Market Matters Report / Market Matters Weekend Report Sunday 25th June 2017

By Market Matters 25 June 17

Market Matters Weekend Report Sunday 25th June 2017

Market Matters Weekend Report Sunday 25th June 2017

A soft week for the ASX200 which from a seasonal perspective shouldn’t come as a surprise. The index chopped around in a +/- 144pt range to close down -1.01% for the week while the US actually finished higher by +0.30%. Another week of underperformance for the ASX and our expectation that the Australian market will start to outperform overseas counterparts is yet to play out. It’s not all doom and gloom though as we approach the final week of the financial year given the Australian market is set to post its best financial year performance for the last three years. The ASX 200 is now up +8.3% financial year to date which looks good relative to 15/16 which saw the market up +2% and 14/15 where the market put on +5.7%.

That’s where the good news stops though and as we look at other global markets which have fared a lot better. The Dow Jones is up +19% while the UK is up 15% despite continued political and social unrest. Interestingly enough the Japanese market has put on an impressive +29% as huge amounts of central bank activity is starting to help asset prices, while the real scorcher has been the Greek market which has rallied by +53% this financial year.

We know that the Australian market is dominated by two main sectors, being the banks and the miners. The banks have had an extremely choppy year with CBA for instance trading between ~$69 and ~$88, a range of $19 or 24% basis the midpoint. As our subscribers should be aware, we’re about being more active around our portfolio allocations, simply not setting and forgetting and we’ve used this volatility to good effect in CBA (and others) throughout the year.

Looking at the miners, there’s clearly a mixed bag. The broad commodity index is down by -13% with Oil a big drag off by -12% this financial year. Iron Ore is actually up +2% while Thermal Coal has rocketed by +42%. Gold has lagged dropping by -6% but the real pain has been in the base metal complex with Lead, Zinc & Copper down between 18-25%.

Commodity Index – Monthly Chart

Interestingly, we’ve been negative Copper for a number of years and the longer term trends are still pointing lower, however from a shorter term perspective we can see a strong chance for a continued bounce back up to 300 (+15%). This view continues to shape our positive stance towards Oz Minerals (OZL) in the short term.

Copper Price Monthly Chart

From a seasonal perspective, the material sector specifically has a weak end on June before a very good month in July. In terms of our actual holdings, we’ve got RIO, BHP, FMG & OZL in our resource basket along with a small gold holding in Newcrest. Since the GFC, RIO has had an average gain of +5.15% in July being up 6 times and down 3. A similar trend in BHP with the diversified miner up an average of +4.04% in July, 7 times up and 2 down. Oz Minerals is a more volatile stock than BHP & RIO adding an average +8.60% in July up 6 times out of 9, however, 2 of those green months have experienced gains greater than +20% and two more were above +13%. The biggest decline in a July month for Oz has been -6%. In term of Fortescue, perhaps the most edgy horse in the stable, it too has enjoyed 6 positive months in July and 3 negative ones post GFC for an average gain of +7.04%.

Fortescue Metals (FMG) Daily Chart – remains a buy at current levels

For the ASX 200 over the next week, we remain neutral for now, however will become more bullish on the next 100pts decline if it eventuates over the next week or so. Last week we increased our cash holding to 15% giving us further ability to buy weakness. As suggested last week, while the market is still trading in the classic "sell in May and go away" seasonally weak period for stocks the internals of the Australian market are slowly improving which leads us to a short-term "sit on the fence" viewpoint, however there are changes to Super kicking in at the end of this month we can see plenty of reason for this June to end stronger than usual. For now, we will let the market show its hand before we turn short-term bullish.

On a medium-term basis, the ASX200 is trading in a very clear Neutral Pattern with support 5582-5628 and resistance 5909-5956 - a Normal Distribution for those of you who enjoy maths. The local market has now traded in this 374-point range for 19-weeks so while a breakout should not surprise it could still easily take a little while longer.

ASX200 Monthly Chart

Standout technical chart (s) of the week

Last weeks ‘technical chart of the week’ flagged Sirtex suggesting a buy around $13 targeting $18. It traded down to below $13 closing the week out at $13.58. This week we’ll look at something completely different - an income trade on Wesfarmers (WES). Wesfarmers has a very defined range between the high 30’s and mid 40’s - lets call it an $8 range or basis midpoint of $42, a range of 19% . Wesfarmers is now trading in the bottom section of the range and is coming up to a dividend in August expected to be around 95cps full franked.

Assume a purchase of WES shares at $40.72, selling the September $41.01 European Call Option for 85c (theoretical price) and picking up the dividend on August, the standstill return ( incl franking but not including capital gain) would be $2.20 or 5.40% before costs. By selling the European call option we would not be exercised before expiry and therefor are assured to pick up the dividend plus the option premium. If the stock is trading above $41.01 at expiry of the option in September, the return would be 6.1% for a three month hold.

Wesfarmers (WES) Monthly Chart

Investing opportunities for the coming week(s)

1. We are still looking to buy an additional 2.5% in WBC under $30.
2. We are sellers of TLS ~$4.60, although we may amend this lower if we see better opportunities for the funds into weakness
3. We can buy Wesfarmers for income
4. We will likely sell QBE on a move to $12.50 or add to our holding on a pullback to  ~$11.50. Our original purchase was $10.49

Trading Opportunities on our radar

We remain keen on Fortescue Metals (FMG) and RIO for shorter term traders. FMG can be bought <$4.70 with stops below $4.40 targeting $5.50
Seek (SEK), a position we have in the portfolio can be bought for a move above $18.50, although after the recent bounce risk / reward is not as attractive

Summary

No major changes, we continue to believe that US and local stocks can add to their recent gains into 2017, but short-term we are a little 50-50. At this stage we are comfortable holding 15% of the MM portfolio in cash following the sale of Janus Henderson (JHG) last week for a good profit. If Telstra is sold, this will be to fund a new purchase, perhaps Wesfarmers.  Bigger picture, we continue to believe the ASX 200 will break over 6000 in 2017

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 24/06/2017. 3.00PM.
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