Market Matters Report / Market Matters Weekend Report Sunday 22nd December 2019

By Market Matters 22 December 19

Market Matters Weekend Report Sunday 22nd December 2019

Market Matters Weekend Report Sunday 22nd December 2019

The ASX200 closed up last week courtesy of a storming session on Monday but for the rest of the week we drifted lower while global indices continued to March higher – US stocks made fresh all-time highs again on Friday, taking their weekly gain to +1.7%, unfortunately noticeably outstripping the performance by local stocks. We feel this domestic underperformance was triggered by strong Australian employment data which reduced the belief towards a rate cut in February which in turn sent the $A  back up towards 69c – any bounce by the $A has been a real headwind for local equities over recent months.

Three simple statistics to remember as we approach the Christmas week:

1 – The ASX200 has already matched its average post GFC bounce form its December low i.e. 282-points.

2 – The market regularly ends a calendar year very close to its high, potentially the half day on Tuesday 31st.
3 – January is on average a negative month but with large variances while February is historically the second strongest month of the year.

Hence if we get a squeeze into the months end MM will consider reducing slightly our market exposure, either by selling stock (s) or rebuying into the bearish ETF (BBOZ).

MM remains mildly bullish the ASX00 from current levels.

On Friday night the US S&P500 gained +0.5% closing a few ticks below its all-time high but the SPI Futures are calling the ASX to fall -0.4% on Monday – again a strong session by the $A appearing likely to weigh on Australian equities.

Today we have penned a slightly shorter updated version of last Weekend’s Report as we work on our 2020 Outlook Piece which will hit members inboxes in early January.

This will be the final weekend note for the year while daily notes will continue as normal until Christmas Eve. We’re then taking a break with reports recommencing back on Monday 13th January.

ASX200 Index Chart

Global Indices

US stocks again made fresh all-time highs on Friday night as the momentum from the US & China agreed “Phase 1” trade deal continues into Christmas.

From a risk / reward perspective we wouldn’t be chasing the current fresh highs next week in US stocks, at this stage we still believe another pullback towards 3070 is a buy technically, not a panic sell.

US S&P500 Index Chart

In our opinion the clearest “Controlling Chart Pattern” for global stocks is the US small cap Russell 2000 which looks destined to make fresh all-time highs towards the 1800 area, or +8% higher.

MM is bullish US stocks while the Russell 200 remains above 1590, or 5% lower.

Hence in our opinion investors and traders alike should be looking to buy pullbacks not pick tops like so many market pundits continue to do.

US Russell 2000 Index Chart

Metals & Resources remain solid

Copper edged higher last week in the process impressively not giving up on any of its recent gains.

MM remains bullish copper initially targeting a rally 6-8% higher.

Copper Futures ($US/lb) Chart

Major diversified miner RIO Tinto (RIO) has now rallied almost 25% from its August low, a strong performance which we believe has further to go as its chunky dividend in Q1 of 2020 is likely to attract some buying from the yield hungry Australian investors.

MM remains bullish RIO with our initial target 5-6% higher.

However we firmly believe investors should be prepared to take some $$ from the table when the resources sector gets “hot”, simply consider RIO since its major swing low back in mid-2016, only 3 ½ years ago – the stock’s corrected ~20% on four occasions allowing the patient almost opportunistic investor excellent entry levels i.e. during a strong bullish rally the stocks still corrected ~20% more than once per year.

RIO Tinto (RIO) Chart

Inflation & Bond Yields could surprise many in 2020/21.

MM has been discussing our view that industrial metals were looking strong into 2020 which has panned out over the last month. Last we added the Agricultural Index to the mix which is also now looking bullish in our opinion, if both the Agricultural and Metal complexes are going to rally then inflation is almost definitely going to follow higher.

Rising inflation will eventually take bond yields along for the ride.

CRB Index (All Commodities) Chart

BBG Agricultural Index Chart

US bonds are well below their lows of 2013 / 2014 which illustrates how impressive the rally has been by US stocks, sure it’s been supported by consistently low interest rates but not by plunging interest rates like in Australia. US stocks are enjoying sitting in the eye of the perfect storm with corporates performing strongly while bond yields remain close to their all-time low, rising inflation could easily become a “spanner in the works”.

If / when bonds turn lower / yields higher it’s going to create a major headwind for stocks.

The US Fed is currently flooding the market with liquidity in an attempt to avoid a rise in short-term borrowing costs – the Feds policy appears to be “there’s no such thing as too much $$”. For now we believe it’s simple: don’t fight the tape, or Fed, makes 100% sense but one day the global economy will have  to stand up on its own 2-feet but that day of reckoning might be still years away, investors have forgone huge profits by being scarred of “what ifs” over recent years.

US S&P500 v High Yield Bond (Junk Bond) ETF Chart

For now, bond yields / interest rates are extremely supportive of equities, term deposits are on the whole yielding less than 1/3 of CBA shares before we even consider the benefits of franking credits. At MM we feel bond yields will increase in 2020 the tricky part is by how much; a small increase will have little impact on their comparative yield but stocks / sectors who are priced for further falls in rates / yields could be in for a tough year.

If MM is correct and bond yields are “looking for” a major low, then portfolios should be structured in favour of value as opposed to growth / bond proxies.

Australian 3-year Bonds v Official RBA Cash Rate Chart

It remains important subscribers understand that while this medium-term macro-view is panning out ok, as the resources continue to garner a solid bid tone, the chart below illustrates there has been no meaningful deviation from the strong trend of recent years  i.e. Growth outperforming Value as they’ve fully embraced lower bond  yields.

MM believes the Growth stocks will give back a significant part of their relative outperformance moving forward.

S&P500 Value v Growth Chart

As we mentioned earlier a strong $A has becomes a short-term headwind for the ASX200, unfortunately while we are bullish the $A over the year ahead there’s no indicators helping us map out a decent risk / reward path into January but if we are correct for 2020 it could be a relatively tough year for the ASX200.

MM believes the $A is forming an important low, our medium-term target remains the 80c region.

The Australian Dollar ($A) Chart

The gold price in $A has only fallen ~5% while major gold ETF’s are down ~15%, the Australian Gold Sector has basically coped it far worse than anybody! We still believe that gold in $A will make fresh highs around 6-8% higher implying the local sector will regain some of the recent declines, clearly in hindsight Australian gold stocks had gotten way ahead of themselves when gold was rallying and bond yields falling.

MM still believes there will be a better time to exit / reduce our gold exposure.

Gold in $A Chart

1 – The MM Platinum Portfolio

No change to our Platinum Portfolio last week, our cash level remains at 7.0% -

This is a fairly aggressive long position for MM but while we are bullish moving into 2020 there will be plenty of opportunities to tweak positions in an effort to add alpha / performance to the portfolio.

Last week saw our position in Service Stream (SSM) soar +15% while the rest of the portfolio traded in a fairly tight range. None of our holdings are currently in areas where we want to close them but a sharp rally into the years end could quickly change things.

Subscribers should also remember we are considering re-entering the BBOZ ETF into weakness, ideally below its $9 swing low – on Friday it closed over 7% below where we exited earlier in the month. 

BetaShares Leveraged Bearish ETF (BBOZ) Chart

2 MM Income Portfolio

No changes last week in our Income Portfolio leaving our cash level at 4.5% :

While we remain very conscious that bond yields appear to be looking for a low most local Term Deposits are yielding under 1.5% making cash an unattractive asset class for many, especially those trying to live off their savings. Hence MM is likely to continue to look to equities / hybrids for yield while tweaking our portfolio towards value stocks paying attractive sustainable yield as opposed to the more classic yield play / defensives.

Australian RBA Cash Rate Chart

3 – MM International Equites Portfolio

No change for our International Portfolio last week leaving our cash position at 37% :

A couple of our stocks have really outperformed on the global stage over recent months, since we went long - Apple (AAPL US) is up over +40%, Samsung (005930 KF) + 20% while JP Morgan (JPM US),  Bank of America (BAC US), Janus Henderson (JHG US), United  Health (UNH US) and Barrick Gold (Gold  US) have all gained over +10%.

We’ve been a touch slow in hindsight increasing our exposure to International equities but with Christmas only a few days away only one stock still feels worth chasing early next week – Hong based e-commerce goliath Tencent (700 HK).

MM is bullish Tencent (700 HK) at current levels.

Tencent (700 HK) Chart

4 - MM Global Macro ETF Portfolio

No change to this portfolio, our cash position remains at 51.5% :

We’ve been hoping that bond yields will make fresh lows enabling us to fade the move, but this scenario is slowly feeling less likely but at this stage patience remains the better form of valour – just!

US 10-year Bond Yield Chart

Moving into 2020 MM believes the Russell 2000 small cap ETF will play catch up with its more expensive larger indices, we feel the elastic band illustrated below has stretched too far i.e. its time to buy the Russell 2000 and sell S&P500.

iShares Russell 2000 ETF:

MM is looking to buy the IWM ETF.

S&P500 v Russell 2000 Chart


MM is looking to buy the IWM ETF & Tencent (700 HK)

Chart of the week.

It’s easy to be bearish and scarred of equities into 2020 but all the charts say otherwise, sure it looks likely to be a tougher and more volatile year than 2019 but with central banks throwing the  kitchen sink at markets it’s a brave man who says they will lose without a “Big Fight / Last Stand”.

Technically the Euro Stoxx 50 looks set to rally at least 6-8%.

Euro Stoxx 50 Chart

Investment of the week.

Hamish Douglass’s investment firm MFG has performed strongly over the last year along with the international markets where it has focused its investments, we remain bullish both moving into 2020.

MM is now bullish MFG initially looking for 10-15% upside.

Magellan Financial Group (MFG) Chart

Trade of the week.

The second time in a few weeks that AVH finds itself in this section, the risk / reward looks good as the stock looks poised to pop higher next week.

MM is bullish AVH initially targeting 15% upside.

Avita Medical (AVH) 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.

Have a great day!

James & the Market Matters Team


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, or after the session when positions are traded.


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