Market Matters Report / Market Matters Weekend Report Sunday 22nd April 2018

By Market Matters 22 April 18

Market Matters Weekend Report Sunday 22nd April 2018

Market Matters Weekend Report Sunday 22nd April 2018

It’s strange when I started writing this report I felt as if we had seen a pretty big week but its only when you “go under the hood” does the volatility become apparent with the indices themselves pretty quiet e.g. ASX200 +0.68% and the US S&P500 +0.53%. However on a sector / stock level things were very different with resources / energy stocks very strong while banks / financials continued their dismal year e.g. BHP +3.8%, Alumina (AWC) +9.3% but Bank of Queensland (BOQ) -6.3% and AMP -10%. The news flowing out of the Royal Banking Commission is certainly shocking most of us, the question is are the banks / financials being sold down too much?

Today we will again evaluate whether it’s time to consider switching from resources to banks as their comparative performance has definitely been very different over recent years e.g. BHP is now trading more than $2 above WBC after starting 2016 about $15 below it! This is a great example of the benefits of investing in the correct sectors / stocks as opposed to simply buying and holding a “balanced portfolio” i.e. active investing.

BHP Billiton (BHP) v Westpac Bank (WBC) Chart

Last week global equities closed only -6.6% below their 2018 January all-time high, down merely -0.1% for the calendar year, I think most people would agree it feels much worse. If our January view is to prove correct markets should hold together over the come weeks / months and eventually again make fresh all-time highs later in 2018. However, remember the bigger picture:

  • MM is still forecasting a major correction of around -25% in the medium-term hence the risk / reward is still dangerous for the bulls even if we are correct i.e. say +8% upside compared to say a further ~20% downside.

So far in 2018 global stocks have traded in a 10% range between 2009 and 2249, technically we would love to see one final high to sell aggressively but markets don’t always give us what we want! At MM we are seeing some contradictory signals as to what the coming months holds for stocks:


  1. As mentioned previously stocks are following the technical / fundamental picture we outlined in our 2018 Outlook Report which back in January targeted one final high later in 2018 after a Q1 sharp correction – on track so far.
  2. The latest Bank of American Fund Manager survey shows that fund managers are holding their lowest exposure to stocks in 18-months, just like they did in 2016 before stocks surged higher.
  3. The same survey shows that fund managers are holding their lowest exposure to tech shares in 5-years NB we totally agree with this logic in the next few years.
  4. The influential Australian banking sector is down -5.8% for the month and -11.1% for the year, a reasonable bounce is certainly not out of the question.


  1. As the US reporting season kicks off 85% of stocks which have already faced the music have beaten expectations by an average of ~7% but the market has struggled to make decent gains.
  2. Fund managers still remain 20% overweight tech stocks i.e. the FANGs. Still a crowded position that scares us a little.
  3. Increased regulatory pressures on the US tech sector is likely to be painful and expensive, just look at our banks / financials.
  4. Stocks which beat expectations are rallying as expected but those who miss are being smacked noticeably harder i.e. the markets positioned for a stellar US reporting season.
  5. We’ve had US tax cuts, a loosening of financial regulations followed by excellent US corporate performance, what’s left to push stocks higher?
  6. Bond yields are rising fast offering a distinct alternative to stocks, especially for retirees looking purely for income.


  1. US fund managers are now holding about 29% in stocks compared to 41% in March, a big fall compared to the anaemic reaction by the market but it’s now only at its long-term average.

MSCI Global World Index Chart

Following Fridays 201-point fall by the Dow the ASX200 is poised to open on Monday around 5850, still below the important psychological 5900 area.

  • The market internals turned positive 2-weeks ago but following an initial failure at the 5900 area a pullback back towards now 5800 seems a strong possibility.
  • The momentum of the advance from the 2018 lows in March has not been impulsive enough to offer much excitement for the bulls.

ASX200 Chart

Moving onto US stocks the picture is similar although it feels like they are experiencing more volatility, this remains untrue in reality with the Volatility Index (VIX) closing at 16.9 on Friday night, well below its historical average of 19.

Our view moving into Q2 is unchanged, we are looking for US stocks attempt a rally to fresh all-time highs – we are now 50-50 whether they can break above Januarys top, currently 9% away.

When we look at the longer-term picture for 2 of the major US indices a couple of points standout to us:

1. The broad Russell 3000 interestingly formed very similar topping patterns before its last 3 major corrections in 2007, 2011 and 2015 i.e. a failed attempt to push strongly to fresh all-time highs, following a warning correction, resulting in a relatively small ¼’ly range which closed poorly (a classic “DOJI” to the technical analysts out there) – see below purple circles.

2. The Dow is tricky just here but whatever way we look at it technically we will be sellers if new highs do unfold in 2018 i.e. around 9% higher.

NB The obvious risk remains that this time we may get no warning and Januarys high is the start of the next large correction.

US Russell 3000 Chart

US Dow Jones Chart

MM is now only holding 13% and 2.5% cash in our Platinum and Income Portfolio’s respectively with a noticeable increase in our Growth Portfolio last week following the flagged profit taking in RIO Tinto (RIO) and Alumina (AWC).

MM’s current plan remains to significantly increase our cash levels through 2018, whichever way the market moves.

1 Enjoying the volatility within the resources sector

Prior to 2016 MM held almost zero exposure to the resource sector as we saw a painful bear market unfold for most of the sector e.g. BHP fell -69.8% and RIO -58.9% - we in fact put out some very unpopular bearish calls on the likes of BHP. However things have turned nicely as was illustrated perfectly when the Bloomberg Base Metals Index broke its multi-year downtrend in 2016 – this upturn in commodities has coincided with increasing bond yields and rising signs of inflation.

Moving forward while we remain bullish base metals / resource stocks investors should remember they are volatile beasts which regularly experience significant corrections e.g. Since early 2016 heavyweight BHP has retraced -18.7%, -21.1% plus recently -12.5%. Our plan at MM with resources remains to buy weakness and sell strength – please excuse the cliché.

Bloomberg Base Metals Spot Index Chart

  • Our view is the current news assisted advance by base metals is close to completion, we can see another 2-3% upside but moving forward we believe another 10% correction is looming.
  • Hence last week we took solid profits in RIO and AWC.
  • Our remaining positions in BHP and OZL are showing reasonable profits at present with our current ideal sell targets at $32.50-$33 and $10 respectively.

*Watch for alerts moving forward.

Bloomberg Base Metals Spot Index Chart

2 MM and the $US

Coming back to our 2017/8 Outlook Reports, one of our standout contrarian views was the $US would continue its decline before finding a major low around the 88 level. So far this has unfolded perfectly with the $US declining 14% from its late 2016 high, just when most analysts were continually bullish because of rising US interest rates. Now these same analysts have become bearish the $US, just in time for our anticipated 8-10% decent bounce.

  • We believe the $US is either close to / or has made a significant low, hence we are bullish the $US.

MM have allocated 3% of our Growth Portfolio into the $US using the Beta Shares ETF (USD.AXW) we intend to add an additional 2% if the $US Index spikes down below the 88 support area.

NB This is what we anticipate will be one of many views that will be “played” via the diverse array of available ETF’s.

$US Index Chart

Beta Shares $US ETF Chart

If this bullish view for the $US proves correct we are likely to see the decent correction in resource stocks which we are targeting (see Point 1 above) as the inverse correlation between the two has been fairly solid over recent years i.e. $US down and resources up – no great surprise as the commodities are denominated in $US.

$US Index v Bloomberg Base Metals Index ETF Chart

3 Time to switch / buy banks?

Its easy to get caught up in the short-term noise when both investing and trading. If we go back only a few years the relative outperformance by RIO over CBA has been huge, similar to the first chart in this Weekend Report which shows BHP making Westpac look like an investing “dog” over the last 2-years.

  • However CBA and RIO have been trading around the same price in 2018 just as they were post the GFC – it’s all a matter of timeframes.

To us the 2 big questions are:

1 Has the fallout to our banking / finance sector from the damaging Royal Banking Commission finished?

2 Will the resources have another significant pullback, or should we chase them higher as global inflation raises its head?

We believe these 2 huge questions should be answered independently at this point in time:

1 Australian banks / financials

We believe they are good value at current prices but are unlikely to rally hard in the near future. We believe their dividends can be maintained assuming that unemployment does not increase dramatically which would surprise many including ourselves. With CBA paying 5.97% fully franked to NAB at 6.98% fully franked its very hard to imagine significant downside from current levels.

  • For the sophisticated investor we could consider buying banks and selling calls around 5% out-of-the-money to increase potential yield and to give some downside protection.
  • For the average investor we like banks into weakness from here but remember slowly but surely.

2 The resources

At MM we believe we have seen the bottom of the multi-decade bear market for interest rates / bond yields i.e. our view is interest rates and inflation are going to rise. However at MM we believe that a decent pullback is just around the corner for resources, we intend to continue with our plan to take some profits off the table and sit back and wait for the next exciting buying opportunity.

*Watch for alerts.

Commonwealth Bank (CBA) v RIO Tinto (RIO) Chart

4 Bond yields continue to rally

It’s easy to get concerned when interest rates / bond yields are rallying above those on offer by stocks as basically its fairly new to most of us when we look at say US stocks -  NB it’s definitely not yet occurring in Australia.

US 10-year Bond Yields Chart

In the US the S&P500 is yielding around 2% pa, not that exciting compared to say CBA on almost 6% fully franked. However US bond yields have now soared above that on offer from stocks meaning stocks need to rally to be attractive compared to the risk free returns on offer by fixed interest i.e. From an asset allocation perspective, this has led to concern that bonds now offer legitimate competition to stocks for the first time in many, many years.

Rising interest rates historically don’t have a negative impact on stock markets, but with yields being so low for so long, we believe it’s very likely this could cause a psychological shift in investor sentiment, especially considering the magnitude of the rally in stocks during this cycle – or at least another painful knee-jerk reaction.

We can certainly see interest rates as one potential / logical catalyst for a sizeable share market correction.

S&P500 dividend yield v US 10-year Bond Yields Chart

5 Telstra (TLS) remains at levels not seen since 2011

We‘ve had TLS on our radar beneath $3.20 since we took profit on part of our holding around $3.65 in December, in hindsight I wish we had not been as pedantic and had sold it all! Everyone certainly hates TLS today but its valuation of 10.3x while paying a 7.14% fully franked yield is catching our eye.

The stock has more than halved since mid-2015 but it’s had some significant bounces along the way – remember my recent ping pong ball / staircase analogy.

  1. The 2 largest rallies by TLS of +17.6% and 13% started in April 2016 and April 2017 respectively.
  2. Over the last 10-years TLS has rallied on average +6.7% between April and July, historically equity markets weakest time.
  3. With TLS going ex-dividend around March perhaps a large % of the March dividend goes back into the stock.

Also of relevance to our thought process is the telco sector generally outperforms in bear / weak markets.

Out on a limb timewe are bullish TLS beneath $3.10.

Telstra (TLS) Chart


  • We remain net positive equities for the coming weeks / months with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to take profits into strength in the resources sector.
  • We may average one of our bank positions and / or Telstra.

Catching our eye in Australian stocks / sectors

1 Origin Energy (ORG) to test $10

ORG has certainly had a great year rallying +26.4% as the oil price has made a concerted assault on the $US70/barrel level.

We like ORG for fresh highs in 2018 before a ~15% correction – similar to our view for BHP.

Origin Energy (ORG) Chart

2 Newcrest (NCM) how the mighty have fallen!

NCM has the unfortunate characteristics to be mentioned in the same breath as QBE and Telstra having fallen -15.2% this year when say rival Evolution Mining (EVN) has rallied +32%.

Considering our view that the $US is looking for / found a low we have no interest chasing gold stocks at present which usually move in the opposite direction to the $US.

Short-term we can see NCM testing the $18 region.

Newcrest Mining (NCM) Chart

3 AMP – what a disaster!

At MM sometimes we are guilty of trying to catch the proverbial falling knife, clearly often a dangerous game e.g. we are “sniffing” around presently Telstra (TLS).

However, this one’s easy – we still have no interest in AMP until further notice.

AMP Ltd (AMP) Chart

“Shopping List”

Below is our revised list of stocks plus ideal levels which are close after last week’s moves, we currently have only 13% of the MM Platinum & 2.5% of the Income Portfolio in cash, hence we are careful buyers considering our negative medium-term outlook:

  1. Telstra (TLS) under $3.10 is looking attractive to us, this certainly puts us in the minority.
  2. Commonwealth Bank (CBA) around $71.00 and / or National Australia Bank (NAB) around $28.
  3. A2 Milk (A2M) around $11.50 – a fairly aggressive play considering the stocks high valuation.

“Selling List”

  1. BHP Billiton (BHP) around $32.50.
  2. OZ Minerals (OZL) around $10.

Standout technical chart (s) of the week

We remain bullish copper looking for a “pop” towards the $US340/lb area for an excellent selling opportunity – a very similar set up to crude oil before its 10% rally last week.

Hence we remain comfortably long OZ Minerals (OZL) at this point in time.

Copper Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. Our most likely play (s) early next week:

  • Average our Telstra (TLS) holding under $3.10.
  • Average one of our banking positions.

We remain committed to our view to take profits of our resources positions into strength.

  • Sellers of BHP and OZL into strength.

Trading Opportunities on our radar

We remain committed to our bullish $US and bond yields view hence another “out on a limb” trade this week:

  • Buy QBE Insurance (QBE) targeting at least a 10% rally.

QBE Insurance (QBE) 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 21/4/2018. 4.00PM.
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