrations were mainly courtesy of the potential impeachment of Donald Trump - surely nobody believed his presidency was going to be uneventful. Importantly the seed of doubt has been sown in many investors' minds, its likely to take at least a few weeks minimum to forget Wednesdays 372-point plunge by the Dow.

With local equities at record valuations, bar the resources, further attempted sell-offs feel a strong possibility but due to our medium-term bullish outlook for stocks we regard any sharp sell offs by stocks over the coming weeks as buying opportunities. So far, the ASX200 has corrected 259-points (4.3%) from its high on the first of May but we should remain conscious that the average correction since the GFC over this period is 6.9% which would target ~5550, or another 3% lower. The following statistics and views should be kept firmly in mind with us now 70% of the way through May:

1. If the ASX200 is going to correct the full 904-point advance since the US election in November the initial technical target would be the 0.382-Fibonacci retracement at 5610, just above major support at 5582.

2. CBA has already corrected $8.91 / 9.3% from its recent high, the average pullback in CBA during May / June, since the GFC, is just over 10% which targets ~$79 from the $87.74 high i.e. a slight break of the recent panic low around budget time.

3. Remember as this May-June correction unfolds, both locally and globally we will again become bullish for further advances from stock markets through 2017.

We remain comfortable holding 23.5% of the MM portfolio in cash as buying opportunities remain very likely in coming weeks.

Importantly subscribers must remember how we believe the market is positioned going forward to understand our alerts / positioning i.e. We only anticipate another 6-8% upside for global equities before the major 8-year bull market is complete and then a painful +25% correction unfolds. Hence, we are in very clear only "buy weakness and be prepared to sell strength" mode. Most MM alerts over the coming months from the buy side are likely to be targeting a quick 10-15% gain, or a free dividend - we believe the time in this cycle to buy and hold a stock for 20-30% gains is well behind us in the vast majority of cases. We will keep quoting Baron Rothschilds over the coming months, paying special attention to the sell part of the statement.

"I never buy at the bottom and I always sell too soon.” – Baron Rothschild

ASX200 Daily Chart

Global Indices

The US market continues to follow our script which still does not bode well for stocks over the coming weeks, although Fridays bounce was a little higher than we would have guessed. The MM view for US indices moving into June remains the unchanged:

1. We still see a correction of close to 5% with the "small cap" Russell 2000 leading the way in both weakness and clarity - another 3.4% from Fridays close would satisfy our target.

2. We will regain our bullish stance for US stocks if / when this correction unfolds with the NASDAQ 100 still looking destined to crack the psychological 6000 area.

The degree of anticipated correction for US stocks potentially coincides with an eventual test of the 5600 area for the ASX200. Last week we wrote:

"It's been a while since we turned on the Bloomberg at ~6am to see the Dow down 200-points, we feel a decent downside washout is becoming rapidly overdue." - we underestimated its potential with the Dow tumbling 372-points on Wednesday.

Surprisingly the US S&P500 has still had a relatively low range for May with 70% of the month behind us, only ~53-points when the average month usually delivers ~70-points. Hence remembering the DOT Theory, which we have explained over recent months, the break of previous monthly low at 2379 should be bearish at least short-term targeting ~2335 i.e. 1.9% below Fridays close.

Russell 2000 Weekly Chart

Two markets which continue to lead the global bull market advance for equities continue to move very nicely in sync, they are the US NASDAQ and European STOXX. We are watching these 2 markets very closely for clues as to the twists and turns this bull market will provide as it matures after rallying for ~8-years.

1. The EuroStoxx is in the classic acceleration phase of its advance from 2678, with a 3-4% consolidation / correction likely soon before the advance continues - this remains why we are comfortably long CYB and HGG. Fresh 2017 highs would not surprise before a pullback.

2. The US NASDAQ is in the classic acceleration phase of its advance from 3888, with a 4-5% consolidation / correction likely soon before the advance continues.

Importantly while we are expecting a correction in global equities over coming weeks we still remain medium-term bullish.

EuroStoxx 50 Monthly Chart

US NASDAQ Weekly Chart

Banks and Financials

Medium-term we remain bullish the local financials index targeting around 14% higher prices but while the current 9.4% correction has now hit our target area the sentiment / momentum remains poor. Also, the US Banking Index is looking 50-50 at best and may easily fall another 8-9%. Hence any more buying of the sector by MM will remain "fussy":

1. Commonwealth Bank (CBA) $80.23 - We are currently on the bid for an additional 2.5% allocation under $79, we see no reason to chase.

US S&P500 Banking Index Monthly Chart

Resources

Happily, no change, we are bullish the resources space looking for the big cap miners to add to last week's strong gains.

RIO looks great and is now under $7 from our +$70 target area for 2017, an excellent performance considering equities have been weak and the underlying commodities have only stopped falling, they have not yet enjoyed a meaningful bounce.

RIO Tinto (RIO) Weekly Chart

Two moves unfolded last week that reinforced our bullish short-term outlook for resources:

1. Even with Brazil's stock market plunging 10% in one day on political turmoil (again) the Emerging Markets Index (EEM) still only closed down less than 0.2% for the week.

2. RIO plus our other resource stocks, finally started playing some performance catch up with the EEM following recent noticeable divergence.

RIO Tinto (RIO) v Emerging Markets Weekly Chart

Conversely the gold stocks did not rally as many bulls would have hoped last week considering the circumstances, with our likely next purchase in the sector, Regis Resources (RRL) actually closing down 3c for the week. We are pulling our buying of RRL ~$3.05 for now as we see a 50% chance of a decent drop under $3.

Regis Resources (RRL) Weekly Chart

Standout technical chart (s) of the week

Today we have selected WFD as our standout chart, not because its bullish or bearish but to outline our methodology at MM. We need both our fundamental and technical views to align before we purchase a stock. In the case of WFD it looked a great buy ~$8.50 but because we are bearish retail globally and especially in Australia, the listed retailers are all too hard at present, including the US facing Westfield that is also hit by rising interest rates.  Time will tell if this decision proved correct but Fridays drop to test 9-year lows makes us comfortable to have no exposure.

Westfield Corp. (WFD) Monthly Chart

Summary

No major change, we continue to believe that US and local stocks can add to their recent gains into 2017, and potentially 2018. However ideally over the next 4-6 weeks we will see decent pullback in stocks, our current thoughts:

1. Buy CBA under $79 - 2.5%.

2. We are watching SEK, CPU, QBE, MQG and HSO carefully.

3. We are no longer buy RRL around $3.05.

Bigger picture we continue to believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open up ~25-points on Monday, we believe the market will struggle to add to these gains.

Potential Investing opportunities for the coming week(s)

1. Buy CBA under $79 - 2.5%.

2. We are watching SEK, CPU, QBE, MQG and HSO carefully.

Potential Trading opportunities for the coming week

One for the very brave! We can still buy TPG Telecom (TPM) around Fridays close of $5.94 but with a definite exit on failure under $5.68 i.e. 4.5% risk. We are targeting $6.50-$7 so good risk reward.

We are looking to buy AWC around $1.80.

Portfolio / Trade Holdings

The Market Matters Portfolio today is below, notably we have reduced our cash holding to 23.5% after recent buying into weakness. We have been more active than usual over recent weeks/ months which is to expected as this major 8-year bull market matures over the coming weeks / months.

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-19th-may-2017/

Weekend report Charts / Chart Pack

The Market Matters Weekend report charts can be found below:

https://www.marketmatters.com.au/chart-pack/

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 20/05/2017. 10.00PM.
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