Market Matters Report / Market Matters Weekend Report - Sunday 25th February 2018

By Market Matters 25 February 18

Market Matters Weekend Report - Sunday 25th February 2018

Market Matters Weekend Report Sunday 25th February 2018

Last week was a solid one for the ASX200 as it rallied +1.6% with strength in most market sectors except some of the classic “yield play” stocks plus a few companies that disappointed in what’s been a pretty volatile reporting season. It was great to see the ASX200 actually outperform most global indices, a trend we can see continuing for a few months at least – a positive reporting season has helped with around double the number of beats compared to misses. Interestingly the majority of the major upgrades came from overseas earners which not only illustrates the relative strength of global economies compared to our own but also the potential for these companies to keep kicking goals if / when the $A resumes its major downtrend since 2011.

The ASX200, like our portfolios, has recently seen a few major stocks trade ex-dividend including Commonwealth Bank (CBA) $2 fully franked, Suncorp (SUN) 33c fully franked and Woodside (WPL) 49c fully franked which further illustrates the underlying strength exhibited by the local index which has shrugged off these short-term negative influences.

Global stocks continue to follow our forecasted path which has basically been in play since mid-2015. Hence while our finger is on the pulse / we are seeing it like  a watermelon etc – the clichés abound, its vital to fully understand what we at MM believe comes next. Let’s again simply look at how we see the market evolving both short and medium-term, before we look at the reasoning and potential pitfalls later:

  1. Short-term – We are net bullish global equities targeting fresh all-time highs by many indices over the coming 1-2 months. We can easily see the ASX200 challenge the 6250 area minimum in March / April.
  2. Medium-term – We still believe a greater than 20% correction will commence this year for global stocks.

Hence MM is currently only holding 6% and 5% cash in our Platinum and Income Portfolio’s respectively i.e. we are very close to fully invested. MM’s current plan remains to significantly increase our cash levels into market strength ideally around 6250, or higher for the ASX200.

Remember what we said last week: In our opinion at MM “One of the keys to successful investing during 2018/9 will be being prepared to sell” – most investors weakest quality.

At this stage we believe US stocks in particular experienced a washout of weak longs and over committed short-volatility players but the major positions founded on value / economic optimism remain intact, we must maintain vigilance to evaluate when the interest rate “uncle” point is reached – historically bull markets are ended by Central Banks raising interest rates to fight inflation and then a recession usually follows. Investors should simply not forget we are potentially in the final stages of the second longest bull market in history.

Last week’s list of major winners / losers (+/- 7%) in the ASX200 again illustrates the typical impact of reporting season on individual stocks:

Winners: Flight Centre (FLT) +15.9%, A2 Milk (A2M) +37%, Ansell Ltd (ANN) +7.4%, Fairfax Media (FXJ) +19.7%, Lend Lease (LLC) +12.4% and QANTAS (QAN) +9.8%.

Losers: Woodside Petroleum (WPL) -7% and Vocus Group (VOC) -15%.

Following a strong session by overseas stocks on Friday night the ASX200 looks likely to open ~6030 on Monday, we are now bullish the local market short-term while 5925 is not broken. The recovery by US stocks has been assisted by substantial buybacks from the likes of APPLE, Cisco and Mastercard with the fuel for the buying coming from the repatriation of profits from the US following Donald Trump’s Tax Package.

–         Goldman Sachs estimates that the cash returned to shareholders from buybacks and dividends in 2018 will grow by $US1 trillion what a perfect recipe for a stock market blow-off top!

Todays report is going to bore into how we see local stocks moving over the next 8-weeks, into the dangerous “sell in May and go away” period.

ASX200 Monthly Chart

1 Seasonality / Statistics

We’ve bombarded you with bullish statistics / seasonality over recent weeks, especially when we aggressively bought the panic low around the 9th of February. Assuming we are correct and stocks are headed higher over March / April its time extrapolate some fresh numbers to generate some targets to help identify the optimum time to start reducing our stock market exposure, and potentially go short via ETF’s.

As we all know US stocks often provide the music to which global stocks dance, hence we ask how did they fare during the March / April period over the last 20-years:

  1. The average return for March / April is +2.7%, assuming February ended on Friday, not next Wednesday, that would extrapolate to 2820 for the S&P500, below our 3000 target area.
  2. However the numbers get far more exciting / bullish after a weak February, following a decline of 2.5% or more by US stocks the average return over March / April increases significantly to +4.7% - the S&P500 is currently down -2.7% this month.
  3. Hence if we extrapolate the numbers following a weak February the S&P500 target rises to 2876 i.e. fresh all-time highs but again below our preferred psychological 3000 area.

Now moving onto the ASX200, before we focus on market heavyweight Commonwealth Bank (CBA):

  • When the ASX200 falls / drifts in January, like this year, the quarterly low occurs 80% of the time in the first 5-10 calendar days of February - we believe this occurred perfectly on the 9th at 5786.
  • The average rally from the Q1 low into the April / May danger time is a huge 512-points / 10.7%.
  • Assuming that we have seen the low for Q1 that extrapolates to a target of ~6300 taking the more conservative of the above 2 statistics.
  • Historically the top usually kicks in between mid-April and early May as the below seasonal chart illustrates perfectly.

With the ASX200 struggling to meaningfully break over 6000 since the GFC it’s pretty hard to comprehend the market soaring up towards 6300 but as we regularly say investors must remain open-minded”.

ASX200 Seasonality Chart

 

For the ASX200 to rally in a major way over the coming months we need to see our “Big 4” banking stocks regain their mojo and regain some / all of their significant losses of the last month i.e. our Banking Index is down almost -7% since the 10th of January. However,  seasonally this is a very bullish time for our banks who did finally start outperform last week.

  • Over the last 10-years CBA has rallied on average over +6.5% over March / April, with March being noticeably almost twice as strong as April.
  • When we look at the other big 3 banks the average gain is on average actually higher, this makes sense as yield hungry investors start eyeing the looming dividend bonanza due in May.

Suddenly if we believe the “big 4” banks can rally say just +6% over the next 2-months then a 5% rally in the ASX200 towards 6300 becomes fairly easy to comprehend.

Summary – wherever we look from a seasonal / statistical perspective the numbers support our bullish view targeting 6250-6300 by the ASX200 in the next 2-months.

Commonwealth Bank (CBA) Daily Chart

2 Overseas Indices

No change, when we stand back and look at some major international indexes on a weekly basis they very look very constructive for a rally into a potentially very important April / May top:

  1. The US S&P500 looks very constructive for a rally towards 3000 although the statistics currently suggest 2900 may terminate the advance.
  2. The US NASDAQ corrected over 12% very quickly but it’s  regained over 85% of the losses, to be less than 2% below its all-time high, if it can just consolidate around current levels it will look primed for a move to fresh all-time highs.
  3. The German DAX has been one of our favourite charts over recent months and although its recovery has been fairly muted compared to the US it’s still targeting a ~10% rally from Fridays close.

US S&P500 Weekly Chart

US NASDAQ Daily Chart

German DAX Weekly Chart

  1. As MM subscribers know we watch the Emerging Markets (EEM) closely for 2 reasons at present, firstly they are highly correlated to our resources sector, and secondly because they have followed our technical path perfectly over the last 18-moinths.
  • The EEM is targeting further gains of close to 10% which is very encouraging for our decent resources exposure – BHP has rallied over +5% since its panic sell-off, even after a disappointing result i.e. Fund Managers still like the sector!

Emerging Markets (EEM) Weekly Chart

 

3 Interest rates / bond yields

Last week US 10-year bond yields closed above our own, not something that we have really witnessed in a meaningful way for many years. The main takeout on this for us is that it illustrates our economy is not firing as strongly as the US.

If the US bonds are going to yield above our own and their economy is perceived to be safer than our own its hard not to see then “little Aussie battler” trade lower. With our target well under 70c – a big win for US earning companies.

Australian v US 10-year Bond Yields Weekly Chart

At MM we love to read, something we have in common with Warren Buffett, as we continually look for light bulb moments whether it be on a macro, or company basis. A leading correlation that we picked up on this Saturday which goes back a few decades was that between the Volatility Index (VIX) and the US 3-month T-Bill yields, as the VIX is inversely correlated to stocks this amounts to a correlation between US short-term interest rates and stocks. This makes sense because as interest rates rise they suck money from stocks as term deposits become an increasingly more attractive form of investment on a relative basis.

–         Stocks regularly correct around 2-years after US T-Bills kick higher.

–         In this case US rates kicked up in late 2015 and just over 2-years later volatility goes crazy and stocks plunge.

–         Beware what comes next as rates significantly accelerate higher from September 2016 implying stocks will struggle again later in the year.

Basically this observation supports our long-term view that stocks will experience a +20% correction that should start in 2018.

US 3-month T-Bill v VIX Index Daily Chart

US S&P500 Monthly Chart

4 The $US

We’ve maintained our view on the $US which was the cornerstone of the MM Outlook piece for 2018.

No change, we are looking for a decent swing low in the $US, ideally just under 88, but its close!

The $US is close to a bottom which is likely to be bad news for the reflation trade i.e. resources.

NB The low may already be in place.

$US Index weekly Chart

Conclusion

On balance we still believe that stocks have found a short-term low that should be followed by a rally to fresh all-time highs by many indices.

However, we still believe that a +20% correction will unfold over 2018/9 and we must now give a revised 15% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

Catching our eye in Australian stocks / sectors

1 Banks

We discussed earlier how we like the look of the banking sector and the Bank of Queensland (BOQ) is another great example. After correcting exactly $1.84 again technically the stock looks poised to rally towards $14, or ~9% higher.

  • Over the last 10-years the BOQ has rallied on average above +7.5% suggesting our target is very realistic.

Another example of the Australian Banking Sector usually having  a stellar March.

Bank of Queensland (BOQ) Weekly Chart

2 Telstra (TLS) $3.48

TLS has become the stock everyone loves to hate, probably more than Myer (MYR) simply because its more owned by the average Australia. However very often people get “too close” to a stock and lose perspective:

  • BHP fell 70% from its 2011 into 2016 and remains 34% below that high and it’s still trading where it was over 10-years ago.
  • Telstra is trading 62% below its all-time 1999 high – plus of course its paid out some large dividends over the “lost / disappointing decade”.

I’m not comparing the 2 companies, especially not today, but you will not struggle to find someone who calls TLS a dog stock but I doubt if many are saying that about BHP BUT the above numbers suggest that shareholders returns are comparable.

If / when stocks correct the 9-year bull market we would not be surprised to see TLS outperform.

We are buyers of TLS under $3.30 and sellers around $3.85 – we still believe it’s a trading stock, with decent fully franked dividends on offer.

Telstra (TLS) Daily Chart

BHP Billiton (BHP) Monthly Chart

3 The “yield play” keeps sinking.

The message is simple, don’t be tempted, at least not yet. While last week the ASX200 gained +1.6% we saw Sydney Airports (SYD) -1.7% and Transurban (TCL) -1.8% both fall.

We would rather hold cash than either of these 2 stocks for the foreseeable future.

Transurban (TCL) Monthly Chart

“Shopping List”

Below is our basically non-existent shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 6% of the MM Platinum & % of the Income Portfolio in cash so we are fussy buyers : 

1.       Banks – We are comfortable with current exposure.

2.       Consumer Services – We are comfortable with our exposure at present.

3.       Diversified Financials – We are comfortable with our position at present.

4.       Energy – We are long WPL which just feels ok at present.

5.       Food and Beverage – Happily square at present.

6.       Healthcare – Square feels ok but our favourite stock is ResMed around $11.50.

7.       Resources – We have completed a lot of buying and are considering our sell levels moving forward.

8.       Real Estate – Another sector we are not keen on.

9.       Telco’s – We believe the Telcos will outperform in 2018/9 but our Telstra is enough at current levels.

10.   Retail – No investment buying at this stage.

11.   Gold – We have no interest considering our $US view.

“Selling List”

1.       Resources – At this stage we are looking for another 5-10% from our holdings.

Importantly we anticipate the resources will be the first section of our portfolios that we move to cash primarily due to our $US view.

Standout technical chart (s) of the week

WPL has had a tough few weeks courtesy of a significant rights issue and paying a 49c fully franked dividend.

  • WPL is still trading at the same level as when crude oil was around $US50/barrel, or 25% lower.

We believe the market has become a touch short-term focused and WPL is great value under $29.

Woodside Petroleum (WPL) Monthly Chart

Investing opportunities for the coming week(s)

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

  • We are unlikely to be buying in the coming weeks.
  • We have nothing very close to our sell areas at present but anticipate our resources will be in the cross-hairs first.

Trading Opportunities on our radar

It’s simple, MM believes NAB will outperform BHP over the next 2-months.

  • In early 2016 NAB was trading about $9 above BHP, today we’ve seen an almost $10 transformation with BHP almost $1 above NAB.
  • NAB / Australian Banks usually surge in March / April while BHP advances slowly, its switch time.

Buy NAB and sell BHP.

BHP v NAB Weekly 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, or fter the session when positions are traded.

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 23/2/2018. 4.00PM.
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