Market Matters Report / Market Matters Weekend Report Sunday 24th September 2017

By Market Matters 24 September 17

Market Matters Weekend Report Sunday 24th September 2017

Market Matters Weekend Report Sunday 24th September 2017

Last week the local market was again pretty choppy finally falling -0.26% but on Wednesday it was threatening to be far worse as aggressive index selling hit via our futures market. During the mid-week selling the ASX200 was only 6-points / 0.1% above the markets low since early June, prior to again managing to find some buying this time primarily in the banking / financial sectors. The sector rotation from resources to banks continued last week although the weakness in the resources was more noticeable than the buying in the banks e.g. Both BHP and RIO fell another -1.2%. In the US stocks have been equally as quiet with the S&P500 churning in one of its tightest ranges in history, on Friday night it continued an 8-day sequence without a move of more than 0.3%, it begs the question what geo-political issues / North Korea? It certainly feels like the calm before the storm.

Again the list of major winners / losers remained small for the week with only 9 stocks in the ASX200 moving by over 5%, the list was clearly dominated by weakness in the resources sector.

Winners : CYBG Plc (CYB) +5.2% and BT Investment (BTT) +6.9%.

Losers : ALS Ltd (ALQ) -7%, Evolution Mining (EVN) -7.5%, Fortescue Mining (FMG) -7.7%, BlueScope Steel (BSL) -6.4%, OZ Minerals (OZL) -5.8%, Charter Hall (CHC) -5.1% and Carsales (CAR) -6.6%.

We’ve said it before but it’s now becoming amazing that the ASX200 is entering its 19th week trading in the tight range between 5629 and 5836 – some index volatility is statistically extremely overdue! Let’s yet again look at the ASX200’s “trading patterns” which continue to contain the local market as we move towards the end of September, surely at least one of these ranges will be broken soon:

  1. Short-term Neutral Pattern between 5629 and 5836 – 18 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 33 weeks to-date.
  3. September’s range to-date is 5639-5777 i.e. 138-points.

We continue to bang the drum that profitable / outperformance investing is currently all about sector rotation as opposed to simply jumping on board the market train to make money, especially as this 8-year bull market matures. In 2017 we’ve regularly seen money suddenly flow back towards sectors which have been previously unpopular, just like the banks over the last 2-weeks – the Telcos being the notable exception to-date. On Friday Bloomberg quoted a senior US trader who summed up our current view towards optimum investing:

“Mega large-cap growth dominance has been replaced by timely rotation as the most important theme” – Instinet LLC New York.

We regard ourselves at MM as “active investors” and importantly not traders, the next few years look perfect for this approach in both directions i.e. we believe being prepared to sell will prove imperative moving forward. Let’s again update the numbers on our most recent switch:

E.g. We recently sold BHP ~$27.50 which has now fallen 5.6% while around the same time we bought CYBG Plc (CYB) ~$4.62 and it has rallied 9.3% i.e. an almost 15% differential already from this example of selling resources and buying banks, a theme we believe has further to unfold.

Technically MM is ideally still targeting a correction towards the 5525 area i.e. only another ~2.5% lower in the weeks ahead but we remain very conscious that the local market continues to experience good buying into any decent declines. While we are in “buy mode” as we sit on a healthy 21% cash position at MM there is no inclination to chase stocks into strength, patience is certainly required in choppy markets like we have experienced over the last 18-weeks.

ASX200 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 only ~4% away, considering we are ultimately looking for an over 20% correction we are not surprisingly avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the Dow has rallied a huge 25% with only one small 3.7% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue.

US Dow Jones Monthly Chart

Last week we identified the US small-cap index, the Russell 2000, as looking bullish targeting a few percent further upside before we would become concerned i.e. looking for a failed “pop” over 2017 highs. The anticipated strength has unfolded but now we are looking for a failed move higher before a ~6% correction.

US Russell 2000 Monthly Chart

No real change for European stocks which were very quiet last week. The ideal scenario for a low risk entry into the German DAX will be an “abc” correction back towards ~11,600. Obviously time will tell if this pullback unfolds but successful investing, like many things, is all about preparation.

In the bigger picture we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

The Hang Seng made fresh all-time highs for 2017 last week but it continues to struggle around this 28,000 area, we continue to expect a 3-4% pullback minimum.

Hang Seng Weekly Chart

Resources

Australian large cap resource stocks continued with their current pulled back last week but again we reiterate a few poor weeks does not end an impressive 1 ½ year bull market. However, the rapid decline in iron ore may catch many investors off guard who have flocked to local resource stocks proclaiming them the next great “yield play”, without necessarily paying enough attention to their dependency on the underlying price of the relevant commodities. The combination of concern around Chinas demand, expectation of rising supply and falling steel futures has led to a 19.5% decline in iron ore this month alone.

We continue to believe the risk reward has definitely switched more to the neutral / negative stance as opposed to the bullish view we held for the previous 3-4 months. Hence we’re cautious at current levels as further weakness in iron ore / copper for example may easily lead to a stampede for the exits with a further ~15% correction not out of the question, especially considering the overall rally since early 2016. The rapid 18.7% plummet by OZ Minerals (OZL) and 16.1% by Fortescue Metals (FMG) should remind investors of what’s possible in the volatile resources sector.

Iron Ore Monthly Chart

RIO Tinto (RIO) Weekly Chart

OZ Minerals (OZL) Daily Chart

Fortescue Metals (FMG) Daily Chart

Gold

Gold stocks again fared poorly last week as safe haven assets were sold e.g. the Yen / gold. We are currently holding 7.5% of the MM Platinum Portfolio in the gold sector via Newcrest (NCM) but we’ve been looking to increase this exposure into weakness and this now feels a strong possibility over the coming weeks. However, we are also aware that seasonally gold stocks struggle into December hence any buying is likely to be more “nibble like” in nature.

Buy – Regis Resources (RRL) around $3.70 and / or Evolution Mining (EVN) around $2.15

Vaneck Gold Vectors ETF Seasonality Chart

Regis Resources (RRL) Weekly Chart

Evolution Mining (EVN) Weekly Chart

Banks and bond yields / interest rates

Last week banks remained firm rallying an additional 1% led by CYB which gained an impressive 5% but we continue to underperform the US equivalent where the banking sector rallied a healthy 2.7% for the week. We remain bullish both US banks and global bond yields – remember bank shares like higher interest rates. Unfortunately while we like our banking sector at current levels it feels unlikely we can get the momentum to outperform on the global stage until perhaps the Christmas rally.

Our view remains that US interest rates will continue to move higher in weeks / months to come and if this proves correct banks should benefit, of course assuming the rally in rates is orderly and of course the Australian property market holds together.

US S&P500 Banking Index Weekly Chart

Commonwealth Bank (CBA) Weekly Chart

Diversified Financials

The diversified financials rallied strongly last week led by UK facing BT Investment (BTT) which advanced 6.9%. We currently like the below 2 stocks in the sector but both at lower levels:

1 Challenger (CGF) under $12 i.e. 2% lower.

2 Janus Henderson around $40 i.e. 5% lower.

Challenger Ltd (CGF) Monthly Chart

Janus Henderson (JHG) Weekly Chart

Retail plus Coles & Woolworths

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

Harvey Norman continues to catch our eye after their aggressive decline over the last few weeks, 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 both our negative outlook for the sector, and major player Ramsay Healthcare (RHC) which fell another 0.64% last week MM is likely to be very fussy with any buying but we never say never!

We are buyers of RHC ~$55, around 10% lower but approaching fairly fast, remember the stock has now corrected 27% so another 10% is not out of the question for this highly owned and loved stock…..it’s definitely the path of most pain with no major brokers having a sell on the stock.

Also, we definitely have no plans to average our HSO position and we may liquidate into any short-term bounce towards $1.72.

Healthscope (HSO) Weekly Chart

Ramsay Healthcare (RHC) Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we now have 21% of the MM Platinum Portfolio in cash: 

  1. Banks – We like the banks into any weakness but we are already very overweight the sector, NAB is the most likely purchase to increase our holding.
  2. Consumer Services – Aristocrat (ALL) ~$20, it traded there for less than 5 minutes last week.
  3. Diversified Financials – Challenger (CGF) under $12 and Janus Henderson (JHG) around $40.
  4. Energy – No interest currently.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and we are long HSO, that’s definitely enough unless Ramsay Health (RHC) falls over 10%.
  7. Resources – We are likely observers for 1-2 weeks.
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – We are buyers of Telstra (TLS) under $3.50.
  10. Retail – We like Harvey Norman (HVN) under $3.50.
  11. Gold – We like Regis Resources (RRL) ~3.70 and Evolution Mining (EVN) ~$2.15.

Potential “Sells”

One of our MM Platinum Portfolio stocks is close to / at our current sell targets:

1. Healthscope (HSO) over $1.72.

Standout technical chart (s) of the week

Westfield Group (WFD) is a stock we’ve successfully avoided during its 34% correction over the last 1 ½ years but we feel an opportunity is looming.

We are trading buyers of WFD around $7.10 targeting a 12-14% bounce.

Westfield Group (WFD) Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sell” earlier in the report.

In general we still remain keen to buy the index / market ~5525 i.e. allocate our 21% cash into stock weakness.

ASX200 Monthly Chart

Trading Opportunities on our radar

We have 2 new trading situations on our radar today: 

  1. Westfield (WFD) – Buy ~$7.10 as in “Standout Chart of the week”.
  2. Origin Energy (ORG) – A two-way trade, we are buyers of ORG ~$6.50 and sellers above $8.10, with oil due a move one of these may occur in coming weeks.

Origin Energy (ORG) Monthly Chart

Summary

We remain short-term bearish the ASX200 ideally targeting a correction back towards the 5525 support area, we are still “hoping” to accumulate equities into such weakness.

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 24/09/2017. 4.00PM.

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