Market Matters Report / Market Matters Weekend Report Sunday 26th February 2017

By Market Matters 26 February 17

Market Matters Weekend Report Sunday 26th February 2017

Market Matters Weekend Report Sunday 26th February 2017


Last week the ASX200 traded almost exactly as we have been expecting, with the resources sector weak and the rest of the market fairly quiet except of course stocks whose reports surprised the market - there were plenty of them in both directions! Markets are very exciting when they follow the path we are anticipating as investors, or traders, it means we can plan our next moves hopefully like a Chess Grand Master. The phrase "make hay while the sun shines" definitely applies to investing as markets do not throw up great opportunities every week. Hence there appears to be  a very good chance that MM will be fairly active during late February / early March.

Please note that today's report is a little longer than usual, but we encourage everyone to read it all as we believe it contains some exciting insights moving forward.

Firstly looking at the local market in the short term, it rallied strongly 252-points (4.6%) fairly early in the month  before basically treading water over the last 2-weeks as we went through a net positive but fairly volatile reporting season. During periods where stocks are going ex-dividend we focus on the futures contract (SPI) that mathematically takes into account these dividends, which actually amounts to around 50-points from the ASX200 over February / March.

Short-term we remain positive the local market while the March SPI trades over the 5653 level - simply the mid-point of the advance.

Share Price Index (SPI) 60-minute Chart

Secondly, let's look at 2017 combining the usual seasonal influences with our bigger picture view for stocks:

1. The ASX200 usually drifts in March before rallying nicely through April as investors receive some big dividends from some of our major companies like CBA, Telstra, RIO, BHP and Wesfarmers. Obviously a certain percentage of this dividend income gets reinvested back into stocks hence supporting the market.

2. The banks / financials usually rally until around 2/3 of the way into March before a small pullback followed by a strong move into late April. We remain comfortable with our bank exposure at present.

3. Conversely the resources sector usually struggles through March before rallying in April with the whole index.

Hence over the next 2 months we are comfortable remaining fully exposed to stocks and importantly we will look to buy weakness in resources.

ASX200 Annual Seasonality Chart

Thirdly, lets again look at the two overseas share markets which we have been focusing on over recent weeks:

1. The German DAX - The DAX has already corrected around 2% from our targeted 12,000 area, ideally there is another 3.5% to go. Currently the ASX200 is following the European indices closer than their American counterparts.

2. The US Russell 3000 Index - We have raised higher our ultimate target area for US stocks by ~2%. The current advance is unfolding in a slightly more bullish manner than first anticipated. Overall we still believe a 4-5% pullback will occur in coming months but it may be a few months away - May is looming fast.

Both the DAX and US stocks are bullish over the next ~6-months but short-term the DAX looks set to fall over 3% which should assist some buying in March if the ASX200 remains in sync with European indices.

German DAX Daily Chart

Russell 3000 Index Quarterly Chart

Just quickly when we look at the most watched and traded US index the S&P500 it can be clearly seen that it's RSI (Relative Strength Indicator) has broken over the top red band - many technical traders are very quick to call this overbought, a sell etc. However, we believe it is usually the opposite, a very bullish sign, the market spent 2-years with this elevated RSI between 2013 & 2014.

Hence, at MM we still believe US stocks have further decent upside to complete this bull market advance, which started from 667 in 2009. We are still targeting a 25% correction in the next few years but not yet.

US S&P500 plus RSI Monthly Chart

Fourthly, moving onto the resources which was the majority of last Weekend's Report ( where we discussed in detail our reasoning for our targeted decent pullback in our major miners e.g. BHP, FMG and RIO. Last week we witnessed some aggressive selling within the sector that hopefully will bring stocks into our targeted "Buy Zones" in the not too distant future:

1. BHP Billiton (BHP) has now fallen $3/ over 10% from its high in January with further 33c fall expected on Monday to ~ $24.73. Our ideal buying area for BHP is ~$24, now less than 3% away. BHP also goes ex-dividend on the 9th of March - 40c fully franked which would take the stock very close to our target in one go.

2. Fortescue Metals (FMG) fell 9.6% from its multi-year high last week at $7.27. We continue to target a test of the $6 area for FMG in coming weeks, close to another 9% lower. FMG goes ex-dividend 20c fully franked next Thursday which all things being equal would take the stock to within ~5% of our target.

3. RIO Tinto (RIO) fell 10% from its high last week but it should be acknowledged that it traded ex-dividend $1.64 last Thursday. The following RIO chart illustrates how the stock has a tendency for short sharp corrections, our ideal buying level is under $59, or another 6% lower. If this pullback does occur it's likely to look very average, similar to Friday, but we will definitely stand up and buy RIO into weakness under $60.

Overall no change, we are buyers of these large Australian miners into further weakness. We may even consider a Buy / Write strategy, or other option play with decent dividends looming for FMG and BHP.

RIO Tinto (RIO) Weekly Chart

Standout technical chart (s) of the week

FMG was smacked almost 10% after making a multi-year high last week, we simply believe the market has simply got a little too long - there is nothing wrong with FMG especially with iron ore over $US80/tonne, let alone the current $US90/tonne. Every week iron ore defies the many economists and remains firm resource analysts will be closer to further upgrades for FMG - they have nothing like today's levels in their current models.

Once the panicking longs have been squeezed out this stock can still surprise to the upside. The last $1.19 pullback happened in December it was all over in just 2 weeks.

We are buyers of FMG around $6, or potentially via a buy / write prior to next weeks 20c fully franked dividend.

Fortescue Metals (FMG) Weekly Chart


We now feel that US and local stocks extend recent gains well into 2017, locally we need the current correction in the resources sector to play out before the overall index is likely to again push higher.

Medium term a slight tweak, after a further rally of ~8% by US stocks we are targeting a 25% correction over a few years. On balance we believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open unchanged on Monday, short-term we need a break of 5650 by the March SPI to lose our net bullish view for the overall index.

Potential Investing opportunities for the coming week(s)

We continue to hold 20% in cash which is likely to be deployed towards the resources and Healthcare sectors in the short-term

We are considering 3 tweaks to our portfolio, and not surprisingly one outright purchase in coming weeks.

1. Buy BHP, FMG and RIO into weakness, potentially 2 of the 3.

2. An aggressive play is to take profit on our NCM before Donald Trumps address to congress on Tuesday. We feel gold is fearing the worst and the US President is unlikely to hurt markets, especially as he is enjoying taking credit for rallies in stocks - remember we regard gold stocks as aggressive plays as opposed to long term investments. We believe we can re-enter gold stocks at lower levels.

3. Increase our PTM position to 7.5% after last week's solid report and before next Wednesday's 15c fully franked dividend - the stock yields 8.95% grossed up for franking. See Friday Afternoons Report:

4. Switch our 5% in Healthscope (HSO) after it has failed to rally on a solid report, our position is breaking even at present. We also like the Healthcare space into 2017 so hence may overall increase our exposure:

(1) We like Ansell (ANN) under $21 after taking a good profit in December above $25 i.e. well over 15% higher.

(2) We like Ramsay Healthcare (RHC)  now it has corrected over 20% since its 2016 highs, while HSO remains unchanged - a good switch.

* Watch out for trading alerts.

Potential Trading opportunities for the coming week

We unfortunately see no obvious trades locally this week but we do still like our short FMG position and VOC / TPM feel like they have bottomed for now.

Patience is a virtue with trading and the next 2 weeks feel more like a time for the investors - but you never know!

* Watch out for trading alerts.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 24th February 2017 is below:

We still hold 20.5% in cash, plus we added a short FMG position via options. We buyers of weakness in resources and are looking at a few portfolio "tweaks" moving forward.

* Watch out for trading alerts.

Australian ASX200

The ASX200 could easily break over 6000 in 2017 before the significant correction we are targeting unfolds over the coming few years - the key remains to be open-minded.

Considering the recent monthly ranges we had experienced it's no surprise that February has become choppy after its initial strong advance, March will start next Wednesday and we are again likely to see a ~105-point monthly range.

Chart 1 – ASX200 Monthly Chart


Chart 2 – ASX200 Weekly Chart


Chart 3 – ASX200 Daily Chart


Chart 4 – March Share Price Index (SPI) 60-mins Chart


American & Canadian stock market indices

US stocks have surged over 16% since Donald Trump's victory with the Dow, Russell 2000, Russell 3000 and finally the NYSE Composite making fresh all-time highs. We remain more cautious on stocks, our best "guess" at present is ~8% higher i.e. a slight reversion wards.

Importantly US indices are in a very clear final "Phase 5" of a major bull market since early 2009. We see further upside in what should be a choppy / volatile year prior to a major downturn that is likely to last a few years and correct ~25%.

Chart 5 – Dow Jones Index Monthly Chart


Chart 6 – Dow Jones Index Daily Chart


Chart 7 – S&P500 Index Monthly Chart


Chart 8 – S&P500 Index Daily Chart


Chart 9 – Russell 3000 Quarterly Chart


Chart 10 – NYSE Composite Index Monthly Chart


Chart 11 – Russell 2000 Index Monthly Chart


Chart 12 – US NASDAQ Index Monthly Chart


Chart 13 – The Canadian Composite Index Monthly Chart


European stock market Indices

European indices have broken out to the upside and technically are bullish with targets for the German DAX of ~+10% and Swiss SMI ~+15% - potentially fund managers that have been caught overweight cash are searching for value in previously weak markets. However, on a fundamental basis we may need to wait for some election results later in the year that do not favour extremists for this strength to unfold.

Chart 14 – Euro STOXX 50 Index Monthly Chart


Chart 15 – UK FTSE Index Weekly Chart


Chart 16 – German DAX Index Monthly Chart


Chart 17 – Swiss SMI Index Quarterly Chart


Chart 18 – Spanish IBEX Index Monthly Chart


Asian & Emerging stock market indices

Asian indices remain bullish with the Hang Seng index looking poised to rally ~4% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher. Similarly the Emerging Markets remain in a positive uptrend, generating no sell signals, even after a poor week.

Chart 19 – Hang Seng Weekly Chart


Chart 20 – China Shanghai Composite Index Weekly Chart


Chart 21 – Japanese Nikkei 225 Index Monthly Chart


Chart 22 – Emerging Markets MSCI ETF Weekly Chart


Interest Rates & volatility

Short-term interest rates in the US have moved sharply higher since the Trump election win, the move has been assisted by the Fed forecasting 3 interest rate rises in 2017 plus strong wages growth fuelling inflation fears - however markets are pricing in only 2 rate hikes as more likely.

Beware, we believe this move higher for interest rates has only just commenced, however short-term we can see a little further consolidation at current levels e.g. Australian 3-year bonds have reached the psychological and technical 2% support area i.e. a 98.00 bond price.

Chart 23 – Australian 3-year bonds Weekly Chart


Chart 24– The US 10-year Interest Rate Monthly Chart


Chart 25 – The US 2-year Interest Rate Monthly Chart


Chart 26   Volatility (VIX) Index Weekly Chart


Australian stocks & sectors

The Australian stock market fell 1.2% last week, ignoring a positive US market and moving more in step with both Asia and Europe. However local weakness was primarily all about the resources sector last week with RIO -7.2%, FMG -4.5% and BHP -5.9%.

Banking sector

The local banking sector remain strong which makes sense as it becomes more profitable as interest rates rise and Donald Trump considers removing onerous / costly regulations - the Dodd-Frank reform. Recent strong reports from both ANZ and CBA have help support the sector.

Chart 27 ASX200 Banking Index Monthly Chart


Chart 28 US S&P500 Banking Index Monthly Chart


Chart 29 – Commonwealth Bank (CBA) Quarterly Chart


Chart 30 – Commonwealth Bank (CBA) Daily Chart


Chart 31 – ANZ Bank (ANZ) Weekly Chart


Chart 32 – Westpac Bank (WBC) Weekly Chart


Chart 33 – National Australia Bank (NAB) Weekly Chart


Chart 34 – Bank of Queensland (BOQ) Monthly Chart


Chart 35 – Bendigo & Adelaide Bank (BEN) Weekly Chart


The Insurance sector

We remain bullish and comfortably long SUN and QBE within the insurance sector. QBE has enjoyed a strong move with the $US and rising interest rates, further consolidation feels likely short-term.

Chart 36 – Suncorp Group (SUN) Monthly Chart


Chart 37 – Insurance Australia (IAG) Monthly Chart


Chart 38– QBE Insurance (QBE) Monthly Chart


Diversified Financials sector

The Financials Index remains  bullish, our target is over ~10% higher, with CGF leading the way over recent weeks/ months.

Chart 39 – ASX200 Financials Index Quarterly Chart


Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart


Chart 41 – Platinum Asset Management (PTM) Daily Chart 


Chart 42 – Henderson Group (HGG) Weekly Chart 


Chart 43 – Challenger Ltd (CGF) Monthly Chart 


Chart 44 – IOOF Holdings (IFL) Monthly Chart 


Resources / Materials  sector

Copper remains in a negative downtrend long-term, even after the recent months fireworks, we are eventually targeting the 150 area.

Iron Ore has significantly exceeded its technical "abc" target of ~$US80/tonne leaving us neutral at present. Importantly the forward prices for iron ore are in a pronounced backwardation e.g. The February 2020 price is trading at a whopping 40% beneath today's price.

NB Backwardation - A situation in which the spot or cash price of a commodity is higher than the forward price, generally associated with short-term supply shortage. Contango is the opposite scenario.

Heavyweights BHP and RIO look still positioned for some more short-term consolidation / weakness. We are holding a trading short position, via options, in FMG.

Chart 45 – Copper Monthly Chart


Chart 46 – Iron Ore Monthly Chart


Chart 47 – BHP Billiton ADR ($US) Monthly Chart


Chart 48 – BHP Billiton (BHP) Weekly Chart


Chart 49 – RIO Tinto Ltd (RIO) Weekly Chart


Chart 50 – Fortescue Metals (FMG) Weekly Chart


Chart 51 – Independence Group (IGO) Weekly Chart


Energy sector

Our target for Crude Oil of +$US60/barrel remains a real possibility after the last OPEC decision and the close over the $US52/barrel area. Our main concern for the energy stocks is the overall optimism in the market. Recently we took an excellent profit on our Origin position and feel comfortable square the sector for now.

Chart 52 – Crude Oil Monthly Chart


Chart 53 – Woodside Petroleum (WPL) Monthly Chart


Chart 54 – Origin Energy (ORG) Weekly Chart


Chart 55 – Oil Search (OSH) Weekly Chart


The Gold sector

Cracks appeared in gold in mid-2016 as it fell hard on anticipation of rising interest rates in the US, but gold has recovered well rallying ~$US135/oz from its December low.

We believe there will be some excellent trading opportunities in 2017 within the gold sector primarily on the long side as we continue to look for a major top in the $US. Short-term we feel a pullback is likely.

Chart 56 – Gold Monthly Chart


Chart 57 – Newcrest Mining (NCM) Monthly Chart


Chart 58 – Regis Resources (RRL) Weekly Chart


Chart 59 – Evolution Mining (EVN) Daily Chart


Chart 60 – Market Vectors Gold ETF Monthly Chart


The "yield play" stocks

We have been bearish bonds / bullish interest rates since mid-2016 and this view has not wavered. Hence we will only consider buying the "yield play" stocks as a trade when they are under severe pressure, as we did in late 2016 with both Transurban (TCL) and Westfield (WFD).

Chart 61 – Sydney Airports (SYD) Monthly Chart


Chart 62 – Transurban Group (TCL) Monthly Chart


The Property sector

A confusing picture short-term with the overall sector remaining mildly positive at current levels which theoretically contradicts our higher interest rates forecast. Hence we will avoid the sector in 2016 except WFD as an aggressive play if an opportunity arises under $9.

Chart 63 – Westfield Corp. (WFD) Monthly Chart


Chart 64 – Mirvac Group (MGR) Monthly Chart


Food & retailing  sector

Some interesting signals are now unfolding within the sector, we believe WOW looks interesting at present levels but only for a relatively small rally.

Chart 65 – Wesfarmers Ltd (WES) Weekly Chart


Chart 66 – Woolworths Ltd (WOW) Weekly Chart


Chart 67– JB Hi-Fi (JBH) Monthly Chart


Chart 68– Harvey Norman (HVN) Monthly Chart


The internet / Technology sector

The Australian Tech. sector had a relatively tough 2016, we may have interest this year but still only into further weakness.

Chart 69 – Seek Ltd (SEK) Monthly Chart


Chart 70 – REA Group (REA) Monthly Chart


Chart 71 – (CAR) Monthly Chart


The Telco sector

The Telco sector endured an awful 2016 falling ~20% after spending many years in the limelight. Changes within Broadband have made it extremely tough to value stocks within the sector which helped create the panic selling in both Vocus and TPG Telecom.

Telstra had a shocking result recently sending the sector down 5.3% that week. However, VOC then had a solid result last week which helped support both it and TPM, but TLS remains under pressure.

Chart 72 – Telstra Corp. (TLS) Monthly Chart


Chart 73 – Vocus Communications (VOC) Weekly Chart


Chart 74 – TPG Telecom (TPM) Weekly Chart


The Healthcare sector

After being the perfect place to be invested since the GFC last year we saw some clear "wobbles" within the sector as bond yields rose and excessive valuations, without clear growth / performance, were no longer tolerated by investors. We now see higher levels from the sector in the months ahead led by the S&P Healthcare index which is having a great February i.e. up an impressive 8.4%.

CSL  has shown us how a stock performing well in the sector can rally to fresh all-time highs.

Chart 75– US S&P500 Healthcare sector Quarterly Chart


Chart 76– CSL Ltd (CSL) Monthly Chart


Chart 77 Ramsay Healthcare (RHC) Monthly Chart


Chart 78– Healthscope (HSO) Weekly Chart


Chart 79 - Ansell (ANN) Monthly Chart 


Chart 80 - Sirtex Medical (SRX) Weekly Chart 


Chart 81 - Cochlear Ltd (COH) Monthly Chart 


The Gaming / Tourism sector

This sector had a volatile an overall pretty average 2016. However, we currently like Star City (SGR) targeting ~$5.50 minimum - note MM holds SGR.

Chart 82 – Crown Resorts (CWN) Monthly Chart


Chart 83 – Star Entertainment (SGR) Weekly Chart


Chart 84 – Mantra Group (MTR) Daily Chart


The China speculative sector

Significant wealth has been destroyed in this area over recent times as crazy valuations came down to earth with a huge thud. Bellamy's return after suspense confirms our current view that it's all too hard!

Chart 85– Bellamy's (BAL) Daily Chart


Chart 86– Blackmore's (BKL) Monthly Chart


Australian Dollar (AUD) / FX Markets

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region but a test of 82c first feels likely.

The $US remains firm after Donald Trump's victory as the market adjusts for higher US rates. We have been targeting ~105 but short-term feel the bullish $US view is becoming crowded hence any rally is liekyl to lack strong momentum.

Chart 87– Australian Dollar (AUD) / FX Monthly Chart


Chart 88– The $US Index Monthly Chart



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.


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 25/02/2017.  3.00PM. 

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