Market Matters Report / Market Matters Weekend Report Sunday 24th June 2018

By Market Matters 24 June 18

Market Matters Weekend Report Sunday 24th June 2018

Market Matters Weekend Report Sunday 24th June 2018

Last week the ASX200 roared back to life gaining over 2% as the banking sector led by ANZ and CBA rallied almost 5% - a huge impact on the ASX200 where the “big four” banks make up over 20% of the index! We thought there was a good chance stocks would squeeze into last Thursdays June futures expiry and the next likely important date they face is Fridays EOFY rule off, anything can happen here as fund managers rejig portfolios, take some tax losses and often appear to push their “winners” higher all to look good on June 30th.

Last week was a perfect example of why at MM we believe you should invest with a combination of fundamental and technical analysis. Most major global indices took hit last week, as did our large cap resources but the technical picture kept us bullish initially targeting 6250 although it did get there faster than anticipated. We touched on last week our theory that hedge funds were covering their “short Australia – long global indices spreads” and this view feels on the money, just look at the relative index performances below over the last week – remember “we don’t go down without the banks”.

There were a number of influential factors that aligned which may have created this action i.e. the liberal party finally getting its personal tax package approved with a corporate one likely in the offing, the banks coming back into favour probably assisted by a few well known economist’s believing Australian housing prices won’t fall much further plus of course the positions are likely to have been showing some healthy / temping profits.

Winners – ASX200 +2.1%.

Losers – Japanese Nikkei -1.5%, Hong Kong Hang Seng -3.2%, China Shanghai Composite -4.4%, US Dow Jones -2% and the German DAX -3.3%.

We have regularly reminded subscribers to be “open-minded” in 2018 / 9 and two major investing tools we have successfully used over the past years simply are not working – fortunately we identified this early on:

  1. Seasonality – So far 2018 is not following its usual seasonality path (see below) e.g. over the last 10-years we have fallen on average -4.7% over May & June, so far this year we are up +4.1%  - I feel a some shorts / underweight fund managers were caught last week.
  2. Correlations – Many correlations we watch are simply not working in 2018, at least not yet e.g. BHP usually follows the emerging markets but this year the big Australian it has ignored a 15% correction by the EEM.

ASX200 Index Seasonality Chart

BHP v Emerging Markets Chart

Equity markets remain extremely interesting with the ASX200 both reaching fresh decade highs and our 6250 target on Thursday. I reiterate that it feels like some underweight fund managers have been forced to commit some of their cash into Australian stocks – remember we pointed out that in the recent Bank of America Fund Manager survey fund managers allocation to stocks was sitting at an 18-month low – not bearish stuff.

  • At MM we remain mildly bullish the ASX200 in the short-term while the index is above 6140 –  but we remain in net “sell mode”.

While the market has reached our initial target there are no sell signals hence will only continue our slow build up of cash as / when individual stocks hit our target areas until further notice. Two triggers will concern us with the local market at this point in time:

  1. The ASX200 closing back below 6140.
  2. The Australian market starting to perform badly on good news i.e. the complete opposite to last week.

ASX200 Index Chart

As subscriber know we’ve been anticipating a reasonable correction in the ASX200 during 2018 /9 – since the GFC the ASX200 Accumulation Index has experienced 2 meaningful pullbacks of around 20% and 18% respectively. Three things are catching our eye when we consider the position of today’s market:

1. The market ASX200 Accumulation Index has clearly reached overhead technical resistance.

2. The market has not experienced a decent pullback since February 2016, over 28-months, its fairly easy to say a correction is overdue – not a particularly good reason to sell for us.

3. Back in 2009 the market spent four quarters grinding higher along the same overhead resistance which is being tested today, it could be longer this time – remain open-minded.

At this point in time the risk / reward for MM is on the sell side but we reiterate no “scary” sell signals / triggers have been generated to-date.

ASX200 Accumulation Index Chart

1 Suddenly everyone wants the banks.

Over recent weeks we’ve discussed the banks at great length, always with the same conclusion – they are oversold and a sharp rally is close at hand.

Last week the predicted rally unfolded with a vengeance as 3 pieces of news aligned to make the local banking sector very much “flavour of the month”. The banks are cheap and paying excellent yields it was always a matter of when to MM:

  1. International ratings agency Moody’s have forecast the worst is over for Australian housing and are expecting prices to “pick up after this years declines”.
  2. ANZ announced it would double its share buyback to $3bn – apart from the huge effective buy order it also confirmed our opinion that the banks should be able to maintain their current healthy dividend yield e.g. ANZ Bank (ANZ) 5.58% fully franked.
  3. The Liberal government have finally got their tax package over the line with a corporate package potentially to follow – just think how bullish this was for US stocks.

The elastic band as we like to say was stretched way too far and snapped back with CBA rallying 8% in a matter of days. It’s a shame the stock didn’t reach our ~$65 area where we planned to add to our holding but we do have 27% of our MM Platinum Portfolio in the banks hence we had to be fussy – it was still an excellent week for our portfolio’s.

  • We plan to maintain our banking exposure and increase if fresh 2018 lows are made, our view remains they will outperform over the next year.

Commonwealth Bank (CBA) Chart

Second tier banks underperformed last week having done the heavy lifting in the previous week – BOQ has bounced over 10% from its low, a potential reaction we had outlined in an earlier report. 

  • We think BOQ will challenge the $11 area before this bounce may encounter selling i.e. another 4% higher.

At this stage we are now neutral BOQ although we would be aggressive buyers into fresh 2018 lows if a weak market dragged it lower.

BOQ looks likely to help us with our road map for the banks moving forward i.e. how will it react around $11.

Bank of Queensland (BOQ) Chart

2 Our switching has been on the premature side in 2018.

At MM we constantly evaluate our investing decisions / results on a number of different levels, if you don’t continually attempt to improve there’s only one way to go!

Our main focus over the last few weeks has been around our switching, its been on the whole a little early although generally correct in theme.

  • We sold our last resources exposure, BHP around $34, a few weeks ago but we topped up our banks too soon leaving us cautious during the last panic sell off in our banks. We never considered selling but buying more at lower levels would have been nice.

In hindsight we sold the first half of our resources exposure and increased our banks too soon. Two things we will be considering moving forward:

  1. A more staggered approach to switching between stocks and sectors, especially easier if we have a reasonable holding in a stock e.g. we only sold 50% of our A2 Milk last week around $11.40.
  2. Not always switching, being prepared to leave the funds in cash for a few days / weeks.

Commonwealth Bank (CBA) v BHP Billiton (BHP) Chart

Last week we again implemented 2 switches and we felt this was an ideal forum to explain our logic for any subscribers who were not sure at the time:

  1. MM sold 50% of our A2 Milk position, 3% of the MM Platinum Portfolio, and switched into Ramsay Healthcare (RHC) – we felt our position in A2M was too large considering its high valuation and recent volatility, hence we took the opportunity to lock in a 16% profit after the stock had bounced almost 25%. Our purchased of RHC had been flagged for over a year, it’s a shame it was almost impossible to buy below $55 as we first hoped.

A2 Milk (A2M) v Ramsay Healthcare (RHC) Chart

  1. We sold a small portion of Suncorp holding (2% of the 12%) realising a ~30% profit and proceeded to allocate the same 2% into Telstra (TLS), a purchase we had flagged for weeks.

We intend to continue with the sale of our Suncorp (SUN) position between $15 and $16.

Already we would have been better to have switched a day later, let’s hope we were not too fast again!

Suncorp (SUN) v Telstra (TLS) Chart

3 $US earners CSL Ltd (CSL) & Macquarie Bank (MQG) look very similar.

We are long term bears on the $A targeting the mid 60c region against the $US, this is both a fundamental and technical view:

  1. Technically the $A has been in a downtrend since 2012 and selling strength has proven profitable, the break below illustrated trendline below generated another sell signal.
  2. Fundamentally the US is way ahead of on the path of economic recovery and subsequently higher interest rates, holding $US simply pays a higher yield than $A.
  3. We believe China slowing down is a real risk and one that would hurt Australia more than the US.

Australian $ v $US Chart

Two excellent stocks that benefit from a strong $US are CSL Ltd (CSL) and Macquarie Bank (MQG) – in both cases we took profit too early but we’ve never been afraid to buy back into stocks at higher prices than we exited, our goal is to add value / make money not stoke our ego.

Although we are concerned to the health of market moving forward both of the stocks look bullish and we are definitely buyers of weakness.

  • CSL looks excellent on all levels and we are initially buyers ~$187.

CSL Ltd (CSL) Chart

 

  • Similarly MQG looks very attractive and we are initially buyers ~$115. 

Macquarie Bank (MQG) Chart

4 The resources may yet provide a buying opportunity

Just a quick addition to last weeks resources section, even while last week the market was strong it was all focused in the banks with BHP -3.1%, RIO -3.8% and OZ Minerals (OZL) -5.7% following the base metals lower, around -3.8%.

Bloomberg Base Metals Spot Index Chart

Today we have deliberately looked at 2 other stocks in the sector that we like into weakness:

  • BHP Billiton (BHP) – We continue to like BHP into weakness but our ideal target remains below $30.
  • Western Areas (WSA) – Nickel producer WSA is a volatile stock and its important investors have a plan when venturing into its domain – we remain buyers around $3.

BHP Billiton (BHP) Chart

Western Areas (WSA) Chart

5 Bond yields are looking tired

US bond yields look overdue for a rest with the 2-years up from below 0.5% in 2016 to over 2.5% today, a 500% increase – it shows how strong their economy is and the Feds desire / need to keep hiking interest rates.

Conversely our own RBA appear to have lost confidence that their next move will be up, all we say is if they are down Australia must be destined for a  recession.

US 2-year bond yields Chart

At MM we’ve been anti the “yield play sector” for over a year and while we maintain this view the stocks are not necessarily listening to us.

The current stability in bond yields, not even retreat, seems to be enough for example to push Sydney Airports back towards all-time highs – still not for us but our call has clearly been a touch early in this space.

Sydney Airports (SYD) Chart

6 The pieces of puzzle are slowly coming together

When we are continually evaluating the future direction of global stock markets we look at stocks, sectors & indices that are the clearest to us i.e. they have been following our anticipated roadmap. Below are 3 examples of watch we are watching closely:

Bullish for now

1 Suncorp (SUN) – SUN remains on track for our long-term $15.50-$16 target area, still another 5% higher.

2 German DAX – we continue to look for a rally above 13,600 to produce a strong risk / reward selling opportunity i.e. another 8% higher.

Suncorp (SUN) Chart

German DAX Chart

Sell triggers

We’ve already mentioned our concern if the ASX200 falls below 6140 but the US NASDAQ is arguably of more interest as we its often refer to it as the leading global index.

  • The NASDAQ will generate bearish sell signals if it falls back below 7150 and especially 7050.

US NASDAQ Chart

Conclusion

Again no major changes following last week’s solid gains by the ASX200:

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

“Shopping List”

  • We need decent weakness in the resources, COH, MQG and CSL for example before we start buying.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.50-$16 but we may reduce this large position into initial strength above $15.
  • CYBG (CYB) around $6.
  • Janus Henderson / IOOF Holdings into a further strength.
  • Orocobre (ORE), ideally into any reasonable strength.

Standout technical chart (s) of the week

The UK FTSE had a great day on Friday and a solid week generating excellent buy signals targeting fresh all-time highs up towards 8000, or 4% higher.

  • The FTSE has a strong correlation to both the ASX200 and to a lesser degree our CYB position which bodes well short-term although as we said earlier these relationships have produced mixed results in 2018.

UK FTSE Chart

UK FTSE v ASX200 Chart

Trading Opportunities on our radar

The same as last week - The Emerging Markets (EEM) have been in correction mode for the last 6-months and they reached our target area last week: 

  • Buy the ETF around 53 which represents a +16% correction, initial stops below 50.
  • For the more sophisticated, buy the ETF as above and at the same time take a bear position in US stock market also via an ETF i.e. Emerging markets should come back into favour on a relative basis.

The interesting thought here is if this position / view proves correct then it should theoretically be supportive of local stocks for months to come BUT we ignored the EEM’s fall so will we follow their return to favour is a interesting question, perhaps Australia has received some of the monies that have flowed out of the EEM over the last 6-months.

Blackrock Emerging Markets ETF 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.

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 22/2018. 4.00PM.

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