Market Matters Report / Market Matters Weekend Report Sunday 27th May 2018

By Market Matters 27 May 18

Market Matters Weekend Report Sunday 27th May 2018

Market Matters Weekend Report Sunday 27th May 2018

Last week felt like a continuation of the markets recent theme i.e. the ASX200 drifted -0.9% lower with the banking sector a significant weight on the index, plus this time the energy stocks gave a helping hand to the bears. We will look at these 2 weak sectors later in today’s report but to start with we felt it was time to again stand back and review MM’s opinion of the bigger picture for stocks as we move into the second half of 2018 - uncertainty feels to be slowly, but surely, creeping back into markets.

Following a 4% plunge in crude oil on Friday the ASX200 is set to open down ~30-points / 0.5% on Monday, it will be an interesting test of its own resilience how the first few days of the week unfold as global markets are likely to be fairly quiet ahead of a the US Memorial Day holiday on Monday.

The combination of EOFY and a mature bull market are testing many investors resolve / nerves as stocks slip in and out of favour often daily. Last week we saw A2 Milk (A2M) close down just -2.5% but that performance masks the stock’s recent huge volatility i.e. a six-day 25% fall plus 2 bounces of 13.1% and 11.2% respectively. Myself and the MM team have noticeably found the last few weeks harder on our emotions than we can remember for a long time, especially as I / we hate to lose money!

  • “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett when discussing successful investing.

As we’ve alluded to in the last two Weekend Reports we continue to question whether this recent stock volatility is the precursor to something far larger.

A2 Milk (A2M) Chart

When we look at a few of our recent positions / decisions it’s easy to be hard on ourselves hence at MM we regularly reflect on the last 12-months performance, not just on any individual day which may have us question our whole investment ethos. Some recent tough examples:

A few recent frustrations

1. Orocobre (ORE) soared +19.4% in just 4-days only to give back over 60% of these gains in the last 4-days, we could have easily taken a nice profit.

2. Clydesdale Bank (CYB) was within striking distance of our +$6 target 2-weeks ago then it produced a soft report and drops -13.8%, we followed our plan rather than grab an easy profit but it’s frustrating.

3. We watched Janus Henderson (JHG) rally over 10% before tumbling with other fund managers leaving us looking for opportunities to scratch the position – a similar story with IOOF Holdings (IFL).

4. We took profit on part of our Telstra (TLS) position above $3.70, why oh why didn’t we cut the lot?

5. We are mildly underweight the banks but in hindsight it should have been an even smaller exposure into the Hayne royal commission.

6. We gave QBE’s board the benefit of the doubt to finally stand up and be counted but they failed everybody yet again and we saw  an almost 30% paper profit vanish before our eyes, especially frustrating when our macro reasoning was perfect.

7. Recently we took profit on parts of our large resources play too early although this is at least now starting unwind as expected.

8. In our Income Portfolio we’ve let a ~20% profit in Perpetual (PPT) become  a 10% paper loss as we underestimated the sectors looming weakness, courtesy of the royal commission.

9. Arguably the most frustrating of all last week was watching Aristocrat surge another 10% - unfortunately we got off that train too soon.

Above are some of the positions that irk me almost daily but if we focused too closely on the past it would be impossible to add value moving forward. Always remember 30% of successful investing is psychology – it’s easy to feel the markets unfair and almost personalise news flow e.g. we ran CYB and they have a bad report but we take profit on ALL their results a cracker! However it’s all about being consistent with your process and assuming it’s a good one the numbers that matter will reflect this i.e. long-term returns. The below positions / numbers certainly help my emotions:

A successful financial year to-date

1 This financial year to-date in our Income Portfolio we have closed out 11 positions – 1 loser of -2.6% and 10 winners with an average profit of over +13% for a very health net gain.

2 This financial year to-date in our Platinum Portfolio we have closed out 36 positions – 5 losers with an average loss of -6.3% and 31 winners with an average profit of over +11%, also for a very health net gain.

3 Plus we’ve stuck with our Webjet (WEB), Suncorp (SUN) and Nick Scali (NCK) investments within our portfolio’s and they are all showing us over a 20% paper profit.

NB For details of MM’s investing activity during the last financial year please refer to last Mondays morning report.

I can assure you the above is not about MM basking in glory, we are again simply trying to make some important points which we believe may be critical to profitable and relatively stress free investing through 2018/9. Some of this message has been stated before but solid preparation is important in virtually all walks of life.

MM moving into QA2 of 2018

  • At MM we are not traders but “active investors” and we strongly believe this is not the stage of the stock market cycle to advocate “buy and hold”- simply look at the current individual stock volatility in some of the above examples, we actually should have been busier, more often than not!
  • We are in the second longest bull market in history for stocks and interest rates are rising for the first time in decades, Januarys sharp 9.6% pullback is unlikely to be the end to volatility for the foreseeable future.
  • Since the GFC the MSCI World Index has already corrected 25.4% and 19.6%, it was roughly one every 3-years and its now been 2 years and 3-months since the most recent advance commenced i.e. time to be on alert.
  • Prior to the last 2 major corrections we had “2 respective warnings” followed by fresh highs around 10 and 7-months later, so far it’s been almost 3-months since the January / February volatility shock, or warning i.e. again time to be on alert.

Ideally for MM we will see one final high for stocks before a painful +20% correction which may be triggered by a number of factors but at this stage we believe the risk / reward is building on the “be cautious” side of the equation.

MSCI World Index Quarterly Chart

When we consider the longer-term picture for the ASX200 this actually targets a move back below 5000 which is very hard to imagine today but as investors we must always remain open-minded i.e. this is only a correction of 17%, remember the mighty CBA is down 13% over the last year while Telstra has managed an astonishing -35% decline.

  • The ASX200 has corrected 1259 and 1291-points respectively since the GFC, we believe another exciting ~1300-point correction is looming on the horizon, note I said exciting, this degree of pullback causes panic which equals opportunity.

ASX200 Chart

Bull markets in stocks are historically made up of five distinct phases when illustrated on a chart and from our perspective they are fairly clear in the below example for the US S&P500 going back to before the GFC.

  • If our interpretation below is correct the S&P500 will ideally see one more high between 2900 and 3000 but a major correction back towards 2000 is looming on the horizon – again hard to comprehend but who thought the S&P500 would rally 4-fold back in 2009.

US S&P500 Chart

1 Oil stocks are starting to listen to us

Over recent weeks we’ve expressed our view a number of times that the oil sector would fail, led by Origin Energy (ORG) where MM has been targeting a ~15% correction.

So far ORG has corrected over 5% to-date but Fridays 4% plunge in oil, courtesy of Saudi arabia who told the market that “OPEC and their allies were likely to boost output in second half of the year” – this is real news and likely to cap oil at $US70/barrel in 2018.

  • We remain bearish ORG targeting ~$8.75, or a touch lower.

Origin (ORG) Chart

Over recent years the correlation between ORG and BHP has been almost mirror like. A very useful relationship considering we are keen buyers of BHP into decent weakness – we recently took profit on our positions in both the Platinum and Income Portfolio’s around $34, the stock is set to open below $32.50 on Monday.

If we are correct on ORG simple extrapolation targets ~$29 for BHP – potential MSCI rebalancing selling discussed during the week may put extra pressure on “The Big Australian”.

  • MM remains a keen buyer of weakness in BHP to around $29.

BHP Billiton (BHP) v Origin Energy (ORG) Chart

2 Resources stocks are coming under some pressure

Australian resource stocks have been very resilient over recent weeks, ignoring most negative moves by base metal while focusing on the positives from a weakening $A.

However Wednesday feels like it’s became an inflection point as some decent selling hit the sector e.g. Some pullbacks from Wednesdays highs are OZ Minerals (OZL) -6.9%, Orocodre (ORE) -8.2%, Alumina (AWC) -5.8% and Western Areas (WSA) -3.8%.

  • Technically we are bearish OZ Minerals (OZL) targeting ~$9, the lows of this time last month.

OZ Minerals (OZL) Chart

Gold and nickel miner IGO has already corrected 19% from its April high although the nickel price remains more resilient – if the correlation was perfect IGO would be trading closer to $5.35 but that’s the volatile / emotional resources for you.

  • We are comfortable staying long IGO plus we may average around $4.30 if the stock spikes lower.

Independence Group (IGO) Chart

MM sold AWC prematurely in April when it spiked up towards $2.60, only then to see it challenge $3 the following week – another example of the market testing our piece of mind. However the stock has subsequently corrected almost 14%, we will consider re-entering around $2.45, another 5% lower.

  • MM likes AWC ~$2.45 for both Platinum and Income Portfolio’s.

Alumina (AWC) Chart

3 The banks are gaining support – slowly.

Considering our view on resources for the coming weeks / months the banking sector will need to finally show some backbone to avoid a deep correction for the ASX200. The banks have already endured a bad 12-months falling -4.1% while the ASX200 has rallied almost 5% but we think this period of significant underperformance is close to an end.

Technically ANZ actually looks great and a decent bounce towards ~$30 would not surprise.

ANZ Bank (ANZ) Chart

Conversely CBA still looks to be struggling even though its currently yielding 6.15% fully franked.

We are likely to average our position in the future but considering our medium-term outlook for equities a test of the mid / low $60’s would not surprise, hence there’s no hurry.

Commonwealth bank (CBA) Chart

4 The phones still ringing on Telstra (TLS) BUT the calls have changed!

What a difference a week makes, recently we heard lots of worried investors considering dumping their disastrous investments in Telstra (TLS) but suddenly after an upgrade by UBS, accompanied by an almost 8% pop in the shares, the questions are more along the lines of “is it time to buy TLS?”. Our position at MM remains the same:

  • At MM we are going to stick with our TLS position but are not averaging into current weakness.

Note if we had no position be would be cautious buyers around current levels.

Telstra (TLS) Chart

5 High valuation stocks can sometimes be dangerous – just think A2 Milk (A2M)

High valuation, or P/E, stocks should not be avoided just the risk should not be underestimated as they have a habit of experiencing some significant moves. We can manipulate timeframes to make them all look good, bad or ugly but the following examples are how they feel to us today:

Winners – Seek (SEK), Aristocrat (ALL), CSL Ltd (CSL), Cochlear (COH) plus Treasury Wines (TWE) still for now.

Losers – Domino’s Pizza (DMP), A2 Milk (A2M), Blackmores (BKL) and Ramsay Healthcare (RHC).

The important point to remember is that high valuation stocks tend to underperform when interest rates rise and markets correct – 2 scenarios MM believes will unfold moving forward.

Ramsay Healthcare (RHC)

6 $US is now rallying without bond yields

The $US rallied last week even when US bond yields actually fell, a bullish sign to MM for our long $US ETF position i.e. a market that holds / rises in the face of theoretically bad news is a strong market.

$US Index Chart

US 10-year bond yields Chart


Again no major changes following last week’s market drift:

  • We remain net positive equities for the coming weeks (just) with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position and are firmly wearing our “sellers hat”.
  • We especially believe that Australian resources / energy stocks  are poised for decent corrections. 

“Shopping List”

  • None, we are wearing our sellers hat. – unless BHP for example drops ~10%.

“Selling List”

  • General selling is / when the ASX200 challenges the 6250 area.

Standout technical chart (s) of the week

The correlation between iron producer Fortescue Metals (FMG) and iron ore is as expected extremely close. Hence when we see iron ore falling with strong momentum that suggests we could easily see fresh 2018 lows, ~8-10% below Fridays close, there’s no hurry to buy FMG.

  • MM holds 3% of our Income Portfolio in FMG, we’re considering selling out on any bounce towards $4.80, or averaging below $4.20.

NB FMG is a very volatile stock hence both of these levels could easily happen in one month.

Fortescue Metals (FMG) v iron ore futures Chart

Trading Opportunities on our radar

We’ve discussed Platinum (PTM) a few times as a potential trade which is no great surprise considering the stocks volatility in 2018. This time the risk / reward looks pretty good at almost 3:1.

  • Buy Platinum (PTM) around $6, targeting $6.45 will stops below $5.85.

Platinum (PTM) 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.


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 25/5/2018. 4.00PM.
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