Market Matters Report / Market Matters Weekend Report Sunday 24th February

By Market Matters 24 February 19

Market Matters Weekend Report Sunday 24th February

Market Matters Weekend Report Sunday 24th February 

The ASX200 enjoyed another positive week closing up +1.7% with the influential ”big 4” banks leading the charge with an average gain of +3.1% while the broader market was also supportive with winners outstripping losers by almost 2:1. Under the hood the action was simply frenetic with 13-stocks rallying by over 10% while 10 fell by the same degree – fortunately we sold market favourite Cochlear (COH) the day before it plunged, finally ending the week down over 13%.

Through a plethora of scary macro-economic and political news global stock markets have continued to climb a wall of worry with the ASX200 Accumulation Index (including dividends) now only 1% away from its all-time high set in August 2018. This is a great reality check for all the knockers of stock market investing. Since the GFC the ASX200 including dividends has rallied over 300% while only experiencing meaningful corrections of 20%, 17.6% and 12.9% along the way.  The performance of the local market reminds me of another famous quote by the “Oracle of Omaha”:

 “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” – Warren Buffett.

At MM we are huge advocates of share market investing, our difference as active investors is we just look to add a little value / alpha around the edges. We have been bullish stocks in 2019 although we have underestimated the speed of their recovery from Decembers panic sell off, the obvious question is what now? Through thick and thin the Australian share market has been rallying strongly since the GFC but it has been contained within the clear tramlines of the uptrend illustrated below, we have a two simple observations for the weeks and months ahead, both leading to a similar conclusion:

 1 – The huge gains we have witnessed since December are moving with very similar rhythm 375 and 376 points from their lows for December / January with this February currently standing at 357-points which implies to us from a statistical perspective any buying over the next 4-trading days should be very stock specific.

 2 – We are bullish moving forward but are mindful that major resistance for the accumulation index is now only ~3-4% higher, again suggesting any buying should be very stock specific.

 At MM we remain cautiously bullish for at the least the next 3-6 months hence we will continue to remain focused on sectors / stocks where we want to increase our market footprint.

ASX200 Accumulation Index Chart

As we’ve discussed previously we are watching corporate (junk), as opposed to government, bond yields very closely because we believe this is where the risks may lie for equities in 2019 / 2020.

Currently both Junk Bonds (high yield corporate bonds) and the S&P500 continue to remain strong, importantly it’s not until the corporate bond market slips lower, or fails to embrace a bullish equities market that we get a warning signal for stocks moving forward.

Clearly no worries at this stage, in fact if anything all the signals coming from junk bonds are buy signals.

iShares High Yield “Junk” Bond ETF v S&P500 Chart

The Australian share market has been keeping pace with its global peers for a pleasant change since Decembers panic sell-off helped by solid performance from both the “big 4” banks and the major resources.

 If we are correct and the “Aussie battler” is ready for at least a 10% appreciation it may be time for investors to consider their exposure to various global markets as opposed to our own, especially if not hedged to currency moves – we have underperformed for over 10-years, some mean reversion feels well overdue.

MSCI World Index Chart

 

While we are looking at overseas indices 2 stocks we looked at this weekend gave us a clue to what comes next:

1 – Nestle makes it very clear that new highs are on horizon – do not take $$ too early!

 2 – US heavyweight Microsoft (US MSFT) remains bullish with our initial target ~10% higher implying more upside for global equities before investors should become too cautious.

Nestle (NESN) Chart

Microsoft looks simply awesome targeting the $US120 area ~over 10% higher, our bullish view has not changed.

Microsoft (MSFT US) Chart

1 Australian bond yields are falling

Last week our market was ignited by Westpac chief economist Bill Evans who came out with the brave call of 2 interest rate cuts by the RBA this year, to put things in perspective that amounts to a 30% cut from their already all-time low 1.5% to 1% - while we cannot see any chance of a rate rise in 2019 at MM we question how much impact these cuts would have on our economy and especially housing prices which are now suffering because of the combination of falling consumer confidence, much harder access to credit and the almost disappearance of overseas buyers – the last 2 and most important parts of the equation having been engineered by the very same bureaucrats who are now almost panicking as home prices fall faster than anticipated.

 Australian 3-year bond yields look destined to make fresh lows below 1.36% which implies at least one cut in 2019 but we are concerned about the corner the RBA might be pushed into, if they cut rates to 1% what ammunition will they have at their disposal if Australia does find itself in its first recession for over 27-years – perhaps zero interest rates and QE will be on our menu like in the US post the GFC.

This should be good news for the economically insulated high yielding stocks e.g. Telstra (TLS) all else being equal.

Australian 3-year bond yields Chart

US interest rates are now firmly above our own which is a rare occurrence in history and one that has fuelled much of the weakness in the Australian dollar ($A). However I believe more bad news economically has been built into our own bonds than those in the US where everyone remains fairly upbeat on their economy – a risk in my opinion. 

I can at least see a narrowing in the differential between Australian and US bond yields with a potential return to the historical norm by the end of 2020 i.e. Australian interest rates / bond yields back above those in the US.

Australian 3-year versus US 2-year bonds (yield) Chart

 

2 The $A remains on track.

No change, the $A has hit our mid / high 60c targeted area perfectly and we believe that we will see 80c in 2019 / 2020. – MM remains very wary of the crowded $US earners trade medium / longer-term.

Our view is based on a few pieces of the puzzle starting with the extreme pessimism towards the $A which was arguably highlighted last week following the comments by Bill Evans, sure the $A fell on the day BUT it closed the week unchanged, any market that does not fall on bad news is a strong market.

The Australian Dollar ($A) Chart



Last week we sold our Cochlear (COH) position before it tumbled and investors should now question whether some large players are doubting the valuations of some of Australia’s very popular $US earners e.g. Both CSL Ltd (CSL) and Cochlear (COH) remain over 20% below their recent highs.

 We are holding 2 $US earners that I will briefly evaluate below, if in doubt this is not an area MM wants exposure.

1 – ResMed (ASX:RMD) – We bought RMD following its over-reaction (in our opinion) to its last profit report, even after a good bounce the stock remains almost 15% below its 2019 high. When we look at RMD in $US where it also trades, a bit like BHP, the stock looks good technically and we like the business although we are mindful that its trading on a valuation with little room for error.

2 – QBE Insurance (ASX:QBE) – serial underperformer QBE delivers its profit on Monday, an event that’s hurt us in the past! We hold 4% of our Platinum Portfolio in QBE which may test our resolve on Monday, any aggressive upside rally in the stock and we may take some $$ and depart.

ResMed (RMD US) Chart

 

QBE Insurance (ASX: QBE) Chart

 

3 The “Growth Sector” continues to show us the path.

The ASX200 Software & Services Index made fresh all-time highs as expected last week, albeit just, but it was interesting to see 25% of the index close in the red implying the sector needs a rest. However we don’t want to be a hero and call a top at this stage, we are simply waiting to buy the next pullback until further notice.

 In other words the “Growth Sector” is in fact agreeing with our previous bullish outlook for stocks in H1 of 2019 i.e. bullish but choppy.

ASX200 Software & Services Index Chart

 

Appen (ASX:APX) along with Altium (ASX:ALU) have been the big leaders of both the ASX200 and the “growth” sector and they surged again last week. APX is showing no sign of failure but from a risk / reward perspective we are not going to chase at current levels.

MM will consider re-entering APX on its next ~$3 correction.

Appen (ASX: APX) Chart

4 Gold stocks don’t feel  right just here?

We have seen some selling by “insiders” in the gold sector of late – generally the “smart” money sells highs as opposed to lows.

Recently we have seen insider selling in both Evolution Mining (EVN) and Saracen (SAR). Plus technically a few stocks in the sector look tired with Regis Resources (RRL) shown below potentially targeting a major pullback.

MM intends to remain patient with our foray into the gold sector.

Regis Resources (ASX: RRL) Chart

5 Updating our “shopping list”.

As the market evolves higher we have witnessed a  few stocks fell into basket of the “one that got away” like Invocare (IVC) but looking back and sulking adds no value. Our updated shopping list is now a touch smaller:

1 – We like Gem Education (ASX:GEM) around current levels.

2 – We like Star Entertainment (ASX:SGR) around $4.10 which still feels possible after the casino operator reported last week.

3 – Lastly BlueScope Steel (ASX:BSL) which we are deliberating at present.

 G8 education (ASX: GEM)  Chart

 

We’ve also updated our list of recent “dogs” that we are considering buying at lower / current levels, a split of 2% into 4 / 5 remains our preference. Obviously these levels will evolve over time but as we’ve seen with AMP last week any buying of stocks entrenched in downtrends needs careful planning and patience:

1 – CSR below $2.50, or ~20% lower.

2 – Nufarm (ASX:NUF) around $4.75, or ~10% lower.

3 – Costa Group (ASX:CGC) around $4, or 20% lower.

4 – TPG Telecom (ASX:TPM) around $5.40, or 20% lower.

5 – Automotive Holdings (ASX:AHG) around $1, or 50% lower.

6 – CYBG (ASX:CYB) below $3, or around 12% lower.

Plus at current levels:

1 – Boral (ASX:BLD) at current levels, initially targeting 10% rally. (reports this coming week)

2 – Pilbara Minerals (PLS)  initially targeting 90c.

3 – Pact Group (ASX:PGH) targeting ~$4.

4 – AMP Ltd (ASX:AMP) targeting the $3 area.

Pilbara Minerals (ASX: PLS) Chart

 

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2 so far the rally has been absent of any chop!

We continue to see MM being active moving forward with our “buyers hat” now in place as we sit relatively cashed up on both portfolios.

We currently like the concept of being relatively fully invested in stocks and using a negative facing ETF to add some downside protection when it feels appropriate, as we did at the end of last year.

BetaShares Bearish ASX200 ETF (ASX: Bear) Chart

 

Chart of the week.

We have been watching PGH closely over recent weeks looking for a failed spike below $3, a move that looks to have unfolded last week.

MM is bullish PGH with a potential target ~$4.

Pact Group (ASX: PGH) Chart

 

Investment of the week.

 AMP is a stock we have successfully avoided for many years and I was scarred to add it today as an investment but as we often say elastic bands do get stretched too far. The Diversified Financials have enjoyed some excellent recoveries in the last month (s) e.g. over the last month alone Perpetual (PPT) and IOOF (IFL) have both advanced over 20%. We think it may be time for the ultimate dog of the ASX200, AMP is down well over 50% during the last year:

MM likes AMP with stops below $2.10.

AMP Ltd (ASX: AMP) Chart

Trade of the week.

 A few stocks competed for this position today but we finally plumbed for CYB which has more than halved from its 2018 high. We are looking for one final spike lower to stand in front of this train -  a statistically dangerous trait of investors.

 MM likes CYB below $3.

CYBG Plc (CYB) 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. **Please note, this weeks chart pack will be updated Monday Morning**

 Have a great day!

James & the Market Matters Team

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, or after the session when positions are traded.

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