Market Matters Report / Market Matters Weekend Report Sunday 25th March 2018

By Market Matters 25 March 18

Market Matters Weekend Report Sunday 25th March 2018

Market Matters Weekend Report Sunday 25th March 2018

Todays report was intended to be relatively short given it’s clearly time for concise analysis / action plans as stock markets are on the precipice of a bear market after enjoying a 9-year bull market since the GFC, but alas there’s alot unfolding so it's not as short as I had hoped. A potential trade war between Donald Trump’s “US first” corner and China - the world’s two largest economies, appears to have broken the back of the second longest bull market in history. As a point of interest we are concerned around this high stakes game of poker Mr Trump has started if it were to become a long-term issue. 

Some of my current thoughts; 

  1. Donald Trump has an election slowly looming on 3rd of November 2020 but China’s leader Xi Jinping now has a position for life - not good for Trump.
  2. The Chinese have a tendancy to think more about the next generation (s), yet the Americans don't (a generalisation I know). I wonder whether many Americans today would accept falling living standards in an attempt to apply pressure to China for the betterment of generations to come? Particularly hard to envisage coming on the heels of the painful GFC led recession - Trump would clearly cop the blame for this. 

We currently believe this is sabre rattling by “The Donald” but he must be very careful with this foe, it’s not a “spoilt fat kid from North Korea”, he’s now playing in the big league. China appears to be relatively conciliatory at present in my opinion by only countering with $3bn worth of tariffs (under 2% of their trade with the US) compared to Trumps $60bn opening salvo, at this stage it feels like a slight flex of the bicep at best. Although there were also rumours on Friday night that China would reduce its purchase of US debt, just when Trump needs to pay for his tax cuts!

However, we can discuss these and many more fascinating political issues at length but all that really matters for this report is how stock markets react and how we can add the most value for subscribers from a calculated risk / reward perspective.

  • Almost $US1trillion was wiped off of global equities last week, raising the question of whether the +20% correction we have predicted would commence this year is already underway.

The last 2 major corrections since the GFC gave us a warning as illustrated below before the major pullback, we are 50-50 whether the last 2-months weaknesses is a 3rd warning, or a major decline has already started.

  • Hence today I have looked at more micro examples for some specific risk / reward opportunities in these exciting and volatile times.
  • Remember investors can make great returns in bear markets by applying strict risk / reward i.e. be prepared to sell and of course at times by “playing” the market from a negative viewpoint e.g. ETF’s.

Today is another great time for a Warren Buffet quote, whether we are buying or selling it’s a time for action and not to be caught frozen in the headlights like a blinded deer:

  • We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful – Warren Buffett.

MSCI Global World Index Chart


Following Fridays additional 424-point fall on Wall Street the  ASX200 is poised to open around 5755 / 1.1% lower with a solid performance by BHP in the US marginally helping the tone – BHP was only down 19c supported by a very strong oil price.

  • Mondays open at fresh lows for 2018 switches MM to a negative overall short-term stance on the ASX200 unless we can close back above 5830, and especially 5900.
  • Medium-term major support is now rapidly looming around the 2017 lows of 5600, this would represent a further 220-point correction and then become of similar magnitude to the ~550-point pullback which we experienced in 2016.

Investors should also remember that bear markets can be compared to a ping-pong ball going down a concrete staircase i.e. its going to reach the bottom but will have some sharp bounces along the way.

  • Reading the headlines on Bloomberg on Saturday, it seems the game has changed with most now making the call of - it’s time to sell strength and no longer buy weakness.
  • Remember last week we said “MM remains an overall seller of strength as opposed to buyers of weakness”, so in that respect, our view has not changed. 

ASX200 Chart


ASX200 Chart


Moving onto US stocks the picture is very similar although not yet as bearish with US stocks still holding above their 2018 lows. We’ve used 2 charts below to illustrate our thoughts and importantly the potential 2 scenarios and risks ahead as we see them.

  1. S&P500 – The broad based S&P500 at this stage is only testing its February lows, nothing surprising here BUT if it spends time below 2500 we will turn bearish targeting ~1850 i.e. a painful 25% fall. Its important to note that in 2015 the market made a fresh low by only 3% before commencing its 50% rally, hence a dip under 2532 is not a panic but what we call “acceptance” would be. Scenario 1 is the S&P500 holds the 2500 area and we then commence another rally towards the 3000 area.
  2. Dow Jones – We’ve used the daily Dow Jones chart to outline our worst case scenario for US equities. Scenario 2 – if this labelling proves correct the Dow will accelerate lower over the coming weeks probably reaching ~20,000 before we know it.

On a pure index level we are probably 50-50 which scenario will unfold for stocks moving forward BUT we are confident all should be revealed next week.

Not surprisingly the threat of a global trade war topped the risks to stocks in March’s Bank of America’s fund manager survey, significantly beating the perceived economic risks caused by inflation. On a broad basis we also saw confidence is ebbing away in the bull market even as money flow into stocks remains buoyant however what caught our eye was cash levels at only 4.6%, this is historically a very low level suggesting that quick support for a tumbling market is certainly no guarantee.

US S&P500 Chart


US Dow Jones Chart


Selling whether to realise a profit, and especially to take a loss, is where most investors do themselves a disservice. However lets consider the bearish scenario that stares in the face of this bright Sunday morning on Sydney Northern Beaches:

  • Australian / global stocks have potentially finished their 9-year bull market and we should see a decent correction to the whole advance.
  • MM’s target for such a pullback will be well under 5000 for the ASX 200 (15-20% lower) hence its far from too late to sell / gain negative exposure to stocks.

Investors should be excited not scarred of the next few years if indeed we;'ce started a new bear market! If we can add value / make money in a declining market we will be excellently placed both financially and mentally to start buying stocks as everybody else throws in the towel and becomes on mass bearish – ideally around the lows of 2016.

  • Long-term – MM believes that a pullback back towards the lows of 2016 will present the best buying opportunity for stocks for many years.

 ASX200 Chart


ASX200 Accumulation Index Chart


MM is now only holding 6.7% and 4.7% cash in our Platinum and Income Portfolio’s respectively following Fridays planned foray back into Orocobre (ORE) around $5.80. Hence we remain heavily invested considering our medium-term outlook for global stocks.

MM’s current plan remains to significantly increase our cash levels if the market shows its hand to the downside next week, however, from a risk / reward perspective in the short-term we may actually look at a couple of buying opportunities with close stops i.e. we will take losses if global markets fail to hold together next week.  

1 Seasonality / Statistics

We‘ve been discussing the seasonality of the ASX200 for most of this year but simply its failed so far this month e.g. NAB has never closed negative in March for the last 10-years but the stock is already down 4% for the month with a gap lower expected on Monday.

History tells us that when Australian banks are weak over the first 3-months of a year they usually enjoy a great April with an average return over 4% with a success rate of almost 90% - which would be nice and does fit both our Scenario 1 and Commonwealth Bank short-term picture but so far 2018 has clearly been different.

ASX200 Seasonality Chart

The Royal Banking Commission and Donald Trump have joined forces to exert pressure on our banks in their usually favourite time of year: 

  • Over the last 10-years CBA has rallied on average over +6.5% over March / April but so far this March CBA is -4.7%

Hence if the “big 4” banks can vaguely emulate their normal April performance following a weak January to March CBA should represent excellent value into any further weakness.

Commonwealth Bank (CBA) Chart


2 Overseas Indices

 Stock markets obviously changed dramatically last week and we’ve covered the US and Australian markets earlier in today’s report, 2 other indices caught my eye from the MM  Chart Pack:

  • The Emerging Markets remain solid on a weekly basis ideally targeting an advance of ~10% before major concerns will evolve technically.
  • Hong Kong’s Hang Seng fell hard last week but would represent excellent risk / reward buying below 28,000 if it falls sharply next week i.e. -8% lower.

Emerging Markets (EEM) Chart


Hang Seng Index  Chart

3 Interest rates / bond yields

Last week US 2-year bond yields slipped as investors chased the perceived relative safety of bond markets.

At MM we remain bullish US bond yields but following the recent strong gains over the last 12-months a pullback back towards 2% for the 2-years would not surprise.

US 2-year Bond Yields Chart


However when we explore the correlation between the S&P500 and US 2-year bond yields its very pronounced although out of the 2, equities generally lead. Hence we expect short-term interest rates in the US to consolidate lower but unfortunately it’s no great help when forecasting the next step for stocks.

S&P500 v US 2-year Bond Yields Chart

4 The $A and  $US

Unlike stocks FX land was relatively quiet last week as we continue to watch the $US very closely – remember it was one of the cornerstones of our MM Outlook piece for 2018. No change, we are looking for a decent swing low in the $US, ideally just under the 88 area which still feels very close.

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

However we believe the little “Aussie battler” has already shown its hand, aided by weak iron ore / base metal prices.

  • We remain technically bearish the $A targeting the 65c area.

The Australian Dollar ($A) Chart


$US Index Chart

5 Copper gives resources some hope

Copper has endured a tough 2018 so far falling over 10% from its January high however on a risk / reward basis we actually like copper.

  • We like copper ~295 targeting 350 with stops beneath 280, pretty good risk / reward of almost 3:1.

NB Copper is usually regarded as a bellwether to the global economy so if markets decide we are likely to experience a trade war triggered recession copper could easily plummet significantly lower.

Copper Chart



We see global equities unfolding in one of 2 very different scenarios moving forward:

  1. Scenario 1 – Stocks are close to a decent low and should hold reasonably close to recent Februarys lows before rallying back towards January’s highs at the very least.
  2. Scenario 2 – Equities have topped for a few years and acceleration down should continue over the coming weeks – our ultimate target would be at least 20% lower.

Catching our eye in Australian stocks / sectors

1 Oil looks good short-term

We remain bullish crude oil which rallied back towards multi-year highs on Friday – our target remains ~$US70/barrel.

  • While we are looking to increase cash levels our positions in both BHP and WPL should benefit from strong energy prices – WPL was up +2.7% last week while BHP outperformed only falling -1.3%.

Ideally we will sell / reduce these 2 positions into a pop by crude oil to at least ~$US68/barrel.

Crude Oil Chart


2 Telcos remain interesting to us

No change from last week but further weakness within the sector has brought a few of our “active buy levels” closer. We believe TLS has now become a trading stock which will probably provide one, or two, great opportunities annually, at least for a while.

  • We are buyers of TLS below $3.20 and sellers above $3.75.

At the more speculative end of town Vocus (VOC) looks attractive from a risk / reward perspective if we get a continued sell-off in the sector:

  • Vocus (VOC) $2.50 – we are buyers into fresh lows around / below $2.20.

NB There is no hurry at this stage to chase a sector in such an entrenched downtrend, especially in our case when we have recently gone long TLS.

Vocus (VOC) Chart

3 Diversified Financials

No major change, the Financials have experienced a very average time recently but Platinum (PTM) is rapidly approaching our buy zone:

  • Platinum Asset Mgt. (PTM) $6.04 – Looks an excellent risk / reward buy into weakness around $5.70 targeting a 15-20% bounce.

Platinum Asset Mgt. (PTM) Chart


4 Lithium opportunities continue – we hope!.

On Friday we bought back into Orocobre (ORE) around $5.80. This is our second foray into the stock recently plus we enjoyed a healthy win from current sector favourite Kidman Resources (KDR).

While ORE is likely to struggle if equities do enter a bear market we like its lack of direct correlation to the ASX200 – the main reason we bought ORE on Friday as opposed to say CBA.

Orocobre (ORE) Chart


“Shopping List”

Below is our list of stocks plus ideal levels which are close after last week’s aggressive falls, we currently have only 6.7% of the MM Platinum & 5% of the Income Portfolio in cash, hence we are extremely fussy buyers :

  1. Platinum (PTM) on weakness beneath $5.80 – this would be an active play looking for a 15-20% bounce.
  2. Vocus (VOC) below $2.20 – this would be an aggressive trade in our old nemesis.

“Selling List”

  1. Alumina (AWC) around $2.70.
  2. Woodside (WPL) between $30.50 and $31.
  3. Plus we will increase our cash position / take on negative positions if scenario 2 starts to unfold.

Standout technical chart (s) of the week

The US small cap index Russell 2000 remains in a perfect Neutral Pattern – Normal Distribution for the mathematicians out there.

  • Our preferred scenario is now a test of the support area ~1450, or -4% lower.
  • Our best guess would be a low in the first week of April before at least a very strong bounce.

Russell 2000 Chart

Russell 2000 Chart


Trading Opportunities on our radar

The ASX200 has shown its hand to the downside unless it can close back above 5900.

  • Buy Vocus (VOC) beneath $2.20 – this is aggressive but we like it.
  • Sell 50-point bounces in the ASX200 with stops above 5900 for now.

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.



Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . Positions are updated each Friday.


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 24/3/2018. 8.00AM.
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