Market Matters Report / Market Matters Weekend Report Sunday 27th November 2016

By Market Matters 27 November 16

Market Matters Weekend Report Sunday 27th November 2016

Market Matters Weekend Report Sunday 27th November 2016


Last week the ASX200 continued with its post US election rally, advancing an impressive 148-points (2.77%). The strength was healthily right across the market with standout performances from the Energy, Insurance, Telco and Resources Sectors. It feels to us that some of the stubborn fund managers who have been sitting on cash are being forced to renter the market, painfully for their investors 17% above the lows of 2016 and only 1.9% below its highs! We have discussed a few times that investing with the crowd can lead to poor results, especially when you get on the train late and we believe this will become another classic example. The following graph is produced by Bank of America and sourced from Bloomberg, it shows the Global fund managers increasing their cash levels steadily since 2013 reaching 5.8% last month, a level not seen since 9/11, amazingly higher than during the GFC. However history tell us that these elevated cash levels are a very accurate reverse indicator.

  1. The US S&P500 has rallied ~50% while cash levels increased steadily from 2013.
  2. Cash levels spiked up during the GFC as the market formed a major bottom before the last 8-year bull market.
  3. When cash levels spiked up on worries around both the US debt ceiling and GREXIT it produced excellent buying opportunities for stocks.

With so much cash on the sidelines hoping to buy stocks at lower levels any pullbacks are likely to be shallow, and as stocks rally cashed up investors become increasingly uncomfortable. The "FOMO" (fear of missing out) effect is coming into play, ideally for our outlook for the stock market some of this cash will pile back into stocks forming a blow-off top, taking cash levels back towards, and hopefully under, the psychological 5% area.

Last week we received a classic short-term bullish signal when the market shrugged of bad news - a large capital raising by Boral (BLD). Boral raised $A1.56bn for institutional investors to help fund its purchase of Headwaters Inc., the retail entitlement is expected to raise $A483m. The issue was oversubscribed illustrating the volume of cash looking for a home. BLD shares fell 11% last week but remain at $5.10, well above the $4.80 raising price. Technically and fundamentally we would not be buying BLD at these levels.

In a weak market ~$A2bn being sucked out of potential buyers would lead to selling but by Friday this was already a distant memory, which tells us pullbacks should still be bought short-term.

The press have jumped on the recent aggressive fall in bonds and subsequent increase in interest rates - Westpac and NAB have just increased home loan rates by up to 0.60% without any RBA move. Australian 3-year bonds have fallen for the last few months but this is currently hardly a blip compared to the gains over recent decades. However, many investors are dumping bonds and some of these funds will be reallocated into equities, competing with the already cashed up fund managers to buy shares, hence increasing their already "rich" valuations.

Australian 3-year bonds Quarterly Chart

So we have covered some of the reasons why we believe the short-term strength in stocks has further life but as subscribers know we are also forecasting a ~25% correction when this advance has run its course. When we stuck to our bullish view during the recent volatile times we had a number of readers challenge our opinion quoting famous, and extremely successful, traders as being bearish e.g. Paul Tudor-Jones and George Soros. Forecasting markets is a bit like sport, when your hot your hot and unfortunately vice versa. Currently we are in the zone with global equity indices, if not always specific local stocks, so we urge readers to keep their fingers on the pulse with us as this mature bull market completes its advance.

We will continue to use the US market to identify the time to move into cash - we doubt very much we will nail the exact time, tops are harder than lows, but we believe in trading to sleep and the time will come when high cash levels will help us relax! Moving onto the US indices as most of them make fresh all-time highs: 

  1. The Value Line Arithmetic Index - our target area is 5250-5750, potentially ~9% upside but our minimum target has been achieved. 
  2. NYSE Composite Index - The lagging index at present, our minimum target is 4% higher but ideally it will rally another 8-10%.
  3. The S&P500 - Our minimum target has been achieved but ideally it will advance another ~10%.
  4. The Dow - Our minimum target has been achieved but ideally it will advance another ~10%.
  5. The Russell 2000 - Our minimum target has been achieved but ideally it will advance another ~8%. 
  6. The Russell 3000 - Our minimum target has been achieved but ideally it will advance another ~10-11%.
  7. The NASDAQ - Our minimum target has been achieved but ideally it will advance another ~7%.

We watch all these indices looking for clues to major turns, in this case a top to end the 8-year bull market. Our favourite two levels at present are the NYSE Composite should at least rally another 4-5% to fresh all-time highs  and the Russell 2000 should gain another 8%. Hence we are short-term bullish and medium / long term bearish.

Value Line Arithmetic Monthly Chart

NYSE Composite Index Monthly Chart

Last week we noticed a number of recently out of favour stocks regain a healthy bid tone e.g. Flight Centre (FLT) +8%, Vocus (VOC) +6.4%, TPG Telecom +6.1%, Transurban (TCL) +4.9%, Sydney Airports (SYD) +4.3% and +5.3%. This is of no surprise to us as fund managers that are being forced back into a market they feel is too expensive, or risky, feel more comfortable buying ASX200 stocks that have underperformed and are potentially showing some value.

We hold 3 such stocks in our portfolio Westfield (WFD), Transurban (TCL) and Vocus (VOC) plus we are long TPG Telecom (TPM) as a trade. This catch up strength was evident in the US on Friday with the strongest sector the Utilities. Our positions in the 4 stocks mentioned are either relatively short- term in nature, or in the case of VOC a bad position we are looking to exit, hence we will be looking to sell into this strength.

The one sector that has not enjoyed the "Trump rally" is the Healthcare Sector which usually seasonally outperforms in November / December. It was again the only one of the main 11 sectors in the S&P that closed in the red last week. However we feel it's almost time that the sector regained its "mojo" and similar to the out of favour stocks just mentioned the cashed up fund managers are likely to see some relative bargains unfolding at least on a relative basis. Our favourite stock on a risk / reward basis is Primary Healthcare, its down 6.25% over the last month closing on Friday at $3.60 - we remain bullish PRY under $3.50 with stops under $3.20.

Primary Health (PRY) Monthly Chart

Standout technical chart (s) of the week

Asia stock markets look excellent led by the Hang Send and the Japanese Nikkei. We are targeting further gains of 10% for the Hang Seng and a massive 20% for the Nikkei. While the correlation between these 2 powerhouse Asian indices and our ASX200 is not perfect it is good, and closer than the US over recent times. Simply if they are going to rally as strongly as we believe the ASX200 may easily reach the 5750 area.

The Hang Seng Weekly Chart

The Nikkei Monthly Chart


Our view remains that US stocks will rally ~8% over the coming months prior to a significant decline. Our favorite sectors locally into 2017 are the Financials (including banks), $US earners and Healthcare which is still not yet listening to us. We are not keen on Europe at present as more disgruntled elections may see the end of the EU in our opinion.

What Matters this week

The ASX200's is set to open flat on Monday, short-term we can see consolidation around the 5500 area prior to further gains into December.

Potential Investing opportunities for the coming week(s)

We are only holding 11% in cash after taking profit on half our ORG position but we are happy buyers of situation stocks for a rally into 2017. On our radar at present is PRY, ISD and HSO.

Potential Trading opportunities for the coming week

On the index front we still especially like the Hang Seng and Japan over coming weeks.

For the index traders we think the market will again rally into Christmas but be patient a ~85-90 point pullback is likely in next 2 weeks.

* Watch out for trading alerts.

Portfolio / Trade Holdings

The Market Matters Portfolio as of Fridays close is below:

We are currently holding 11% in cash after taking a nice profit on 50% of our Origin position..

Australian ASX200

The ASX200 continued to rally again last week which is no surprise considering the seasonally strong period, we are positive the local market into Christmas targeting a break over 5600, short-term consolidation around 5500 feels likely.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart


Chart 3a – December Share Price Index SPI) 60-mins Chart

Chart 4 ASX200 Banking Index Monthly Chart

Chart 5 US S&P500 Banking Index Monthly Chart

Chart 6  Volatility (VIX) Index Weekly Chart

Interest Rates

Short-term interest rates in the US have moved sharply higher since the Trump win, beware we believe this move higher for interest rates has only just commenced.

Chart 7a – Australian 3-year bonds Weekly Chart

Chart 7b – The US 10-year Interest Rate Monthly Chart

Chart 7c – The US 2-year Interest Rate Monthly Chart

American Equities

The US stock market has surged since Donald Trump's victory with the Dow, Russell 2000 & Russell 3000 making fresh all-time highs. Eventually we expect all US indices to play catch and achieve fresh highs, once this has occurred we will be far more cautious stocks, our best "guess" at present remains ~8% higher. Seasonally US indices should now have a rest for 1-2 weeks before rallying strongly into the end of 2016.

Chart 8 – Dow Jones Index Monthly Chart

 Chart 9 – Russell 3000 Weekly Chart


Chart 10a – US S&P500 Index Monthly Chart


Chart 10b – US S&P500 Index Daily Chart

Chart 10c – US S&P500 Healthcare Index Quarterly Chart

Chart 11 – NYSE Composite Index Monthly Chart


Chart 12 – Russell 2000 Index Monthly Chart


Chart 13 – US NASDAQ Index Monthly Chart


Chart 14 – The Canadian Composite Index Monthly Chart


European Indices

European indices remain tricky and neutral, they continued to struggle even after the Trump victory which sent most global indices soaring. The fundamental risks to the future of the EU are growing fast and we continue to advocate avoiding the region.

Chart 15 – Euro Stoxx 50 Index Monthly Chart

Chart 16 – UK FTSE Index Weekly Chart

Chart 17 – Spanish IBEX Index Monthly Chart              

 Chart 18 – German DAX Index Monthly Chart


Asian & Emerging Markets Indices

The Hang Seng index remains very strong looking poised to rally 8-10% while the Nikkei closing over 17,500 is also bullish targeting ~22,000 i.e. 20% higher!

Conversely the Emerging Markets ETF have remained bearish since the US election.

Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Monthly Chart

 Chart 21a – Emerging Markets MSCI ETF Weekly Chart

 Chart 22 – Japanese Nikkei 225 Index Monthly Chart


Australian Stocks

The Australian stock market resumed its uptrend last week, with fresh 2016 highs feeling highly likely. We are bullish into Christmas / 2017 but a pullback next week would not surprise.

Chart 23 – BHP Billiton ADR ($US) Monthly Chart


Chart 24 – BHP Billiton (BHP) Weekly Chart

Chart 25a – Woodside Petroleum (WPL) Monthly Chart


Chart 25b – Origin Energy (ORG) Weekly Chart


Chart 25c – Oil Search (OSH) Weekly Chart

 Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart


Chart 27 – Fortescue Metals (FMG) Monthly Chart


Chart 27b – Independence Group (IGO) Weekly Chart


Chart 28 – Newcrest Mining (NCM) Monthly Chart


Chart 29 – Regis Resources (RRL) Weekly Chart


Chart 30 – Barrick Gold (US) Monthly Chart


Chart 31 – Market Vectors Gold ETF Monthly Chart

Chart 32a – Commonwealth Bank (CBA) Quarterly Chart


Chart 32b – Commonwealth Bank (CBA) Daily Chart


Chart 33 – ANZ Bank (ANZ) Weekly Chart


Chart 34 – Westpac Bank (WBC) Daily Chart


Chart 35 – National Australia Bank (NAB) Weekly Chart


Chart 36 – Macquarie Group (MQG) Monthly Chart


Chart 37a – Bank of Queensland (BOQ) Monthly Chart


Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart


Chart 38aAMP Ltd (AMP) Monthly Chart 


Chart 38b – Henderson Group (HGG) Weekly Chart 


Chart 39a – Sydney Airports (SYD) Monthly Chart


Chart 39b – Transurban Group (TCL) Monthly Chart

Chart 39c – Mantra Group (MTR) Daily Chart

Chart 40 – Suncorp Group (SUN) Monthly Chart


Chart 41 – Insurance Australia (IAG) Monthly Chart


Chart 42 – QBE Insurance (QBE) Monthly Chart


Chart 43 – Wesfarmers Ltd (WES) Weekly Chart


Chart 44 – Woolworths Ltd (WOW) Weekly Chart


Chart 45a – Seek Ltd (SEK) Monthly Chart


Chart 45b – REA Group (REA) Monthly Chart

Chart 46 – Telstra Corp. (TLS) Monthly Chart

Chart 47 – Vocus Communications (VOC) Weekly Chart


Chart 48 – TPG Telecom (TPM) Monthly Chart


Chart 49 – Westfield Corp. (WFD) Monthly Chart


Chart 50– CSL Ltd (CSL) Monthly Chart


Chart 51 Ramsay Healthcare (RHC) Monthly Chart


Chart 52– Healthscope (HSO) Weekly Chart


Chart 53 - Ansell (ANN) Monthly Chart 


Chart 54 – Amcor Ltd (AMC) Monthly Chart

Chart 55a – Crown Resorts (CWN) Monthly Chart


Chart 55b – Star Entertainment (SGR) Weekly Chart

Chart 56– Bellamys (BAL) Weekly Chart


Chart 56b– Blackmore's (BKL) Monthly Chart

Chart 57– JB Hi-Fi (JBH) Monthly Chart

Chart 58– Harvey Norman (HVN) Monthly Chart

The $A is trickly at present, we are comfortable with our eventual target of the ~65c region, short-term we were 50-50 around ongoing strength towards the 81c area but the Trump victory / $US strength has turned us towards a lower $A now.

The $US is looking very strong after Donald Trump's victory as the market adjusts for higher US rates. We are targeting ~105 minimum but surprises are likely to be on the upside.

Chart 59a– Australian Dollar (AUD) Monthly Chart


Chart 59b– The $US Index Quarterly Chart



Cracks appeared in gold recently as its fallen hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which has now been broken. We think it's best to be an observer for now.

Copper remains in a negative downtrend, even after the last few weeks fireworks, on a longer-term basis we are targeting the 150 area.

Our target for Crude Oil of +$US60/barrel looks a tough call unless OPEC, plus Russia, get organised and agree on "something", it still needs to punch through $US52/barrel to look good.

Iron Ore achieved our initial +$US70/tonne target, technically we are neutral after the "abc" target of ~$US80/tonne was achieved this month.

Chart 60 – Gold Monthly Chart

Chart 61 – Copper Monthly Chart

Chart 62 – Crude Oil Monthly Chart

Chart 63 – Iron Ore Monthly Chart

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 26/11/2016 5.25PM

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