Market Matters Report / Market Matters Weekend Report Sunday 22nd October 2017

By Market Matters 22 October 17

Market Matters Weekend Report Sunday 22nd October 2017

Market Matters Weekend Report Sunday 22nd October 2017

The ASX200 enjoyed another great week gaining 92-points / 1.6% with the banks / financials the clear powerhouse of the advance as global economic data remained strong implying higher interest rates moving forward. Although we took a nice profit on CYBG Plc (CYB) last week we intend to run our major overweight exposure to financials at this stage, while we remain buyers of weakness of the resources if / when it unfolds. The local markets powerful 11-day, 4.8% rally appears to have caught many fund managers napping and painfully underweight / short local stocks with any pullback shallow at best, on a global level we’ve stood out as the clear winner for a pleasant change i.e. over the equivalent period the UK FTSE is +0.2%, the German DAX +0.3%, Hong Kong’s Hang Seng +0.1% and the US S&P +1.1%. Simply too many people were positioned the same way, looking for lower levels before purchasing local stocks which was illustrated perfectly when strong buying appeared  into any daily weakness in September / early October.

We are bullish the ASX200 at MM targeting a decent break over 6000 in 2017 / early 2018 assuming the 5800 area holds, however short-term we can see a begrudging pull back towards the 5850 area.

Although our preferred scenario was a pullback towards 5525 to be aggressive buyers we still purchased Challenger (CGF), Aristocrat (ALL), Santos and Regis Resources (RRL) when optimum levels presented themselves because as investors you must remain openminded. Eventually the market became like a bottle of champagne that’s been shaken too much with the cork finally popping hard! I’m actually getting excited writing this report, even on a sunny Saturday morning, as I can see so many great opportunities looming over the coming months.

The list of major winners / losers again illustrated last week’s strength within the market as the winners notched up another victory, this time 9 to 2 i.e. when we consider stocks in the ASX200 which moved by over 5% for the week:

Winners : Challenger (CGF) +8.9%, Origin Energy (ORG) +5.3%, QBE Insurance (QBE) +5.9%, OZL Minerals (OZL) +5.7%, James Hardie (JHX) +5.8%, Boral (BLD) +5.3%, Fairfax (FXJ) +6.6%, AGL Ltd (AGL) +5% and Vocus Group (VOC) +16.6%.

Losers : Crown Resorts (CWN) -5.7% and Lend Lease (LLC) -9.6%.

When we look at the winners above, plus some other moves during the week, it feels that investors are still in “bargain hunting” mode, buying stocks which have underperformed / pulled back from their recent highs – with Vocus (VOC) leading the way last week rallying almost +17%.

Below is the ASX200’s “trading patterns” which we believe are now controlling the local market as we move into the back-end of October, an eventual break over 6000 now feels almost inevitable moving forward:

  1. Following its strong 272-points advance from 5652 the ASX200 is bullish while it remains over 5800.
  2. Medium-term we still have a Neutral Pattern between 5582 and 5956 – 37 weeks to-date.
  3. October’s range to-date is 5650-5924 i.e. 274-points, almost exactly matching Mays range when the market experienced a sharp decline.

ASX200 Daily Chart

We have touched on the banking sectors strong rally recently and its obviously always important to have a clear handle on this dominant sector within the Australian market. Let’s consider how banks operate their important loan books:

  • Banks borrow short (cash on deposit) and lend long (a mortgage being the classic example).
  • Hence banks benefit if the spread on interest rate duration increases, technically referred to as “ yield curve steepening”.
  • Once bond markets calmed after the GFC we have slowly witnessed US 2-year bond yields increase, primarily from around 2013, while longer dated bond yields have fallen i.e. yield curve flattening which banks shares theoretically hate.
  • The missing ingredient for the long duration bond yields to rise, which is the ideal scenario for banks, has been inflation.

Currently inflation is remaining subdued globally although it has raised its head in the UK which helped our CYB position. The US Fed is talking up the “inflation is just around the corner story” and the market likes it but if we finally see “widening of the yield curve” banks could move significantly higher, conversely if investors lose confidence that inflation will eventually pick up the recent strong gains by global banks could evaporate quickly – hence at MM we are watching global inflation closely.

US 2-year, 10-year & 30-year bond yields Weekly Chart

One thing the last 2-weeks has reminded us is how the ASX200 is very capable of running its own race, whether it be rallying on its own or ignoring global gains which unfortunately it has often be the case since the GFC. However one characteristic our market regularly sticks to like clockwork is its seasonality patterns. As we have pointed out a few times in recent reports our banks love October which makes sense considering the large dividends on offer in November from the likes of ANZ, NAB and WBC – it also helps with the Christmas rally because these dividends get paid out into relatively thin December markets. Let’s simply consider CBA’s performance in October since the GFC: 

  1. The average return since the GFC for CBA in October is +3.8%.
  2. CBA closed positive an amazing 87% of the time.
  3. On 3 out of the 8-years CBA closed up well over 6% i.e. +6.7, +7.9 and +10.6% respectively.
  4. Currently CBA is up +4.2% this month, above the average but by no means extended. Also, if we take out the one month CBA was negative in October the average gain is actually 5%!
  5. Seasonally CBA remains strong into the first 1/3 of November.

Hence at this stage we see no reason to reduce our banking exposure, we may potentially look to switch out of one of the ex-dividend banks in November into CBA / Bendigo for next year’s dividend targeting some mid-month weakness to add value to the switch.

Commonwealth Bank (CBA) Seasonality Chart

We looked closely at the $US last week with a special reference towards our position at the time in Regis Resources (RRL) and general sector rotation. We have now adjusted our view on the $US which is likely to have implications towards our investing over the coming weeks i.e. we are now short-term bullish the $US targeting fresh highs for the month, with an ideal target of 1.5% to 2.5% higher. This may sound minor in the scheme of things but it potentially will assist with some buying targets within the resources space i.e. a higher $US usually leads to lower commodity prices and related stocks – remember a mere 3.5% rally in the $US led to a 18% fall in RRL. Our current targets that may benefit from this move if it unfolds:

  • RRL around under $3.30, BHP around $25.25 and OZ Minerals under $8.30.

Note of the above BHP is considered a medium-term investment and RRL / OZL more short-term.

The $US Weekly Chart

Australian sectors

Resources

Australian large cap resource stocks have remained choppy recently with the general trend “sell iron ore and buy base metals” continuing unfortunately we have not yet to found a good risk / reward opportunities with the exception of Independence Group (IGO).  There is no change to our overall outlook but the short term strength in the $US may assist us with some buying levels:

1. We are positive the reflation trade hence are keen on the likes of BHP and RIO into weakness but still do not plan to chase strength.

2. We currently prefer the base metals over the more volatile iron ore sector.

We are specifically looking to buy BHP around $25.25 and Oz Minerals (OZL) under $8.30.

BHP Billion (BHP) Weekly Chart

Oz Minerals (OZL) Daily Chart

Energy

We remain bullish crude oil for now, especially with Iran back in the news who are responsible for ~11% of OPEC production - a test of $US60/barrel feels a definite possibility.

MM is currently long Santos (STO) from $3.95 with a ~$4.40 target, or 3% higher, this feels on the money at present although we may consider dropping our sell level slightly.

Santos (STO) Daily Chart

Gold

We took profit on our Regis Resources (RRL) position last week at $4 which feels correct, especially following the sell-off at the end of last week in both the stock and precious metal. Taking into our thoughts earlier on the highly correlated $US we are likely to be patient re-entering RRL with a current ideal buying level around $3.25.

Regis Resources (RRL) Weekly Chart

Banks and bond yields / interest rates

We remain both positive and overweight the banking sector as we fully move into reporting season and of course the Novembers dividends.

We continue to keep 3 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is another ~6% higher, they made fresh highs for 2017 on Friday night.
  2. The middle of November is usually a poor time for our banks although dividends clearly have a significant impact, we may take some money off the table from part of our holdings in the next few weeks - either pre / post dividends.
  3. We are currently considering switching the Bank of Queensland (BOQ) into ANZ Bank (ANZ) i.e. BOQ is up +20% for the year compared to ANZ which is up only +8.3%.

CBA, the only member of the “big 4” who does not pay a November dividend looks strong at current levels with a move towards $80 now on the cards. Seasonally CBA usually corrects in the middle of November before rallying into its February dividend – this may prove very useful if we consider a switch within the sector.

Commonwealth Bank (CBA) Daily Chart

US S&P500 Banking Index Weekly Chart

Diversified Financials

The diversified financials rallied last week but with reduced momentum only gaining +0.7%. We now like 2 stocks within the sector: 

1. IOOF Holdings (IFL) $11.44 – We are buyers under $10.80, while a decent fall is required the stock has been volatile recently.

2. Macquarie Group (MQG) $93.86 – This now feels like an opportunity drifting away - we are buyers under $92.

IOOF Holdings (IFL) Weekly Chart

Macquarie Group (MQG) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will be prepared to buy panic weakness in some select stocks if the opportunity arises.

Harvey Norman continues to catch our eye after their aggressive decline in early September, primarily because of their recent profit report. While the momentum and sentiment is clearly against both the sector and the stock MM will become potential buyers of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

Healthcare sector

Taking into account our neutral / negative outlook for the sector MM remains likely to be very fussy with any buying but we never say never. There actually is one stock catching our eye, although it is volatile!

We like SRX around $10, again this seems a lot lower but SRX is very capable of this sort of move.

Sirtex Medical Ltd (SRX) Weekly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is only a few % away for the broad Russell 3000, considering we are ultimately looking for a correction of over 20% we are not surprisingly avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the Russell 3000 has rallied an impressive 24% with only one small 5.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet another ~5% pullback simply feels overdue but perhaps too many people are hoping / looking for it.

US Russell 3000 Quarterly Chart

US NASDAQ Weekly Chart

No real major change for European stocks which were again very quiet last week. The ideal scenario for a low risk entry into the German DAX will be a second correction back under 12,000 following failure around this 13,000 area. The recent lack of follow through on the upside is a warning to the short-term bulls but no sell signals have yet been generated.

Obviously time will tell if this pullback unfolds but successful investing, like many things, is all about preparation.

German DAX Weekly Chart

At MM we’ve been very bullish the Japanese Nikkei for all of 2017 but we are now under 3% from our target area after rallying over 30% since late 2016. While we remain positive the attractive risk / reward for the bulls has clearly diminished significantly.

Japans Nikkei Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 14% of the MM Platinum Portfolio in cash: 

  1. Banks – We like our overweight banking position at present.
  2. Consumer Services – Nothing is close at present.
  3. Diversified Financials – We like Macquarie (MQG) under $92 and IFL under $10.80.
  4. Energy – Were positive but see no value at current levels to increase our exposure beyond our STO position.
  5. Food and Beverage – No interest currently.
  6. Healthcare – We like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We like BHP around $25.25 and OZL under $8.30.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage but VOC is a potential trading buy.
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have enough exposure at this time.

Potential “Sells”

Two of our MM Platinum Portfolio stocks are close to our current sell targets: 

  1. Challenger (CGF) around $14.40 – note this has been lifted.
  2. Santos (STO) around $4.40.
  3. Aristocrat (ALL) around $25.

Standout technical chart (s) of the week

The Australian Financials Index remains nicely bullish with our ideal target over 10% higher. While this remains MM is likely to be over-weight banks / financials within our two portfolio’s.

ASX200 Financials Index Quarterly Chart

Investing opportunities for the coming week(s)

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

Buys –Macquarie Group (MQG) under $92, IFL under $10.80, SRX ~$10, BHP ~$25.25, OZL under $8.30 and HVN ~$3.50.

Sells – Santos (STO) ~$4.40, Aristocrat ~$25 and Challenger (CGF) ~$14.40.

Trading Opportunities on our radar

We have 2 trading ideas today, one of which we have mentioned previously and will scare some members! 

  1. We are buyers of Vocus (VOC) around Fridays close at $2.80 with stops under $2.65.
  2. We are buyers of Platinum Asset Mgt. (PTM) under $7, with stops under $6.50.

Vocus (VOC) Daily Chart

Platinum Asset Mgt. (PTM) Daily Chart

Summary

We are now confident in our medium-term forecast of the ASX200 breaking over 6000 in 2017/8  with a “guess” target around 6200.

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.

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 20/10/2017. 4.00PM.

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