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

By Market Matters 22 July 18

Market Matters Weekend Report Sunday 22nd July 2018

Market Matters Weekend Report Sunday 22nd July 2018

It’s hard to remember such a quiet week for stocks in terms of underlying movement while relatively major news on both the macroeconomic and stock specific level was crossing the wires. The Donald Trump inspired US – China trade war now has taken on a second dimension with currency manipulation being thrown into the mix. Yet again stocks have ignored any probable escalation of the aggressive posturing as the results of the last +9-years bull market remains firmly in investors / traders’ minds i.e. selling weakness = losses. Interestingly President Obama challenged China on trade and currency issues back in 2011 – perhaps we’ve found something that Trump and Obama agree on!

On Friday the Chinese Yuan plunged to its lowest level for over a year leading to yet another outburst by President Trump, via Twitter as usual, accusing both China and the EU of “manipulating their currencies & interest rates lower” – a lower currency makes a countries exports more competitive. As the emphasis in rhetoric shifts from a trade war to a currency one we continue to ask ourselves the same question:

  • “Are stocks incredibly strong, or just worryingly complacent, as they continue to discount potentially huge market risks?”.

At MM due to the underlying positive market sentiment we still only advocate selling of strength in indices / stocks i.e. sell strength, not weakness. However, like all trends this will eventually end and the so called brave who stand up and buy the falling market will be trampled by the stampeding bears, its just a matter of time but as we regularly say picking tops is the hardest part of the stock market cycle to identify, importantly at MM we continue to believe the risk / reward for the buyers is now very thin on the ground.

  • Famous value investor Warren Buffett is sitting on 25% cash hence although as active investors we look at markets slightly differently to the “Oracle from Omaha” he, like MM, is seeing few decent buying opportunities at current levels.

Clearly Mr Buffett is remembering his most famous investing quote as the current bull market slowly approaches its 10-year anniversary - “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett when discussing his successful approach to markets.

On Friday we realised a small profit on our first venture into ETF land, in this case the purchase of the BetaShares $US ETF, MM now holds 25% of our flagship Platinum Portfolio in cash plus 2 negative facing positions via ETF’s to the US and local markets. Its imperative that subscribers understand that we anticipate our portfolio’s will struggle to match the ASX200 short-term, especially if equities continue to climb the current wall of worry.  Looking at the big picture missing a few % on the upside when we believe at least a 10% correction is a major risk sits comfortably with our investment team – its all boring risk / reward.

We remain in cautious “sell mode” but our high cash levels plus negative facing positions does allow us to take long positions if the risk / reward on offer is compelling.

ASX200 Index Chart

The recent resilience in the face of adversity by global equities, with the exception of the emerging markets, on balance makes us feel that US stocks in particular can make fresh all-time highs in 2018, our best guess is ~3-4% higher. Ideally a pop to new highs is likely to stop many bears out of their positions while in our opinion presenting an excellent risk / reward selling opportunity.

  • MM is likely to increase our short ETF position (BBUS) if US stocks rally 3-4% higher.

Technically a clear breakout by the S&P500 above its all-time high at 2872 followed by weakness back under 2825 technically targets a decline to well under 2600 / almost 10% lower - in our opinion this would be the optimum time to sell some initial weakness, a move that may hurt the “crowd” which appears to currently believe that buying pullbacks is the “stairway to heaven”!

US S&P500 Index Chart

1 The Chinese Yuan (RMB) devaluation.

On Friday the USD / Chinese Yuan soared above 6.80, its highest level in 12-months. The massive game of brinkmanship between the world’s 2 largest economies is escalating but markets remain sanguine as to the outcome, I believe this may be naive because China plays a long game planning for the future generation(s) while western governments rarely look past the next election, a recipe that can easily fail to provide an ideal outcome.

  1. Back in August 2015 when the Yuan fell so hard in one month we saw the Volatility Index (VIX) shoot up over 50, around 400% higher than todays complacent sub 13 reading and we’ve now actually seen 2 consecutive huge monthly moves lower in the Yuan!
  2. In August 2015 the fall in the Chinese Yuan led to a 11% rout in US equities over just 2-weeks, whereas on Friday the market rotated in a tight 1% trading range

The above 2 facts illustrates perfectly the confident nature of today’s stock market, again we ponder if 9 ½ years of almost uninterrupted strength has investors forgetting that equities can and regularly do fall.

NB One of the main catalysts which led to the October 1987 crash was arguments between the US and Germany around their respective currencies but I guess that is over 30-years ago - however the clear point is we are amazed this time around the Yuan’s aggressive devaluation is being so blatantly ignored by most market players.

Chinese Yuan / RMB Chart

US Fear Index (VIX) Chart

2 The yield curve contraction

In a number of reports recently we have discussed why many economists / market players are watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends.

  • Historically stocks will correct when / if the US yield curve inverts i.e. the move will become self-fulfilling because so many market players are conscious of it.

Hence we will maintain this small section in the Weekend report until further notice – the current differential is +0.3%.

US 2/ 10-year yield curve Chart

3 Will the small caps continue to outperform the ASX200?

During the last 18-months the local smaller cap space has certainly been the place for the highest returns and we saw this illustrated perfectly last week as AfterPay (APT) soared – for the record a stock MM underestimated as we feared regulatory intervention of a company who essentially promote the buy now pay later mentality. We wonder  if a bank had come out with the same idea how it would have faired under the heat of the Royal Commission.

We believe that the relative performance has probably now ran its race and the 14% bounce in CBA shows that investors have started to let deeper value present itself in the more traditional vehicles for retail investors.

At MM we believe strongly that we are now in an ideal market for “active investors” who need to remain open-minded to opportunities from all sectors / areas of the market not just the high flyers of the last few years.

Vanguard MSCI Australian Small Caps v ASX200 Index Chart

4 Opportunities a $US correction may present

At the end of last week we saw the $US make fresh highs for 2018 only to then fail, we now see the $US falling back towards the lows of June, before potentially regaining its bullish footing.

  • MM took profit on our $US ETF on Friday and will consider re-entering into any ongoing weakness.

The markets had a deluge of news to digest at the end of last week with the falling Yuan accompanied by an aggressive Trump, it feels like a good time to be on the sidelines.

Economists started the year very bearish the $US, only to switch to a bullish stance as the herd often does as a market rallies against them, hence a pullback maybe deeper than many anticipate – crowded trades often end in tears.

Undoubtedly one crowded trade on the Australian market is long $US earners and its helped propel the likes of CSL Ltd (CSL), Cochlear (COH) and Macquarie Bank (MQG) to fresh all-time highs while also helping our gold sector which has seen the gold price in $A terms rally steadily compared to a sideways market for the precious metal priced in $US.

We like to be prepared and if a period of $US strength causes a selloff in the quality $US earners it would be a pullback MM will seriously consider buying:

  • MM likes CSL ~$192 and MQG below $120.

The $US Index Chart

At the end of last week we pointed out that gold in $A looked to have topped out and the price action over the last 5-days in the local gold sector supports our view – Evolution Mining (EVN) -9.7%, Newcrest -6.3% and Northern Start -5%.

  • We have interest in Regis Resources (RRL) and Northern Star (NST) in the local gold sector but we would want a further 10% correction - EVN is off the radar for now after last weeks average report.

Gold in $A terms Chart

5 Emerging markets rotation?

Over the last few months there has been a few days when the strength in the local market was extremely hard to comprehend and the aggressive rotation of funds out of Emerging markets is the best explanation we can find.

Along with the $US, market pundits have not enjoyed 2018 when it comes to the EEM as they were bullish - since the end of January the 19% correction is likely to owe a lot to the many players being caught way too long.

The main problem for the EEM has been a strong $US creating refinancing issues for the EEM countries with weakening currencies, unfortunately our concern is too many players seem to be looking for buying opportunities as opposed to hoisting up the white flag, often a sign of more falls to come.

While technically we could be a buyer of EEM from a risk / reward perspective the fundamentals “feel wrong” hence its unlikely that we’ll be chasing EEM ETF’s this week, even though we can see short-term weakness in the $US.

Emerging Markets Index Chart

6 Nickel stocks are on the MM radar

The Nickel price has been correcting nicely since its highs last month with our ideal target ~3% lower but a rally in the $A may amplify the impact on the major nickel producers. The 2 stocks we have been watching in 2018:

  1. Western Areas (WSA) $3.33 – the stock has already corrected ~17% but our ideal target is closer to $3, another 10% lower.
  2. Independence Group (IGO) - the stock has already corrected ~18% but our ideal target is closer to $4.20, again another 10% lower.

Both of our target areas look miles away but these are volatile stocks and a break under the lows of 2018 could easily accelerate any decline providing us with a value and technical buying opportunity.

Cash Nickel Price Chart

Independence Group (IGO) Chart


Again no major changes although following the recent solid gains by the ASX200 / banking sector it continues to be hard to be negative local stocks, just yet.

  • We remain net positive equities for the coming weeks (just) while the ASX200 can remain above 6250, and especially 6140.
  • We will continue to slowly increase our cash position and are still firmly wearing our “sellers hat”. 

“Shopping List”

  • We still need decent weakness in $US earners MQG and CSL for example before we start buying.
  • Similarly we are interested in a number of resources stocks into continued weakness.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.50-$16 but we may reduce this large position into initial strength above $15.
  • Janus Henderson into a further strength between $44.50 and $45.
  • Orocobre (ORE), ideally into any reasonable strength, or potentially a switch into Kidman Resources (KDR) – see Trading Opportunities 2 weeks ago.

Standout technical chart (s) of the week

Last week BHP fell just over -1.2% closing below $33, interestingly it feels much stronger while our selling around $34 still looks on point.

  • BHP in $US, where it trades decent volume on the ADR market, still looks poised to fall ~10% - similar to the nickel stocks WSA and IGO.

At we remain keen to buy BHP but are comfortable being fussy.

BHP Billiton (BHP) in $US Chart

Trading Opportunities on our radar

MM has been bullish the telco sector over recent weeks and the trend has been positive with the sector up over 5% this month.

We like both Vocus (VOC) and TPG Telecom (TPM) as trades but have focused on TPM today.

  • MM is bullish TPM targeting at least $6 with stops under $5.50 – ok risk / reward but not a blockbuster.

TPG Telecom (TPM) Chart

Investing on our radar

Today we have 2 stocks which is a surprise considering we are in “sell mode” :

1 A2 Milk (A2M) $9.71 – we are long A2 Milk but having halved our position recently ~$11.40 are in a position to average weakness. We are buyers of A2M between $8.50 and $9.

2 Healthscope (HSO) $2.23 – HSO was under a takeover offer at $2.36 by BGH before a second bid was tabled by Canada’s Brookfield at a higher valuation but HSO has rejected both.

  • We like HSO as a risk / reward buy below $2.25 with stops under $2.10 targeting over $2.60.

A2 Milk (A2M) Chart

Healthscope (HSO)  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 Sunday!

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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