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

By Market Matters 28 July 19

Market Matters Weekend Report Sunday 28th July 2019

Market Matters Weekend Report Sunday 28th July 2019

The ASX200 continues to enjoy broad based buying, the rally from December has now extended to an impressive and unrelenting 26%. While the markets clearly close to testing both the psychological and trendline 7000 area zero sell signals have been generated, sure a few indicators are flashing amber but none are saying it’s time to disembark this bull train. During the last full trading week for July we saw less than 25% of the index close in the red, while volatility under the hood slowly increases before reporting season with almost 20% of the ASX200 moving by over 5%:

Winners: NRW Holdings (NWH) +6%, Seven Group (SVW) +5%, Emeco Holdings (EHL) +5.9%, Bingo (BIN) +8%, Breville Group (BRG) +5.7%, Flight Centre (FLT) +6.7%, Corporate Travel (CTD) +6%, HUB24 (HUB) +7.9%, Magellan (MFG) +6.2%, Pendal Group (PDL) +5.4%, IOOF Holdings (IFL) +12%, Worley Parsons (WOR) +11%, Oil Search (OSH) +5.9%, Beach Energy (BPT) +8.7%, Viva Energy (VEA) +6.3%, Cooper Energy (COE) +8.4%, Treasury Wine (TWE) +7.9%, Bellamys (BAL) +11.9%, ResMed (RMD) +7.4%, Mineral Resources (MIN) +10.9%, James Hardie (JHX) +5.4%, Sims Metal (SGM) +7.6%, Nufarm (NUF) +7.4%, Incitec Pivot (IPL) +7.1%, Carsales.com (CAR) +6.2%, Southern Cross (SXL) +5%, Clinuvel (CUV) +6.5%, Aveo Group (AOG) +8%, Webjet (WEB) +5.1%, Afterpay (APT) +8.8%, Wistech (WTC) +9.1%, Xero (XRO) +5.7%, Nearmap (NEA) +5.1% and Vocus (VOC) +5.4% -13.5% - a total of 35 stocks.

Losers: Iluka (ILU) -14.7%, Lynas (LYC) -5.7% and Regis Resources (RRL) -13.5% - a total of 3 stocks.

I knew when I started typing today’s report that the markets internals were strong from just watching the screen but I was still extremely surprised to see almost 12x more stocks rally by 5%, or greater, than decline by the same degree. At this stage of the cycle we still see no reason to “fight the tape”, hence while we believe its time to structure portfolios with a more conservative skew than over the previous 6-months it certainly doesn’t feel like the time to abandon ship. Our “Gut Feel” that the local market had a very good chance of making fresh 2019 highs has proved to be on the money but we should all remain open-minded to actually how far it can run.

We simply must not be the proverbial ostrich burying our head in the sand and forgetting the relative value supporting equities, its not rocket science - term deposits appear headed towards 1% while Commonwealth Bank (CBA) is still yielding around 5% fully franked. The second surprise I had writing todays Weekend Report and compiling the Chart Pack was the number of stocks that I found which are still offering both compelling stories & attractive risk / reward for the bulls, not what I expect to see if the market is about to fall apart.

At MM we continue to adopt a more defensive stance than over the previous 6-months; the specific thoughts and skews across our 4 Portfolio’s will be discussed later. Note a defensive stance largely dictates which sectors we are keen to own as opposed to piling into cash and / or  going short.

ASX200 Chart

At MM we continue to believe it’s time to keep stock market investing simple (KISS), today’s market is all about interest rates and relative value. Last week Australian 3-year bond yields again made fresh all-time lows, trading well below the RBA Cash Rate of 1%. Over the last few weeks we’ve received a constant barrage of dovish news flow including comments from Westpac chief economist Bill Evans and the RBA themselves:

1 – The market is now pricing in a rate cut by Melbourne Cup Day as a given with another in 2020 is a strong likelihood, they are even pricing in a greater than 20% chance of a second cut to 0.5% in 2019!

2 - Importantly RBA Governor Phillip Lowe also said just 3-days ago that “its reasonable to expect an extended period of low interest rates”.

If rates remain where they are today we believe stocks are arguably still very cheap, let alone if they actually fall further as most predict. Hence our almost fixation with bond markets at this stage of the economic / stock market cycle, the positive tailwind from hyper low interest rates continues to push up most asset prices, including equities. The almost “free money” environment is forcing increasing numbers of investors up the risk curve in an effort to achieve any meaningful income from their monies but I feel this is not a particularly mature move at this point in time as banks are still slashing both their borrowing and lending rates in earnest.

Equities with sustainable yield remain arguably cheap with interest rates at current levels – term deposits are still paying way under half of the average yield of the ASX200.

We are comfortable that equities will remain strong until they make an about face and focus on the deteriorating global economy, we will continue to monitor the indicators / signs but “the when” is guess work. With global bond yields almost racing to the bottom multiple expansion is winning the battle at present, although it can hardly be called a fight! However markets do move in cycles and while its all about rates today we should all remain cognisant the markets usually fall in a recession which in this case will probably be when central banks lose the confidence of investors

Comparative Australian interest  rates / bond yields Chart

History tells us that the US fed, like our own RBA, are often caught being too reactive as opposed to a more preferable pro-active, we could even call it being asleep at the wheel – don’t forget the  GFC occurred when they were both dictating monetary policy. Similar to our own 3-year bond yields which are sitting below the RBA 1% cash rate, the US 2-year notes are trading under the Fed Funds Rate but in their case by a whopping 0.65%.

Markets are expecting a 0.25% rate cut by the Fed at this week’s July 30-31 FOMC meeting, although its undoubtedly hoping for 0.5%. Our feeling is things will follow their usual path, the Fed will cut only once thus finding itself needing to cut once, and probably twice again over the next 12-months.

Just like our own, US official rates looked poised to fall 0.5% in the next year.

Hence we have no change with our core view that stocks with solid sustainable yield should outperform over the next 6-12 months.

US S&P500 & Junk Bond ETF (HYG US) Chart

In the previous 2 Weekend Reports we looked at the resources sector and it dawned on me this morning that investors are unlikely to be able to “have their cake and eat it” over the next year i.e. if interest rates are going to continue falling because the global economy is struggling then a number of commodities  are likely to remain subdued e.g. “Doctor Copper” which is regarded as a bellwether indicator for the global economy.

1 – Copper is regarded as a reliable prognosticator for the world economy and its inability to bounce from current levels causes MM to fear for a recession moving forward, and in particular the health of the Chinese  economy.

2 – The chart below shows how iron ore has managed to shrug off the slowing global economy with the assistance of the Vale disaster in Brazil. However the best days for the bulk commodity feel behind it, at MM we like iron ore stocks into weakness but we believe patience is the best approach e.g. RIO almost 10% lower.

MM is looking to be extremely fussy with any purchases in the Resources / Materials sector.

Comparing Copper & Iron Ore Chart

No change to the 2 strategies we’re following with regard to both sector allocation and the macro back drop for stocks:

1 – Investors have been chasing the obvious and usual suspects in their hunt for yield, we believe these stocks have become fully priced thus we feel the secondary (not necessarily in quality) less familiar “yield play” stocks will come to the fore and outperform.

2 – The market is expecting a recession but it’s not currently pricing the risk into share prices. Investors were far more afraid of a recession because of higher rates than one which unfolds when rates are already low – this makes no sense to us because central banks have far less ammunition to deal with economic issues if they unfold today as rates are already at extremely low levels.

1 –  The MM Platinum Portfolio

We have been tweaking the MM Platinum Portfolio largely as flagged in previous reports, there has been some great profits taken over recent weeks but our cash level of 26% is definitely on the high side as we head into reporting season; a period when volatility is usually significantly elevated presenting opportunity for the prepared and nimble. The question we ask ourselves is do we add to our 16 holdings now, or be patient :   https://www.marketmatters.com.au/new-portfolio-csv/

Following the last few weeks ongoing repositioning we still find ourselves with an appetite for risk due to our large cash position but it’s important to stress we only have interest where both the company and risk / reward is attractive. Below is a quick snapshot of the stocks currently on our “buy”, a list that has noticeably evolved  over the week:

1 – Worley Parsons (WOR), we have been watching WOR for over a month, it now looks poised to accelerate higher. Buy WOR now with stops below $15.50, under  4% risk with an initial target over  10% higher.

2 – Origin (ORG), interestingly another energy stock in a similar position to WOR. Buy ORG with stops below $7.50 under 4.5% risk with an initial target almost 15% higher.

3 – Elders (ELD), no change with our interest around the $7 area, only 3% lower.

4 – Chorus Ltd (CNU), the NZ telco was previously the golden child of the sector but its quickly fallen 14% from its high in 2019. We see value presenting itself below $5 where the yield will become a healthy 5% unfranked i.e. buy ~5% lower.

5 – James Hardie (JHX), building business closed at fresh 2019 highs last week, MM likes JHX initially targeting 15% higher with stops below $19.40, or just 2% lower.

6 – Pendal Group (PDL) was discussed in Fridays morning report, MM likes PDL with stops below $7.10, 10% risk with a target ~20% higher.

7 - Iron Ore stocks, we covered above, another 8-10% lower and we anticipate accumulating the likes of Fortescue  Metals (FMG) and RIO Tinto.

As I mentioned earlier the number of stocks that felt attractive when I put together the Chart Pack made me feel far more  bullish than I expected, especially as no fresh “sells” jumped  off the page. Hence considering our  cash position don’t be surprised to see some buy alerts next week.

*Watch for alerts.

Worley Parsons (WOR) Chart

James Hardie (JHX) Chart

2 MM Income Portfolio

The Income Portfolio was left unchanged last week https://www.marketmatters.com.au/new-income-portfolio-csv/

Again no major change, until we see any indication that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

3 –  International Equites Portfolio

Last week we exited Netflix (US NFLX) into a bounce as planned, a painful loss but an inevitable outcome of investing through reporting season, it leaves us now holding 75% in cash : https://www.marketmatters.com.au/new-international-portfolio/ .

We are again considering a couple of different positions:

1 –  Buy Bank of America (BAC US), at today’s levels, targeting a break of 2018 highs, around 20% further.

2 – Buy Alibaba (BABA US), at today’s levels, again targeting a break of 2018 highs, over 20% higher.

3 – IBM (IBM US) reported well last Friday night and we believe the stock remains well positioned to at the very least outperform the index, stops can be run ~7% below Fridays close.

At this stage I can see MM buying at least one of the above to balance  our bearish ProShares  ETF, our preference is as listed above.

International Business Machines (IBM US) Chart

4 - MM Global ETF Portfolio

No change last week with MM’s new Global ETF Portfolio -  we have tickled on 3 positions, long both the $A and gold, plus we have a small short US equities position leaving us holding 80% in cash. Construction of this portfolio similar to our International Portfolio one will be a slow and patient process. We are currently keeping an eye on 2 other scenarios:

1 – As  we touched on earlier we like the concept of Australian banks now outperforming the Resources sector, it’s been a long time as the chart below illustrates.

To play this we would buy the VanEck Vectors Banks ETF (MVB) https://www.vaneck.com.au/funds/mvb/snapshot/ but the short is far more tricky, potentially a simple short ASX200 would be ideal but I stress this is not a perfect solution – my thinking hat remains in place.

2 – We continue to look for a short-term opportunities in the influential bond markets but at the moment no risk / reward opportunities we like are presenting themselves.

ASX200 v NASDAQ Chart

Conclusion

Short-term Australian stocks still look good although we continue to feel it’s time to adopt a more conservatively structured portfolio, but this does not mean large cash balances hence we are considering a couple of buy options for next week.

US stocks will only trigger a sell signal with a break below the 2960 by the S&P500 (just over 2% away). Gold still looks great and we want to increase our exposure to the sector if / when pullbacks unfold.

Chart of the week.

This week we could  have featured either Worley Parsons (WOR) or Origin Energy (ORG) but we’ve gone for the later but it was a 50-50 call.

We are bullish ORG looking for a sharp rally towards $9, while stops can be used under $7.50 – excellent risk / reward.

Origin Energy (ORG) Chart

Investment of the week.

We’ve had Elders (ELD) on our radar for months but unfortunately we missed out on the ~25% rally earlier in July following its successful takeover of AIRR, a great strategic fit in our opinion. However the stock is now drifting lower and we would be keen accumulators in the weeks ahead ~$7.

MM is bullish ELD with ideal entry around $7.

Elders (ELD) Chart

Trade of the week.

Our preferred stocks for this position today are WOR and ORG but as we have mentioned them in other sections we have gone for our 3rd  choice.

We have discussed lithium producer Orocobre  (ORE) previously and after the stocks found a base around $2.70 it feels like now or never for a decent upside rally.

MM likes ORE at current levels with a stop below $2.70, we are considering averaging our holding.

Orocobre (ORE) 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 27/07/2019

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