Market Matters Report / Market Matters Weekend Report Sunday 26th March

By Market Matters 26 March 17

Market Matters Weekend Report Sunday 26th March

Market Matters Weekend Report Sunday 26th March 

This Monday will be a fascinating day and at this stage we believe it's likely to dictate the direction of stocks for the next 4-5 weeks. Donald Trump failed to get his health-care bill through the House but US stocks closed unchanged, albeit after giving back earlier gains when optimism on the vote was peaking. The early noises from the Trump camp since their disappointment are not about looking back at Obamacare but forward to tackle the far more market sensitive economic growth, starting with tax cuts. Second guessing politics is very hit and miss but now the Republicans have failed to support "their man" Trump over health we feel they are more likely to get behind him around tax. Otherwise Novembers election, and the whole Republican party, will start to look like a farce and markets will not embrace that outcome.

The ASX200 was very strong on Friday but remained in the extremely tight 158-point trading range of the last 30 days - this coincides perfectly with the seasonal drift that March usually delivers. Two simple but important  statistical / seasonal conclusions can be drawn from where the local market is positioned today:

1. A break of either 5815, or 5675, for the ASX200 next week should statistically follow through quickly for another 100-points i.e. targeting either under 5600, or over 5900.

2. Seasonally April is the strongest month of the year, led by the banking sector as May dividends loom for 3 of the big 4 banks. Hence we will maintain a positive bias whether its buying a breakout over 5833, or buying a sharp decline towards 5600.

ASX200 120-minute Chart

We reiterate our plan to increase cash levels if we get the anticipated April rally - we may potentially increase today's 12% cash level to well over 30% if the market unfolds as we expect.

ASX200 Annual Seasonality Chart

A number of subscribers continue to ask us why we maintain our short term bullish outlook when so many market pundits are hoisting up the surrender flag. Today we will hopefully explain our thoughts while throwing up a couple of opportunities moving forward but do not forget we are still forecasting +25% correction that should commence later this year, or early 2018.

We often say the NASDAQ is the leader amongst indices and last week, even when global equities had a small wobble, the NASDAQ again made fresh all-time highs, while managing to close only 1.4% below this fresh milestone. The technical path we believe the NASDAQ is following implies it could easily reach the 6000 area i.e. over 10% higher.

US NASDAQ Weekly Chart

Seek (SEK) is a high quality business and one of the few local companies that would fit nicely into the bullish NASDAQ. We exited Seek back in mid-2016 and the stock has subsequently bounced around basically between $14 and $17. In February SEK announced a solid profit report, while importantly confirming 2017 guidance for a net profit of $220m. Their international expansion into China is paying dividends with Zhaopin growing revenue 23%. We like SEK at current levels but do acknowledge its est. P/E of 26.7x is dangerous if the management fail to continue with its impressive growth. The company is now paying a 2.6% fully franked yield.

We are bullish SEK, around $15.50, but would be concerned technically if the stock failed to hold over $14.60 i.e.6% lower.

Seek Ltd (SEK) Monthly Chart

Another key factor for MM to remain bullish equities is the position of the US Banking Index. We have recently been targeting a 10% correction back towards the 280 area which has unfolded perfectly, note another 1 or 2% lower would not concern us. We are now targeting fresh highs for US Banks in 2017. This obviously ties in with the local banks who historically perform extremely well in April, leading into dividends in May for ANZ, NAB and Westpac.

US S&P500 Banking Index Weekly Chart

A macro factor we watch carefully when looking for turning points in markets is consumer confidence. The last two major tops for US stocks have been preceded by a turn lower in US consumer confidence by 3-4 months. However US consumer confidence continues to make fresh multi-year highs which is a bullish signal for stocks.

US S&P500 v Consumer Comfort Index over the last 25 years

Until further notice we believe that US stocks are simply taking a breather to see how the new administration will perform politically i.e. can they get their reforms passed. Interestingly over recent weeks it's the companies who pay the highest rates of tax that have generally corrected the most, if the market gets a sniff that the Republicans will back Mr Trump's tax reforms these stocks are likely to pop higher very quickly.

Lastly the Australian Financials Index remains one of the clearest and bullish technical pictures we can find, strongly implying that Donald Trump will get some good news in months to come - we continue to target over 10% further gains.

ASX200 Financials Index Quarterly Chart

Moving back to our favourite topic of remaining open minded, everybody is now jumping on the higher interest rate bandwagon. While at MM we have been forecasting higher global interest rates in the years to come we are very mindful that US 10-year bond yields remain firmly within their multi-decade downtrend. Central Banks around the world have been desperately trying to avoid a recession / depression since the GFC by almost any means possible, they may still fail and US bond yields will again turn lower within the clearly defined trend.

US 10-year Bond yields Quarterly Chart

Standout technical chart (s) of the week

Last week Star Entertainment Group reached our $5.40-$5.50 target area but on closer inspection we are likely to give this position more room - the holding is currently showing a 16% paper profit. US gaming stocks are looking bullish with Melco-Crown on track for a 20% advance from Fridays close, hence we will look to ride SGR further for now.

Star Entertainment Group (SGR) Weekly Chart

US Melco Crown Entertainment $US (MPEL) Monthly Chart

Summary

Early next week looks likely to dictate in which direction the ASX200 breaks out of its recent tight trading range of 5675 to 5833, after 30 trading days a break feels close at hand.

We continue to believe that US and local stocks can add to recent gains well into 2017, and potentially 2018. Ideally over coming weeks the banking sector will rally after its recent correction as the seasonally strong April arrives.

We continue to believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open unchanged on Monday, there will have been a lot of thinking about what comes next for Donald Trump and his administration and it will be fascinating to see how investors vote with their $$.

Potential Investing opportunities for the coming week(s)

We are considering buying Seek (SEK) around $15.50 plus Mantra (MTR) is again becoming interesting under $2.50.

Potential Trading opportunities for the coming week

Early in the week Fortescue (FMG) looks likely to retest the $6 region, a false spike under the recent $5.99 low would provide an excellent risk / reward buying opportunity.

As detailed in the report we would advocate going with the break of the recent tight range for the ASX200 when it eventually occurs.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 24th March is below, sorry it's a week behind:

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-24th-march-2017

Last week purchased National Australia Bank (NAB) and Primary Healthcare (PRY) reducing our cash holding to 12%. 

Weekend report Charts / Chart Pack

The Market Matters Weekend report charts can be found below:

https://www.marketmatters.com.au/chart-pack/

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 25/03/2017. 8.00PM.
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