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

By Market Matters 25 November 18

Market Matters Weekend Report Sunday 25th November 2018

Market Matters Weekend Report Sunday 25th November 2018

In the face of adversity last week the Australian market showed some real backbone– the ASX200 fell only -0.25% while the S&P500 was down -3.8% and oil tumbled -10.7% on oversupply concerns. The core of the ASX200’s outperformance was our banking sector with all of the “big 4” banks rallying 3%, or more - we will look into the sector in more detail later but MM continues to like the sector late  2018 / early 2019. The interest rate sensitive / safe haven Real Estate and Utilities Sectors also fared well closing positive on the week as economists started to question the ongoing strength of the US economy over the coming year which has capped the rally in the US bond yields of late.

Under the hood we saw only a third of the market manage to close in the green but such is the huge weighting of our “big 4” banks that it’s hard for the bears to take control when this sectors rallying i.e. ANZ, CBA, NAB and WBC make up a whopping 21.6% of the ASX. Not surprisingly considering the plunging oil price the Energy Sector was the worst performer declining  – 3.8% but disappointingly the Materials / Resources weren’t too far behind falling -2.4%, both look likely to have another tough 1-2 weeks ahead.

Of the 2 likely scenarios we outlined last week obviously B became reality:

A – The market experiences a corrective pullback towards 5800 prior to an assault well above the psychological 6000 area.

B – The October weakness returns with a vengeance and stocks retest, and probably break, the 5600 area.

However the ASX200 recovered well from its dip below 5600, almost managing to close up on the week. We are now bullish targeting ~5950, in what we imagine will be a staircase style recovery averaging ~10-points per session, we are confident there will be plenty of non-believers leading to days like Thursday and Friday where we open around the lows of the day only to grind higher throughout the session.

MM is bullish the ASX200 into Christmas / 2019 targeting the 5950 area +/- 50-points.

The ASX200 is set to open down ~0.75% on Monday courtesy of weak US stocks and assisted by BHP which tumbled almost 2% in the US following the oil price lower.

ASX200 Chart

Until further notice we will be showing the below chart fairly often, assuming local stocks unfold as we anticipate – US stocks are currently trying to derail our view but over the last 20-years the S&P500 has on average closed up +1.4% in both November and December, while managing to finish in the black 75% of the time. With only one trading week remaining its going to need to get a wriggle on this year as where currently sitting down -2.9% after Fridays fall but we note the majority of Novembers strength is usually after Thanksgiving (last Thursday).

Remember some of the insights from Fridays morning report, If the Christmas rally starts in November, which occurs over 50% of the time, the Dec high is usually in the last 48-hours of December but it then usually kicks a little higher into mid-January, or even early Feb.

Time will tell if we have seen a meaningful swing low last week (November) at 5594 but if we have:

1 - Be patient with general selling as the market usually rallies into the last 48-hours of December.

2 - Don’t be surprised if the market has a little “gas left in the tank” for early Q1 2019.

ASX200 Chart

Global Indices

Global equity markets were again soft last week led the US and especially its large Energy Sector, in fact the S&P500 experienced its worst Thanksgiving week since 1939. Uncertainty is ruling the roost at present and although volumes were down by 30% the bulls clearly felt more comfortable in cash over what’s a long weekend for many.

We can still see a touch more downside risk in US stocks but our roadmap for the Dow remains intact and the second red arrow feels close to completion.

US Dow Jones Chart

Remember 2 of our comments from last week:

1 – The bullish uptrend from its 684 low back in March 2009 remains intact.

2 – The chart pattern has been literally copybook stuff since the GFC low including two exact retracements of 355-points.

We now need a close above 2040 to reignite our short-term bullish view for the global benchmark

MSCI World Index Chart

Europe was softer last week testing fresh 2018 lows, short-term we can see a choppy advance from current levels but the bigger picture is not pretty.

MM is bearish the German Dax over the coming few years targeting  ~20% further downside from current levels.

German DAX Chart

Updated Macro Outlook

No major changes economically over the week as we saw economists continue to question if the Fed may be forced to delay / reduce its planned path of rate hikes into 2019.

We feel after the charge higher in bond yields over the last year a period of consolidation is likely, similar to 2017. Many investors are reducing bets on the number of US rate increases over the next year because of fear for US stocks, an interesting tussle between the Fed and Donald Trump whose been outspoken around the Fed’s rate rises.

US 10-year bond yield Chart

President Trump looks like he may get down to business following his turkey dinner as both he and China’s leader Xi have signalled they are ready to commence talks on trade at the Group of 20 summit in Argentina next week. For our expected Christmas rally we believe these talks need to go well which should then send the VIX back below the psychological 20% area i.e. markets calm.

US Volatility Index / Fear Gauge (VIX) Chart

1 The banks look good into 2019

The Australian banking sector has endured a tough 2018 with the likes of CBA down over 11% with a few weeks remaining – before dividends. You only have to read the weekends press to realise it’s as hard to find a Banking Bull today – just  as it was a Bear back in 2015 but as we often say “elastic bands get stretched way too far in both directions”.

However the Hayne Royal Commission and APRA lending restrictions are slowly becoming old news and fund managers sound like their largely underweight the sector which could easily create a self-fulfilling rally in the weeks / months ahead.

MM likes the banks into 2019 and believes their largely sustainable dividends will lead to the sector outperforming over the next few years.

CBA actually made fresh quarterly highs this week as its stealth like recovery gathered some momentum, we can easily see this rally testing $75, or another 5% higher.

Similarly Westpac (ASX: WBC) is recovering well and we can see a short-term rally to $28, or even $30 i.e. 7.5% and 15% respectively – actual levels are a touch trickier to forecast due to Novembers recent 94c fully franked dividend.

Commonwealth Bank (ASX: CBA) Chart

Westpac (ASX: WBC) Chart

2 No hurry buying the Resources Sector.

The Australian Resources Sector struggled last week even when we look beyond the energy stocks which understandably remain under pressure.

MM currently has direct exposure via RIO Tinto (ASX: RIO) and Western Areas (ASX: WSA) which although being well below an index weighting feels enough at present. BHP is set to open down ~2% on Monday, under $31 well below the $34 where we exited our position but it’s not cheap enough for us yet.

MM still has no interest in the big Australian until under $30, well over 5% lower.

BHP Billiton (ASX: BHP) Chart

Similarly South32 has been on the MM radar over recent months but for the wrong reason – we have been bearish targeting a test ~$3.

While we are not likely to buy the BHP spin-off our target still being over 5% lower lends weight to our sub $30 target for BHP.

South 32 (ASX: S32) Chart

When we look overseas the picture is no more exciting, in the short-term Vale the world’s largest producer of both iron ore and nickel looks poised to decline another ~10% before the risk / reward profile will become attractive.

Vale (US) Chart

3 Oil stocks may be worth a “punt”.

Many investors have been caught trying to pick the bottom of the current 35% plunge crude as was illustrated by Friday nights tumble in crude and US energy stocks e.g. Devon Energy and Marathon Oil both fell over 4%.

However for the brave we like Beach Petroleum (BPT) around $1.40-45 for a 25% bounce.

Crude Oil Chart

Beach Petroleum (ASX: BPT) Chart

4 The $US still looks bearish

The $US remains MM’s best call of 2018 year and it appears to have again shown its hand – we are now bearish the $US targeting a ~3% decline in the short-term, back to its late September lows. The $US currently feels like its “hanging in there” because of volatility in US stocks, not a reason to chase the greenback in our opinion.

As we touched on earlier economists are starting to wonder if the Fed can / will tighten rates once in December and 4 times in 2019, as they have targeted, if the are forced to take their foot off the gas it should be negative for the $US. The implications if we are again correct are fairly wide reaching:

Firstly the $US has received a “safe haven” bid whenever stocks have tumbled in October & November, a weaker $US implies equities will recover, or at least not fall aggressively into 2019.

$US Index Chart

Theoretically the following 3 correlations should play out if / when the $US pulls back:

1 – If the $US Index corrects it should be good news for our resources holdings as the Bloomberg Base Metals Index is inversely correlated to the $US – doesn’t feel right just yet as discussed earlier.

2 – If the $US Index corrects it should be good news for our Newcrest Mining (ASX: NCM) position as gold is inversely correlated to the $US – our current target for NCM is ~$21.80, around 3% higher.

3 - If the $US Index corrects it should be good news for the Emerging Markets (EEM) which are inversely correlated to the $US and especially so in 2018 due to the escalation of fears around serviceability of EEM debt denominated in $US. This makes both technical and fundamental sense to MM.

$US Index v Emerging Markets Chart

5 The Emerging markets remain constructive.

As touched on above we are now bullish Emerging Markets targeting at least a 5-6% bounce, perhaps President Trump will start to appease the world next week at the G20 meeting in Argentina. Region heavyweight Tencent makes up 4.5% of the Emerging Markets Index and following its excellent profit report still looks set to bounce at a further 6-7% i.e. over 20% above last month’s low – a large plus for the index and region.

Finally as discussed above weakness in the $US is very constructive EEM and we like this call. Our target for MM’s long exposure to the EEM via the iShares ETF (ASX: IEM) is now ~8% higher.

Emerging Markets ETF (EEM) Chart

Tencent Holdings Ltd (700 HK) Chart

Conclusion

As subscribers know in the bigger picture we are looking for a more defensive portfolio at this point in time i.e. stocks that provide a constant dividend and stable earnings regardless of the state of the overall stock market.

However we remain mildly positive short-term targeting a Christmas rally ideally towards 6000 where MM will significantly increase our cash position.

We may look to increase our exposure to the resources space if they correct as expected e.g. BHP ~$29.50 and this would obviously be via a  “switch”.

Chart of the week.

A great business – simple product that has resonated with so many consumers, we’re just cautious on the  regulatory risks it carries. Technically however, the  chart pattern is a corker looking for a rally back towards $14.50.

MM likes APT as an aggressive play at current levels for a  +25% rally.

Afterpay Touch (ASX: APT) Chart

Investment of the week.

We are fans of this business and are actually long from higher levels but the stock has been sold off aggressively along with the whole high growth / value sector.

MM remains comfortably long and would be buying if we had no position.

MM likes ALL for an initial ~10% rally from current levels.

Aristocrat (ASX: ALL) Chart

Trade of the week.

We’ve found 2 stocks today, one buy and one sell:

1 Janus Henderson (ASX: JHG) – we are long this investment manager from higher levels and recently trimmed the position back to 5% for simple risk reasons, however technically the stock finally looks good for at least a 10% bounce.

MM likes JHG as aggressive play at current levels for at least a +10% rally.

2 Sonic Healthcare (ASX: SHL) – we are bearish SHL medium term targeting sub $20.

MM likes SHL as an aggressive sell into the current bounce.

Janus Henderson (ASX: JHG) Chart

Sonic Healthcare (ASX: SHL) 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.

Have a great day!

James & the Market Matters Team

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 after the session when positions are traded.

Disclaimer

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