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

By Market Matters 26 November 17

Market Matters Weekend Report Sunday 26th November 2017

Market Matters Weekend Report Sunday 26th November 2017

The ASX200 had a quiet week rallying just over +0.5% as the US enjoyed its turkey dinners and Thursday’s Thanksgiving celebrations. So far this November has only given us a -2.25% correction, less than half of the average since the dark days of the GFC. With only 4 trading days left this month it would appear that 2017 is potentially going to become an outlier from a statistical perspective. At MM we generally pay very close attention to the seasonality / statistics of a market when the said market is following its usual course, so far in 2017 the ASX200 is only moderately tracking it’s normal path but still enough not to be ignored i.e. from Mays high we experienced a -5.5% correction into June while Novembers pullback has been -2.25% to-date – perhaps it may simply be late this year.

We believe it’s important to acknowledge the current ability of global equities to remain firm in the face of a number of aversity / negative headlines illustrating the underlying strength within stocks i.e. they simply are not ready to fall over as many pundits keep predicting. We witnessed another a great example of this last week when Chinese stocks dropped the most in 17-months and their bond yields rose but global stocks held firm, as we often say:

  • “ A market which does not fall on bad news is a strong market”.

Not surprisingly we will continue to keep watching the markets statistics as Novembers seasonal weakness may materialise late, plus as the below numbers show a belated pullback into early / mid-December would also be exciting for the bulls looking for a buying opportunity for a Christmas / window dressing rally.

December

  1. The average gain for December since the GFC is an impressive +2.5%, with only the one negative year in 2011.
  2. However this only tells half the story, in 3 out of the 8-years we formed a low mid-month before rallying strongly over 6% - in 2011 we rallied 5.8% from the start of December before losing all the gains.
  3. The lows for December were at the start of the month 4-times and mid-month 4-times - in the anomaly of 2011 when the market was in “correction mode”, unlike today, the ASX200 rallied strongly initially which I have counted as “start of the month”.
  4. In 6 out of the 8 years the high for December was in the last few days while in 2010 it was on the 23rd, only in the unusual 2011 was the high early on the 5th.
  5. The average gain by Commonwealth Bank (CBA) during December, since the GFC, is +4.1% i.e. banks often regain their bid tone.

MM remains bullish the ASX200 targeting a significant break over 6000 in 2017 / 2018 but a short-term correction down towards the 5860 area offers the best risk / reward buying opportunity - but as always we are open-minded as to whether the market will be so obliging in this bullish year.

Last week’s list of major winners / losers shows a one-sided but extremely quiet few days as the losers notched up a victory but most noticeably only 2 stocks in the ASX200 moved by over 5%:

Winners : None.

Losers : ALS Ltd (ALS) -9.8% and Graincorp (GNC) -8.7%.

Today’s report will primarily focus on how MM currently sees December / January unfolding.

ASX200 Daily Chart

MM’s Christmas / January outlook for markets.

1 The $US Dollar

At the moment the clearest and potentially most influential chart to MM is the $US which looks destined to continue its bearish decline in 2017, our target is around the 90 area / 3% lower. The first 2 thoughts that come to most investors’ minds are:

  1. Australian $US earners might struggle although this is not particularly the case at the moment as the $A is even weaker!
  2. A weak $US is usually bullish for gold, oil and other commodities denominated in $US.

The $US Dollar Index Weekly Chart

If we are correct and the $US will fall towards the 90 level, before it enjoys a good bounce, we pose the question “are there some strong correlations we should be aware of?” :

1 As the $US Index falls the Australian gold stocks rally, we have used Regis Resources (RRL) in the chart below and the correlation since the $US top in late 2016 is excellent, although we note the stock often leads. Hence we are highly likely to sell our Newcrest (NCM) position into fresh lows for the $US, hopefully well over $25 for NCM.

2 Unfortunately we searched high and low but other correlations which we expected to find were not nearly as exciting, especially when we went back over a few years.

However one comment we would make is markets do often turn together and perhaps, just perhaps, a $US low in December / January will herald in a pullback for stocks.

$US v Regis Resources (RRL) Weekly Chart

2 Interest rates

As subscribers know we believe interest rates have bottomed and the break of the 35-year bear market for the influential US 10-year bonds is just a matter of time  however a few intriguing points also continue to evolve under the hood of bond markets.

US 10-year bond yields Quarterly Chart

Last week China grabbed the headlines as their stocks endured the worst 1-day fall in 17-months while we don’t believe the Chinese 10-year bond yield nudging 4%, for the first time since 2014, caused the one-day tumble it is slowly catching people’s attention.

Over the same period Australia’s 10-year bond yield has only rallied from just over 1.8% to 2.5% on Friday, unfortunately this relatively subdued advance is because our economy is struggling with huge household debt levels concerning many economists.

China’s indicative 10-year Bond Yield Weekly Chart

One chart that caught my eye this morning was US 2-year bond yields which are accelerating up towards the psychological 2% level, and our major 3% target level. This generated a few thoughts at MM:

1 – Our view looks correct that the US Fed will continue to normalise their interest rate policy by hiking rates – Goldman Sachs are forecasting 4 hikes of 0.25% in 2018.

2 – If we see a number of interest rate hikes in the US its easy to comprehend why the $US should enjoy a better year in 2018 and subsequently how the $A is likely to be in for a rough time.

3 – Its also easy to envisage at least one period of nervousness by US stocks if interest rates are going to rise at such a fast path.

4 – Most analysts are saying that the spread between the US 2 and 10-year bond yields will struggle to narrow much more than todays 0.6%. We believe they are probably wrong looking at the acceleration in short-term rates, this may unnerve investors in 2018 as parity implies a recession.

Looking into 2018 this adds weight to our likely portfolio positioning:

Overweight – $US earners, insurers and to a lesser extent banks.

Underweight – Gold, “yield play” and be pedantic when buying resources.

US 2-10-year bond yield spread Weekly Chart

3 Stock Markets short-term

We often talk about the bigger picture when we look at stocks / indices but with a potential Christmas rally looming its important to have a plan for the coming weeks – it can often make a good year great! When we look at US stocks / global equities into Christmas we feel 2 scenarios are the most likely at this stage:

1 Stocks will continue to chop, not drive, higher into Christmas. If we see a pullback into early December we would buy this (especially for traders) looking for a push up into late December – look at December statistics earlier in this report.

2 The MM Platinum Portfolio currently holds only 8.5% in cash, this is likely to be significantly increased if stocks rally into Christmas / 2018.

Dow Jones Daily Chart

Australian stocks / sectors

Resources

We have remained patient in adding to our IGO / NCM position within the Australian resource stocks. However there remains no change to our overall outlook:

1. We are positive the reflation trade hence are keen on the likes of BHP, OZL and RIO into weakness but still do not plan to chase strength e.g. OZL around $8 looks attractive i.e. ~5% lower.

2. We currently prefer the base metals over the more volatile and currently weaker iron ore sector. Ideally the Base Metal spot index will correct ~7% again allowing us a decent risk / reward buying opportunity.

Bloomberg’s Base Metals Spot Index Weekly Chart

RIO Tinto (RIO) Weekly Chart

Energy

We remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits are targeting the $US60/barrel area NB Fridays close was the highest since July 2015.

1 We are comfortable with our exposure via Woodside Petroleum (WPL).

2 We still believe the takeover play for STO is too cheap and unlikely to go ahead plus the major Chinese shareholders should not be underestimated in this equation.

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a small paper profit of just over +1% after previously being down well over 10%.

However, if we are correct the $US has a good chance of making one final low in the relative near term around the 90 level and MM then should be able to crystalize a profit from this position, hopefully well over $25.

Newcrest Mining (NCM) Monthly Chart

Banks and bond yields / interest rates

We remain both positive and mildly overweight the banking sector as we continue to look for opportunities in this seasonally weak period which is noticeably not yet playing out in all stocks. Obviously as this report outlines we are bullish bond yields which should help banks profitability hence our portfolio skew towards the sector.

Since trading ex-dividend 99c fully franked this month NAB has continued to fall and is now trading 10.4% below the months high and 7.6% if we take out its dividend. NAB is now trading on a 6.7% fully franked yield and although we do believe that the concerns around Australian housing have some foundation we are certainly considering adding to our holdings in both the Income and Platinum Portfolios.

NAB – currently yielding 6.7% fully franked with its next dividend in May, its trading on an estimated valuation of 12.7x 2018 earnings.

ANZ – currently yielding 5.5% fully franked with its next dividend in May, its trading on an estimated valuation of 12.3x 2018 earnings.

CBA - currently yielding 5.3% fully franked with its next dividend in February, its trading on an estimated valuation of 13.8x 2018 earnings.

We have been contemplating increasing our CBA holding into any weakness but ANZ / NAB are looking more interesting just here.

National Australia Bank (NAB) Weekly Chart

Diversified Financials

We remain bullish the Diversified Financials with a target ~15% higher. Recently we executed the planned purchase of IFL which has just enjoyed a good week rallying over 3% and our other holding Challenger (CGF) is now only within ~2% of our profit target:

  • Our profit target for CGF is ~$14 where we are hoping to take a ~17% profit.
  • Conversely we still like Macquarie (MQG) and PTM into any weakness, especially if its broadly across the financial / banking sector , however in reference to Platinum this is now a very expensive fund manager, and that valuation metric will likely keep us as observers.

Challenger Ltd (CGF) Monthly Chart

Platinum Asset (PTM) Daily Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will consider buying panic weakness in some select stocks if the opportunity arises i.e. HVN under $3.50.

We remain net bearish Woolworths with an eventual ugly target under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly has now fallen almost 5% from its October all-time high while other indices have continued to rally.

However, a significant portion of Australian healthcare stocks enjoy sizeable revenue from the US leaving us mixed on the local sector in comparison.

US Healthcare Index Quarterly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s).

Since Donald Trump’s US election victory the S&P500 has rallied an impressive 25% with only one small -3.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet a ~5% pullback simply feels overdue and we feel it’s now close at hand i.e. time for some pain for the “buyers of the dip” is approaching. We now feel aggressive traders can sell any strong days as pullbacks are likely to become both far more common and larger.

US S&P500 Weekly Chart

We are now short-term bearish European stocks with the recent “gut feel” looking on the money. A close by the German DAX back under 12,900 / 1% lower will increase our bearish view from a short-term technical perspective.

German DAX Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently only have 8.5% of the MM Platinum & 6% of the Income Portfolio in cash so buying will be small and careful :

  1. Banks – We like our mildly overweight banking position but may increase our “big 4” position, plus we like CYB  at lower levels.
  2. Consumer Services – We may add to our Webjet (WEB) under $9.
  3. Diversified Financials – We like Macquarie (MQG) into weakness
  4. Energy – We’re now long WPL which feels enough for now.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – We still like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We are likely observers this week unless weakness unfolds
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7, and some select plays for income i.e Centuria and Vicinity
  9. Telco’s – No investment buying at this stage but as a trade VOC / TPM look interesting for the brave!
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

A few stocks in our MM Platinum Portfolio are in striking distance of our current sell targets:

  1. Challenger (CGF) around $14.00.
  2. Telstra (TLS) over $3.60.
  3. Aristocrat (ALL) between $24.50 and $25.
  4. Newcrest (NCM) and Independence Group (IGO) if / when the $US Index breaks under 91.

Standout technical chart (s) of the week

US short term bond yields are accelerating to the upside which we have discussed earlier in the report.

US 2-year bond yields appear in the middle of acceleration up well over 2%. We will remain bullish US 2-year bond rates while they hold over 1.4%.

US 2-year Bond Yield Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report. A summary of the most likely activity next week is:

  • Nothing imminently close while I’m typing although if CGF has a good week we may sell.
  • Also, we are potential buyers of banks into this seasonal weakness especially at present in ANZ / NAB. 

Trading Opportunities on our radar

Following a very quiet week not many new opportunities caught our eye but for the brave and perhaps reckless one thing did look interesting. We stress this is a trade not an investment chasing the 7% fully franked yield.

  • Buy Myer (MYR) around 70c with stops under 65c. We can see a rally to 80c and even over $1 making it decent risk / reward. 

Myer (MYR) Weekly Chart

Summary

We are now confident in our medium-term forecast of the ASX200 breaking well over 6000 in 2017/8  with an initial “guess” target of over +6200. However short-term we are now cautious at least for a 1-2 weeks with 5860 an ideal pullback target.

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, or after the session when positions are traded.

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 25/11/2017.  8.00AM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

 If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here