Market Matters Report / Market Matters Weekend Report Sunday 28th April 2019

By Market Matters 28 April 19

Market Matters Weekend Report Sunday 28th April 2019

Market Matters Weekend Report Sunday 28th April 2019

In a shortened week we still saw the ASX200 surge 2% to make fresh decade highs with a very low inflation print the primary fuel doused on the fire – Australian 3-year bond yields traded at their lowest level in history as the local futures market has now priced in 2 rate cuts for 2019, that’s down to 1% from todays 1.5%. Almost any stock / sector that benefits from lower interest rates enjoyed a strong bid tone with only the resources weighing on the index. We saw classic “yield play” stock Transurban (TCL) make a fresh all-time high, up almost 18% in 2019 alone.

At MM we have clearly underestimated the momentum behind the recovery from Decembers panic lows as stocks went from fearing a recession in late 2018 to rejoicing in further central bank dovish policies – “free money”. Usually following sharp corrections the initial bounce fails to exceed the depth of the fall, a bit like jumping on a trampoline, your bounce ends up lower than your previous height. However 3 factors appear to have combined to send stocks up faster than we expected although in many cases they are today reaching our outlined targets in January, just months ahead of schedule!

1 – The about turn by global central banks to a dovish stance to stimulate growth came as a significant surprise e.g. The US was expecting / fearing rate rises in 2019 now they believe cuts are more likely.

2 – Many corporations, especially in the US, are continuing  to perform strongly with aggressive buybacks still very much in vogue.

3 – Fund Managers have been caught complacently in cash and they’re now being forced to chase stocks when sellers are thin on the ground – good old fashioned “supply & demand” works every time.

We have seen the US stock market enjoy an amazing rally with equities compounding ~13% pa over the last decade but we like our statistics at MM, and these returns are almost double the historical average implying that when mean reversion does raise its head good returns will be tougher to identify –we believe stock selection over the next 5-years will be far more critical than in the decade post the GFC. The Australian property market has given us a great example with previous favourites Sydney & Melbourne falling while serial underperformer Hobart, Tasmania has appreciated i.e. remain open-minded.

MM is now bullish while the ASX200 can remain above 6270.

Interestingly if we extrapolate the major swings both up and down since the GFC an ideal target for this current advance would be ~6700, or 5% higher, but our investing decisions at this stage of the cycle will be stock / sector specific. The focus of today’s report will continue to be around stock / sector selection following the big dive in bond yields with the question being how much is currently built into the price of equities.

ASX200 Chart

This month the ASX200 Accumulation Index (which includes reinvested dividends) has made fresh all-time highs, hitting our 67,000 target area. However as we’ve witnessed at the 3 previous major post GFC highs in 2010, 2015 and 2018 the market likes to spend at least 2-3 months grinding higher before actually rolling over. It’s this very characteristic that makes picking tops generally far harder than identifying lows when markets usually turn up fast – at tops traders keep selling, getting stopped out until the market finally falls without them, its often referred to as the market moving in the path of most pain!

Our preferred scenario is we will now see the ASX200 to grind higher for a few months.

ASX200 Accumulation Index Chart

As we have discussed previously much of the recent strong run in stocks has been sustained by tumbling bond yields / rising bond prices (bond prices and yields have an inverse relationship). The correlation illustrated below both in Australia and the US is pretty easy to comprehend, stocks are revelling in lower bond yields which equates to anticipated interest rate cuts.

The futures market is already factoring in at least 2 interest rate cuts in Australia taking the RBA targeted cash rate down to 1%, another all-time low. Its hard to imagine local rates going much lower BUT with German 5-year bond yields closing at -0.438% never say never!

MM believes stocks will remain firm until bond yields start to increase, or perhaps just plateau.

ASX200 v Australian 3-year Bonds Chart

Similarly with the US we believe the health of the “junk Bond” market remains a huge indicator for US stocks in 2019 /2020 especially with it being a major funder for the massive buybacks being undertaken in the US equity market. The chart below shows US corporate bonds are continuing to make fresh 2019 highs indicating that the S&P500 should remain strong, at least short / medium-term.

NB Since 2015 junk bonds have either led or accompanied all the meaningful declines in US stocks as they are a great representation to the degree of liquidity which by definition is required for stocks to rally.

US S&P500 v iBOXX high yield index Chart

We are seeing the tech sector scale valuations close to those achieved in 1999, just before the tech wreck, while our market is trading “rich” from a historical valuation perspective while growth is extremely thin on the ground but 2 factors remain supportive of stocks for now, ignoring the obvious week to week vagaries of news:

1 – All the indicators we use for liquidity remain supportive for stocks and where there’s money lurks buyers.

2 – The post GFC rally remains unloved, in our Monday “questions” report it feels like we are receiving 10:1 queries around when to sell as opposed to buy, tops usually don’t unfold when people are looking for them. Again consider the sentiment towards housing 12 to 18-months ago, the bears were struggling to be heard above the masses.

While we believe the post GFC bull market is relatively mature it now feels too early to be cashing in, it remains more a case of what stocks / sectors should we be invested at this stage of the cycle, a great time for the “active investor”.

1 Is it too late to chase yield?

Before we write the Weekend Report we delve through around 250 different charts of stocks, sectors, indices, FX, commodities etc reviewing how they look on different timeframes such as daily, weekly, monthly etc. Very often a chart will look likes its been drawn by a spider walking across the page after too many glasses of red (lucky thing!) but on occasion things jump out with a degree of clarity, especially from a risk / reward perspective.

This weekend the “yield space” produced a couple of gems:

1 – High flying property company Goodman Group (GMG) looks positioned to test the psychological $14 area, around 3% higher BUT then our preferred scenario is a correction to its impressive 14-month rally. Technically a pullback of at least 10% feels on the cards and with the stock already trading on an Est P/E for 2019 of 26.5x its not hard to imagine.

If one of the best performing Real Estate stocks looks poised to struggle moving forward in 2019 we find it extremely hard to get excited about chasing yield from a risk / reward perspective.

At MM we believe its too late to chase yield but a little more upside feels likely.

Goodman Group (GMG) Chart

In the last Weekend Report we wrote Until further notice we still believe sectors that enjoy lower rates will perform strongly”. Obviously this has come to fruition but what comes next? Similar to GMG, Transurban (TCL) feels likely to push another 3-4% higher but above $14 we would be looking for bearish catalysts to sell at the elevated levels.

Conversely for those that believe rates will be lower for years to come and remain keen to accumulate yield play stocks we now think Sydney Airports (SYD) probably has more legs than most.

Transurban (TCL) Chart

Lastly moving onto the stock the MM Platinum Portfolio reduced last week in Telstra  (TLS) – we trimmed our holding from 7% to 4% after the Telco basically achieved our $3.50 target. We will be watching the stock carefully in the weeks ahead and may still consider taking profit on the balance.

Telstra (TLS) Chart

2 The Banking, Financial & Insurance Sectors

After their recent run the banks are tricky here but while we remain comfortable holding 24% of our Platinum Portfolio in the sector we want a pullback to consider adding to our 8% holding in each of CBA, NAB  and Westpac. NAB reports in around 1-week and they look very cheap but with a new CEO we may see a few changes to the likes of their dividend policy – Bloomberg is looking for a 7% fully franked yield in 2019, imagine that grossed up if the Liberals win!

National Australia Bank (NAB) Chart

The Financials look more interesting to us at this point in time with a few stocks in the sector looking poised to move higher while a couple feel fully priced.

We are in a market where the herd has been chasing quality stocks to the point where many are arguably overpriced and now investors are looking for value / cheap stocks in a fully priced market, not easy! We think being invested in places where many are scarred to venture can still pay dividends e.g. recently we have seen CYBG (CYB) up over 30%, IOOF (IFL) gain over 60% and Eclipx (ECX) double – all 3 of these stocks have felt friendless at times in the last few months but now look.

Conversely the ASX Ltd (ASX) has surged to our $75 target area in 2019, I may live to regret this but I feel that AMP will outperform ASX over the next 3-6 months.

AMP Ltd (AMP) Chart

ASX Ltd (ASX) Chart

Both NIB (NHF) and Medibank Private have rallied well over 5% over the last 5 trading days, relatively recession proof earnings and an ok yield works in today’s environment.

We considered adding to our NHF position on Friday but decided caution was warranted especially as volume can at times be frustrating in this private health insurer, although we do remain bullish.

NIB Holdings (NHF) Chart

3 The Energy sector feels vulnerable, leave alone!

Crude Oil exceeded our $US64/barrel target but has since fallen ~5% fairly quickly. The jury is out at MM whether we have seen a decent top in oil but we do believe the risk / reward has gone from a buyers perspective especially given Mr Trump would like lower prices ahead of an election.

Santos (STO) $7.32 – we have been looking for a breakout by STO towards $8, the breakout occurred but its so far failed to push above $7.50, no reason to panic as one average week does not make a summer but we are no longer considering buying.

Crude Oil Chart

Santos (STO) Chart

4 The resources are trying to come to us.

Considering how investors have chased yield elsewhere the belief is clearly that the miners will not be viable medium-term yield plays but we believe the miners will provide for the faithful longer than many sceptics believe.

The volatility in the sector has been illustrated perfectly over the last 2-weeks with Fortescue (FMG) correcting over 12%, our ideal buy zone (s) are below $7 and then averaging below $6.50 if the opportunity arises. Heavyweight RIO Tinto (RIO) also has been tired of late and we would be keen buyers around $90, or 7/8% lower.

At MM we are looking to buy RIO and FMG into weakness.

Fortescue Metals (FMG) Chart

RIO Tinto (RIO) Chart

Lastly moving onto the Gold sector where our view has not changed, MM is keen buyers a little lower e.g. Evolution Mining (EVN) will be in our sights around $3.

Evolution Mining (EVN) Chart

5 Growth stocks v Healthcare looks interesting.

The Australian Software & Services sector had a mixed week for a change but the bid tone was not too far away as Appen (APX) made fresh all-time highs but if we were long the sell button would be pushed in this top performer around $26 – I’m sure the momentum players are long, like in late 2018, and they again may fight for the exits at some stage in 2019.

It’s been a common theme in today’s report but APX has reached our target area and we have no interest here from a risk / reward perspective – MM still likes APX but closer to $20.

Appen Ltd (APX) Chart

However some of the stocks in the Healthcare sector look ok at today’s levels, including Healius (HLS) which MM owns in the Platinum Portfolio which looks like it may accelerate over 5% towards our initial $3.25 target area fairly quickly.

Ramsay Healthcare (RHC) looks poised to pop over $66 and the bigger picture is now looking interesting, we currently could be buyers with stops below $62.

Ramsay Healthcare (RHC) Chart

Conclusion

Short-term stocks that look bullish have become harder to uncover whereas the number which we feel are in our sell sights are increasing, not ideal with our large cash levels but forcing things when investing is a distinct recipe for disaster.

Chart of the week.

Our long-term view for stocks has been tweaked and is illustrated below by the broad based Russell 3000 – the US index which encapsulates the largest listed 3000 US companies.

If the interpretation below is correct US stocks should rally higher, endure another deep correction before rallying yet again but we will just invest week to week around what we see always keeping a focus on risk / reward.

MM is bullish US stocks but believe volatility will increase from here

Russell 3000 Chart

Investment of the week.

Engineering and Construction company CIMIC has frustrated MM over the last few years but it still looks good both technically and fundamentally. MM is bullish CIM with stops below $49, less than 5% risk which is attractive.

MM likes CIM for at least for another 10% upside.

CIMIC Group (CIM) Chart

Trade of the week.

Good news is thin on the ground in the Australian property market but that’s when the bargains present themselves. REA has corrected over 26% since its 2018 but a glimmer of hope on the property front could easily see a 15% pop higher, we like the stock with stops below $77.

MM likes REA for a potential rally to fresh highs.

REA Group (REA) 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.






Have a great day!

James & the Market Matters Team

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 27/04/2019

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