Market Matters Report / Market Matters Weekend Report Sunday 23rd September 2018

By Market Matters 23 September 18

Market Matters Weekend Report Sunday 23rd September 2018

Market Matters Weekend Report Sunday 23rd September 2018

The ASX200 had a mixed week finally gaining +0.5% with strong support from the large cap miners while the broader market felt relatively heavy e.g. BHP +5.5%, RIO +8.7% and Fortescue (FMG) +7.9%. The “weak end of town” was dominated by the interest rate sensitive stocks, a trend we believe is likely to have much further to evolve i.e. Real Estate and Transport sectors down -1.7% and -2.5% respectively.

The local market has largely failed to embrace recent optimism in US markets as sector rotation remains the key thematic on the Australian bourse – stocks / sectors are swinging in & out of favour on an almost weekly basis. On Friday the ASX200 closed unchanged to the exact point for the financial year to-date, nevertheless we’ve witnessed enormous swings from many household names and popular stocks alike, we’ve only shown 5 examples below but there are many more:

  1. CSL Ltd up +20.8% followed by a correction of -14%.
  2. Fortescue Metals (FMG) down -20% followed by the current bounce of +13%.
  3. OZ Minerals (OZL) down -14.2% and now up +16.5%.
  4. Xero Ltd (XRO) up +16.8% and then down -14.8%.
  5. Aterpay Touch (APT) one the most volatile of all, up +170% and then down 35% giving up almost 60% of the gains in the process.

Even taking APT into account buying quality names when they correct ~15-20% and selling when they rally to the same degree has proved a simple but successful formula in most cases this year.

The volatility our market is experiencing “under the hood” is not synonymous with a healthy index but Fridays close less than 3% below its decade high hasn’t yet shown any signs of a market which should be ditched on mass.

The combination of last weekend’s report evaluating the 11 sectors in the ASX200 and the above 5 stock examples reiterates a point MM has made a number times over recent months – the field is set for the “active investor”. MM describes itself as such and when we look in the mirror on this beautiful sunny morning in Sydney the main criticism we have of ourselves over last week was not accumulating additional resource stocks into weakness – catching the falling knife is always hard but that’s why MM often “scales into a position”.

  • MM strongly believes the time to “set and forget” in stocks is behind us as the longest bull market in history continues forge ahead, albeit with diminishing momentum.

For MM subscribers who read the Australian Financial Review  (AFR), or who want to consider a month’s free trial, the below article supports our opinion. It’s a good simple read that dovetails with a number of our thoughts / strategies moving forward.

The ASX200 continues to consolidate its 7-day aggressive decline which started on the last day of August, the 10-day slow grind higher is usually a sign that the next swing will be with the short-term trend i.e. down. In hindsight one of the mains reason we’ve been patient with deploying our reasonable cash levels has been our opinion that  a break under 6000 was likely in the coming weeks but as we saw with a number of stocks / sectors last week autonomy is the main game in town.

  • We continue to believe there is a strong possibility that the current pullback will test below 6000, over 3% lower.

On Friday night markets were relatively quiet with the US tech based NASDAQ slipping -0.5%, the UK FTSE rallying +1.7% as BREXIT concerns sent the Pound tumbling down -1.5%, while copper rallied over 4% for its largest daily gain in ~5-years – overall it all felt net bullish for local stocks BUT the SPI futures are pointing to a ~25-point decline early on Monday morning.

ASX200 Index Chart


The Bank of America Fund Manager survey for September showed some extreme readings but no great surprises:

  1. For a number of different reasons pessimism about the global economy / global growth is at its lowest point since December 2011.
  2. Cash holdings have risen above 5%, the highest allocation in 18-months, as exposure to global stocks (ex-US) hit an 18-month low – NB the average cash holding over the last decade is 4.5%.
  3. However allocations to US stocks rose another 2% to a substantial 21% overweight, the largest reading since January 2015.
  4. The most crowded 2 positions are short emerging markets and long $US i.e. obvious cautious positioning around the outcomes of a potential US – China trade war for example.
  5. While not part of the survey, another interesting / concerning indicator for American stocks is we’re seeing the greatest number of stocks making 52 week highs AND 52 week lows at the same time i.e. the breadth of the rally is very low. That’s been similar to our market where such as small proportion of stocks had been doing the heavy lifting. 

Our take from the survey results:

  1. Fund manager pessimism is not definitely a great indicator, December 2011 following a greater than 20% correction in stocks was a time to buy, not sell although to be fair the GFC was still fresh in many investors’ minds.
  2. Large cash holdings / low exposure to offshore markets makes us believe that any decent pullbacks will be short and sweet i.e. money is queuing up to accumulate weakness outside of the US and that includes us.
  3. We remain very wary US equities at current levels, especially now the Dow has joined the other indices making fresh all-time highs.
  4. US equities ground a few % higher from January 2015 before getting hit 15% i.e. such heavy optimism towards the US concerns us.
  5. We believe the crowded long $US and short emerging markets positioning is prime for a countertrend correction i.e. a move up for emerging markets and down for the $US.

MSCI World stock market Index Chart

US S&P500 v emerging markets Chart

1 International equities

As we said a few weeks ago global stock markets have been moving in different directions with the underlying theme being the US outperforms everybody else – the above fund manager survey explains the “money flow” behind this phenomenon and when combined with the huge volume of company share buy backs it’s easy to see why US stocks have been big outperformers.

Ever since Donald Trump entered the Whitehouse US stocks have continued to hiccup occasionally on news and then rapidly shrug it off, whether large or small. Whatever your political leanings it’s impossible to ignore the 40% rally by the S&P500 since election day back in April 2016, stock markets clearly love lower corporate tax and a reduction in the costly regulatory environment. Something our own Government has failed the deliver.

However what’s now important is what comes next and at MM we believe there’s some exciting volatility close to hand, especially as its just rolled across my screen that “China have cancelled trade talks with the US and wont send a delegation to Washington” – Blomberg News Saturday 12.52pm AEST. Following strong market optimism at the end of last week around US – China trade this may be the catalyst we’ve been waiting for to end the ASX200 back below the psychological 6000 area.

Interestingly in the AFR article I referred to early on active investing UBS state that “ there was a strong relationship between short-term interest rates as measured by the Federal Funds Rate and the VIX, a market measure of volatility.” They mentioned an approx. 2-year lag before rising interest rates in the US led to increased volatility (usually means sharp pullbacks) and that dangerous time frame is essentially now.

Turning our attention back to US equities and following last weeks rally to yet new fresh all-time highs we have to first question whether a “melt up” is in the offing, our current belief is a definite no for 3 reasons:

  1. Fund managers are already heavily long the US, hence this would make the majority of investors happy, not a common occurrence.
  2. The positive fundamental news courtesy of Trump et al we believe is now built into the market i.e. stocks are fully priced / expensive.
  3. Technically US stocks have followed our roadmap since the panic selling in January / February and have to-date given us no reason (s) to question our views around what comes next.

Until further notice we believe US stock will follow the below swings:

  1. Initially we are looking for a ~5% correction by US stocks back towards its June lows.
  2. We believe this will be a buying opportunity for yet another rally to fresh all-time highs.
  3. The weekly Dow chart then illustrates the deeper correction we are anticipating if the above 2 swings unfold.

Its important to understand we are not trying to be “crystal ball readers” at MM just simply being prepared for eventualities if / when they unfold.

  • MM will look to buy stocks if we see a ~5% correction, we’ve already seen with the correct stock selection the returns can be both quick and attractive in today’s rotational market.

US Russell 2000 Chart

S Dow Jones Chart

2 Should we chase the resources / materials stocks into current strength?

Last week we saw a sharp snap back into favour for the resources sector, gains were led by RIO which gained +8.7% following its announcement of a $4.4bn capital return via  buybacks.

This weekend news of China cancelling trade talks with the US feels likely to create some renewed weakness in the sector which we believe is a buying opportunity, obviously China / US press releases are going to determine how deep such a correction will become.

  • We are bullish RIO targeting the $90 area for this current advance i.e. ~13% higher.

BHP also enjoyed strong gains last week rallying a healthy +5.5% in anticipation of similar capital returns to RIO.  Although last week’s rally addressed part of the imbalance we still prefer RIO over BHP at current prices.

  • MM is considering increasing its RIO position on a pullback towards the $78 area i.e. ~2% lower.

RIO Tinto (RIO) Chart

Moving onto other names in the sector, we are likely to be more pedantic on entry levels if / when we add to our RIO Tinto (RIO) position. We most certainly cannot fully discount the risks of a US – China trade war spiralling out of control, it definitely sounds worse today than a few weeks ago.

Today we have covered 3 other stocks in the sector, on top of RIO, and the respective areas where MM is likely to put its hand to accumulate a positions.

1 Western areas (WSA) $2.70

I actually said to a colleague on Friday that if I had been lucky enough to “snag” any WSA below $2.30 I would be grabbing the quick return above $2.70 – the bounce so far has been well over 20% in just a few days, amplified by short covering.

We like this nickel producer into weakness but unlike RIO we believe there’s a decent chance it can make fresh 2018 lows.

  • At this stage MM is only a buyer around $2.20.

Western Areas (WSA) Chart

2 Fortescue Metals (FMG) $3.95

Although our last foray into FMG was ill-timed it remains MM’s most successful vehicle from an aggressive investing / trading perspective.

Similar to WSA at this stage FMG only lines up to us if we see another round of strong style selling in the sector, always a possibility with the shenanigans between Trump and China.

  • At this stage MM is only a buyer around $3.25.

Fortescue Metals (FMG) Chart

3 Lithium names

The lithium sector has been on a roller-coaster ride in 2018, the likes of which are rarely seen in markets, even in the volatile resources!

Tesla have announced a 3-year deal with Chinese’s top lithium producer which looks to have been made public after our market closed on Friday. This can be interpreted in different ways but may present opportunities if it’s taken negatively.

  • At this stage MM is a buyer of ORE / KDR into fresh 2018 lows.

Orocobre (ORE) Chart

Kidman Resources (KDR) Chart

3 Checking in on the US “yield curve”.

Market players continue to watch US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends. However recently the spread has moved the other way, increasing back to 0.2629% as the 10-years soared above 3% to challenge their 5-year highs.

The rally in global bond yields has been assisted by the markets dismissal of major concerns around the US-China trade war, it will be interesting if this continues next week following the latest new out of China.

We have specifically noticed the impact on the sector front in the US i.e. over the last week the S&P500 is up +0.9% but the real estate and utilities sectors are down -1.3% and -2.3% respectively.

US 2/ 10-year yield curve Chart

Our macro view has not changed over the last 12-momths i.e. inflation / interest rates will rise moving forward, historically a solid back drop for the following sectors financials, energy, consumer staples and resources / materials.

As the market evolves subscribers will be kept informed of the stocks in our cross-hairs as we strive to continually tweak our portfolios to best suit the continually evolving macro-economic landscape.

A quick snapshot today is as follows:

Financials – We are already fully exposed to the sector unless we see a sharp sell off.

Energy – Woodside (WPL) or Oil Search (OSH) into 2/3% weakness and Origin (ORG) around $7.25.

Consumer Staples – tricky because many of these stocks are also high growth names that we are generally avoiding. Costa Group (CGC) under $6 is interesting i.e. ~10% lower. Also Bellamy’s (BAL) below $8 and Coca Cola Amatil (CCL) around $8.75.

Resources / Materials – see point 2.


No real change:

  • Remain patient and look to accumulate stocks into weakness ideally below 6000. 

Standout technical chart (s) of the week

We have been calling Origin Energy extremely well over recent months / years, the last “call” was to sell around $10, the stock then experienced a ~20% correction. 

  • We are now buyers of ORG if we see fresh 2018 lows below $7.50 and ideally around the $7.25 area – touch wood our luck hasn’t run out!

Origin Energy (ORG) Chart

Trading Opportunities on our radar

Our last “call” in this section was saying buy KDR targeting above $1.20, that was achieved just  few days later!

Todays call is in 2 halves but both are bullish:

  1. Buy KDR below $1.10 targeting ~$1.35.
  2. Buy KDR into new lows below 90c targeting above $1.20.

Either way the plan should be to buy any weakness in KDR & then add if it falls further.

Kidman Resources (KDR) Chart

Investing on our radar

No major change, we’ve been monitoring ALL for a few weeks and have been very close to pulling the trigger on a few occasions.

  • We still like Aristocrat Leisure (ALL) but now well under $28 i.e. a few % lower.

Aristocrat Leisure (ALL) 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.


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 22/09/2018

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