Market Matters Report / Market Matters Weekend Report Sunday 28th January 2018

By Market Matters 28 January 18

Market Matters Weekend Report Sunday 28th January 2018

Market Matters Weekend Report Sunday 28th January 2018

Last week the ASX200 bounced smack on cue for its usual seasonal late January low, the question now is will we see the weakness over the next fortnight that usually follows? i.e. Since the GFC when the ASX200 drifts in January the quarterly low has occurred 80% of the time in the first 5-10 calendar days of February. From a sector perspective the main 2 standouts for MM was ongoing weakness in the Australian Banks / Telco’s while the Energy Sector maintained its strong start to 2018.

The ASX200 is marginally lower for the month compared to the Dow which is up an impressive +7.7% making it easy to lose to faith in the local market but we should not forget the impact of a tumbling $US which is now -3.4% just for January. America is basking in the perfect environment for equities with a strengthening economy / company earnings while interest rates are increasing in a controlled manner – plus of course we have Donald Trump’s generous tax package, a reduced regulatory environment and now rhetoric towards an even weaker $US.

A lower $US makes American exports more competitive but hurts global players looking to export to the US hence were currently experiencing some very different relative stock market performances – last week we saw the US S&P500 index gain +2.2% but Europe fell marginally, as did Japan, Canada and Australia. Global markets are following their own fundamentals and subscribers should not follow the old fashioned thinking that if the Dow rallies so will we.

Last week’s list of major winners / losers from the ASX200 did show us that the local market was underpinned by the strong technology based NASDAQ and a belief in ongoing strong exports into China:

Winners : Seek (SEK) +6%, Flight Centre (FLT) +8.2%, A2 Milk (A2M) +11.5%, Treasury Wine (TWE) +12%, ResMed (RMD) +12%, Evolution Mining (EVN) +6.1% and Carsales (CAR) +6.6%.

Losers : BlueScope (BSL) -5.1%, Fairfax (FXJ) -6.3% and Spark Infrastructure (SKI) -5%.

Today’s report will mainly focus on the $US and the implications if we are correct and a decent low is approaching in the coming weeks -  a very non-consensus view.

ASX200 Daily Chart

Due to the common February low since the GFC we are comfortable sitting on ~20% cash in the MM Platinum Portfolio and 8% in the Income Portfolio seeing no reason to chase market strength at this point in time.

Recently we’ve had a few subscribers question our concern around a potential pullback on the horizon and while we believe its imperative for successful investing to remain very open-minded please consider the following simple 2 statistics:

  1. The ASX200 only experienced a 5% pullback last year but only around 1 in every 12-years has the index managed such a small pullback.
  2. The average pullback for the local market is well in excess of 10% in a calendar year e.g. In 2016 the ASX200 corrected 10%, following a classic early May high.

Thus it would very unusual to only see a 300-point correction in 2018, with a pullback of over 600-points far more likely – MM is highly likely to hold high levels of cash in its portfolios on a regular basis during 2018/9.

Unfortunately we have not followed the US stocks up but I think we all agree if / when the Dow drops 1000-points / 3.8%, only where it was just 15-days ago, the local market is very likely to succumb to a degree of weakness.

ASX200 Seasonality Chart

The $US

As we approach the end of the first month of 2018 we have decided to focus on the $US this week for 2 important reasons:

  1. Once markets had settled down after Donald Trump’s surprise election victory the inverse correlation between the weakening $US and a rallying US stock market has been almost perfect.
  2. MM’s best market call last year was our non-consensus call that the $US would fall even though the Fed were set to raise interest rates, which they in fact did.

As people that are familiar with the recent MM Outlook Piece for 2018 understand one of our main calls for this year was in 2 parts:

  1. The $US Index would make fresh multi-year lows down towards the 88 region – currently a big tick!
  2. Following this weakness we are targeting a significant bottom and a rally of around 10% minimum.

Assuming we are on the money again with our $US fundamental / technical analysis there are potentially huge ramifications for equities in 2018:

  1. Equities are very likely to have a decent correction in 2018, remember the simple norm for the ASX200 is 10% in a year!
  2. Stocks that enjoy a strong $US should outperform e.g. CSL, RMD, COH, AMC, BXB, JHX, IPL and QBE.
  3. Commodity prices usually fall when the $US rises which can easily lead to a sharp correction in the currently much loved resources / Emerging Markets space.
  4. However the Australian resources stocks earn almost 90% of their revenue o/s, with Energy stocks close to 60% plus notably the Healthcare Sector is over 80%, with 1/3 of this in the US.

The speculative long position for the $US is at multi-year lows adding significant weight / confidence to our $US higher opinion over 2018.

MM believes the $US is the key to successful investing in 2018/9.

The $US Index v S&P500 Weekly Chart

The $US is currently accelerating lower following the US Treasury Secretary’s recent comments in Davos about the US desiring a lower local currency. At this stage we expect to see some consolidation over coming weeks in the 88 and 90 area prior to a final attempt lower later in February.

If this unfolds MM anticipates holding a decent cash position to enable flexibility and buying of weakness.

The main reason we are not running from stocks at this stage is the strength we have experienced by equity markets has been fundamentally driven by better earnings as opposed to surging valuations – hence buying the next reasonable correction still makes sense, for now anyway.

The $US Index Weekly Chart

Defensive stocks likes healthcare, real estate investment trusts (REITs), utilities, consumer staples and the big bad Telco’s should theoretically / historically be the outperformers if we are correct with our $US call, especially if they have $US exposure – we currently feel like we are too early with the MM view of take profits in the Healthcare Sector.

The Telco’s could potentially be solid winners in 2018, they are certainly unpopular enough with investors and brokers alike in Australia and the US.

  • US Telcos are down over 10% since July 2016 while our equivalent is down 40% over the same period aided by the disastrous NBN broadband.

However there is definite correlation between the respective Telcos, it’s not just a nightmare in Australia, remember while the US Telcos have fallen their index has soared! Stock markets are cyclical and we think the time to simply ignore Australian telco’s is behind us.

Remember BHP tumbled 70% from 2011 high over around 5-years before finding a meaningful low and now its analysts favourite, investors simply have short memories!

The US v Australian Telco Sector Monthly Chart

Australian stocks / sectors

Resources

While we remain bullish the resources into 2018/9 considering the sectors bull market is now 2-years old, plus we are looking for a $US low, jumping into a strong market could easily prove very painful short-term.

Since the sectors bull market commenced back in early 2016 we’ve witnessed some excellent corrections / buying opportunities e.g. Heavyweight BHP has corrected -18.9% / -21.1%, plus a smaller 6.5% at the end of last year, with the smaller more volatile stocks often pulling back much further. Our simple thought at the start of 2018 remains intact: 

  • Resource stocks still look good but after a strong 2-year rally investors must expect / be prepared for some decent pullbacks in 2018.

We used BHP earlier as a great example of markets cyclical nature it also can be used to illustrate that patience is required when investing.

MM bought BHP in 2017 in the $23.50-$24 region only to watch it languish for months before finding some love. We currently have a small 3% holding in BHP which is showing a small paper profit.

We will potentially add to this position under $30 but will also have no hesitation taking profits if BHP rallies from here i.e. due to our $US view we can see plenty of opportunities in 2018 with increased volatility feeling imminent across many sectors.

BHP Billiton (BHP) Weekly Chart

MM still expects a 7-10% correction in base metals, probably in Q1 this year, hence a pullback for resource stocks should be close at hand.

Bloomberg Base Metals Index Weekly Chart

Currently our preferred resource stocks, plus ideal buying levels, are:

  1. Diversified miners - BHP and RIO – around 3% lower.
  2. Pure iron Ore – Fortescue Metals (FMG) – under $5.
  3. Copper – OZ Minerals (OZL) and Sandfire (SFR) – entry, or not, is tricky and will be determined by the copper price.
  4. Aluminium – Alumina (AWC) – ideally under $2.10.
  5. Nickel – Western Areas (WSA) and Independence Group (IGO) – levels are hard to determine, we will watch the nickel price for clues.
  6. Minerals sands / titanium – Iluka (ILU) – ideally around $9.
  7. Lithium – Orocobre (ORE) – we may average around $5.50.

There are not many surprises in the above list but as we mentioned earlier “buy levels” will have an enormous impact on a portfolio returns over the next 12-24-months – at this stage we advocate patience, opportunities will come along as we saw in ORE.

Banks

As we pointed out last week the Australian Banking sector has simply not participated in the global banking party which has embraced rising interest rates in an extremely positive manner. In fact our banking sector has been declining while others continue to make multi-year highs but value will present itself when the majority become too pessimistic.

Banking Indices Weekly Chart

While local banks may not offer significant growth over the coming years their yield should remain pretty solid hence NAB currently paying 6.81% fully franked is undoubtedly attractive to many Australians even as interest rates look destined to tick higher.

  • MM will consider adding to our NAB position ~$28, where the stock will be yielding over 7% fully franked per annum – last trade $29.06.

Similarly we’ve been watching CBA carefully since Christmas with its looming dividend in February, we currently have an order in the market to buy CBA under $78 – last trade $78.65. 

While our buy levels in both CBA and NAB suddenly look optimistic the shape of ANZ gives us hope, it looks likely to break $28 before at least bouncing i.e. around 3% lower.

ANZ Bank (ANZ) Daily Chart

Energy

No change, we remain bullish crude oil and an extension towards ~$US70/barrel would not surprise, especially as many pundits have been targeting the $US60/barrel area – Fridays +$US66/barrel close is the highest since November 2014. 

  • We still remain very comfortable with our exposure via Woodside Petroleum (WPL) ideally targeting the $38 area i.e. over 10% higher.

Woodside Petroleum (WPL) Weekly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in Newcrest (NCM) which is currently showing a very small paper loss.

As discussed the $US has been very weak which has helped gold rally. However, if we are correct and the $US is close to a decent low then gold may be ready to underperform, especially as traders have been going long the most liquid ETF’s implying a short-term bullish view which could subsequently see some selling hit the sector very easily moving forward.

Australian gold stock St Barbara (SBM) has enjoyed a phenomenal 2017/8 and looks set to make fresh highs around $4, this may coincide with a top in the sector and we are now cautious / watchful considering our position.

St Barbara Ltd (SBM) Daily Chart

Bond yields / interest rates

Its almost impossible to find an analyst who doesn’t think bonds are going down / interest rates higher – we’ve been preaching this for months!

This opinion feels like this has led to money pouring from bonds into equities i.e. if you believe US bonds are destined to fall much further then selling these bonds and paying slightly above the ideal price for equities looks very logical medium-term. This switch between asset classes looks exactly like what’s been happening in the US i.e. any pullbacks in stocks are almost non-existent.

We believe fund managers are scarred of missing out on the move, classic “Fear of missing out (FOMO)” which so often ends in disaster.

Our warning is simple, watch US 10-year bond yields closely as they attempt to breakout to 3-year highs. If we see these yields fall back under say 2.55% MM advises caution as this flow of $$ into stocks is likely to dry up rapidly.

US 10-year bond yields Weekly Chart

Diversified Financials

We remain bullish the Diversified Financials with an eventual target ~15% higher but this feels miles away at present!

  • IOOF Holdings (IFL) will be interesting on Monday following its strong rally on Thursday after Morgan Stanley’s positive report with a buy rating / $13 target.

MM is long looking for the $12.25-$12.50 area.

IOOF Holdings (IFL) Weekly Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but would consider buying panic weakness in some select stocks if the opportunity arises, especially those not heavily exposed to on-line threats. The recent rally in the likes of JB Hi-Fi may unfortunately indicate this horse has bolted.

JB HIFI Monthly Chart

Healthcare sector

We remain neutral the US Healthcare Sector, looking for potential sell signals, as interest rates rise – the US and Australian Healthcare Sectors are highly correlated.

However, conversely we are conscious that the Australian Healthcare Sector has excellent exposure to $US earnings which we believe will be a positive over 2018.

ASX200 Healthcare Index Monthly Chart

Global Indices

We may be seeing a blow-off top evolving in global equities although investors should remember that tops usually take 2/3 times longer to unfold than bottoms and they are MUCH harder to pin-point – we certainly have seen no sell signals in 2018.

Sceptics that cannot imagine a decent correction should simply stand back and look at the 3 main pullbacks by US stocks since 2007 i.e. 58%, 23% and 17% - the S&P500 has not experienced a 5% correction for 2-years, i.e. since Brexit!

We all should remember that the US is in the longest streak in history without a 5% correction and we all know it will come to an end one day!

MSCI World Index Quarterly Chart

US stocks have now exceeded our targeted area of the last 2-years courtesy of Donald Trump’s tax package. We still expect a decent correction this year but more pain for the bears feels likely just for now.

We are becoming concerned that the next top may not be rounded in nature like 2015/6 but more of an inverted “V” similar to the GFC.

US S&P500 Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 20.5% of the MM Platinum & 8% of the Income Portfolio in cash so we can buy areas where we see value :

1.      Banks – We are comfortable with our exposure at present but like CBA ~$78 and NAB ~$28.

2.      Consumer Services – We are comfortable with our exposure at present.

3.      Diversified Financials – We are comfortable with our position at present but like MQG under $96.

4.      Energy – We are long WPL which feels good.

5.      Food and Beverage – Happily square at present.

6.      Healthcare – Square feels correct.

7.      Resources – We are considering a number of buys here, see earlier in the report.

8.      Real Estate – Another sector we are not keen on.

9.      Telco’s – No investment buying at this stage but we are watching closely.

10.   Retail – No investment buying at this stage.

11.   Gold – We have enough exposure at this time with NCM.

Standout technical chart (s) of the week

We have mentioned the cyclical nature of stocks a few times today and with PTM the bullish upturn looks close to completion.

  • MM would be a seller of PTM around the $8.50 area.

Platinum Asset Mgt. Daily Chart

Investing opportunities for the coming week(s)

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

  • We are looking to accumulate resource stocks and to a lesser degree CBA / NAB into weakness.
  • We have nothing very close to our sell areas at present. 

Trading Opportunities on our radar

Today we have 2 very different ideas after a relatively inactive period.

1.      ZIP Co Ltd - Buy Z1P between 86-88c, this has been moved from an investment at 84c to a trade.

2.      Nanosonics (NAN) – We were stopped out of NAN in 2017 but the stock looks good again. The $US exposure also grabs our attention. We can buy NAN around $2.90 with stops under $2.75 i.e. ~5%.

ZIP Co. (Z1P) Daily Chart

Nanosonics (NAN) Monthly Chart

Summary

We believe the $US is the key to stocks in 2018 and MM is looking for a bottom in the coming weeks implying a decent pullback for stocks.

Also, commodities usually struggle when the $US rises which should produce some good buying opportunities.

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 . 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 26/1/2018. 4.00PM.
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