Market Matters Report / Market Matters Weekend Report - Sunday 28th June 2020

By Market Matters 28 June 20

Market Matters Weekend Report - Sunday 28th June 2020

Market Matters Weekend Report - Sunday 28th June 2020

The end of the financial year is only a few days away but following Friday nights +700-point fall on Wall Street, the 2nd in just 3 days, there still appears to be more water left to go under the FY20 bridge. Back in July we kicked off the year with the ASX200 trading just above 6600 before it managed to grind out an 8-month advance, at the leisurely rate of just over 1% pm, finally making fresh all-time highs at 7197 in late February. Then bang the coronavirus hit town and we plunged almost 40% in just a few weeks, it’s been an unprecedented period of volatility which has tested the nerves and resolve of investors while presenting some of the best opportunities in the last decade, and I reckon there’s plenty more to come in the months / years ahead.

The ASX200 has calmed recently trading between 5700 and 6200 since late May and at MM we’ve stuck to our guns, don’t play the noise wait for the clearly defined buying /  selling opportunities, or simply buy weakness and sell strength. I reckon on at least 5 occasions I was confident stocks were poised to break either up or down only to be wrong on each occasion, illustrating exactly why investors / traders should leave markets alone that are rotating in a choppy sideways manner. Obviously under-the hood the market has thrown up some standout pockets of both strength and weakness with gold stocks outperforming while the tourism / travel sector has really struggled as the coronavirus restrictions failed to evaporate as fast as many hoped.

Earlier in the month we called growth stocks (IT & Healthcare) to lead US markets to fresh post COVID-19 highs before a decent correction would again provide some great buying opportunities. Also when we do eventually turn higher MM has felt that value stocks will finally assist with some of the heavy lifting (banks & resources) – time will tell on this one. So far this view has unfolded on point with the tech based NASDAQ roaring to fresh all-time highs last week before pulling back -4.4% into Friday as the coronavirus fears escalate. We remain buyers of weakness as we move into July but equities are overdue a more meaningful pullback after 3 quick sharp 7%, 6% and 6.5% dips hence we intend to be a touch “fussy”  before moving further up the risk curve e.g. we like the NASDAQ below 9500 which would amount to a 8-10% correction.

MM is a buyer of the NASDAQ ~5% lower.

US NASDAQ 100 Index Chart

Following the Dows 730-point fall on Friday night local stocks are set to give back all of their gains from Friday, the ASX200 is poised to open close to 5800 on Monday, still well within its recent tight trading range. It feels like its now or never for stocks to experience a deeper pullback as the coronavirus statistics continue to move in the favour of the bears:

1 – On Friday the US registered its largest ever daily confirmed cases of COVID-19, the number came in over 40,000 which puts our ~37 cases during the same period into perspective.

2 – Some US states are now backtracking on their proposed post virus opening plans, joining the likes of Beijing and Victoria in re-tightening respective lockdown measures.

Many stock markets appear to have gotten ahead of themselves pricing in a “V-shaped” recovery as the pandemic continues to unfold, it’s going to be very interesting to see where fund managers start buying into weakness – in Junes Bank of America Fund Manager survey a record number of 78% of investors thought stocks were too expensive but with cash levels dropping from 5.7% to 4.7% we feel a more meaningful pullback has become a real possibility – our buy level for the local index remains ~5% lower.

MM is currently a buyer of the ASX200 below 5600.

ASX200 Index Chart

Following last week’s sell-off US indices are painting a very different picture to when I penned the previous Weekend Report, then a push towards fresh all-time highs felt likely, now a test down towards the lows of May feels more likely – this change in “look & feel” is exactly why attempting to ascertain optimum investment location during a period of choppy noise is fraught with danger.

With MM remains a buyer of US stocks ~5% lower.

US S&P500 Index Chart

Interestingly the stock market fortress often referred to as the “Fangs” finally came under noticeable pressure late last week with Facebook (FB US) in particular taking a significant -12% dive from its high. The momentum and short-term players should theoretically be long the tech based NASDAQ stocks considering the index made fresh all-time highs on Tuesday hence a sharp sell-off could easily unfold as these largely computer generated trend following systems may hit the exit button if weakness persists, another potential classic case of when the music stops playing there’s not enough buyers. By definition as this sector has led us higher post the COVID-19 outbreak if it does struggle over the coming weeks the broader market is likely to follow suit.

MM is cautious US tech & broad-based stocks next week.

Facebook (FB US) Chart

The coronavirus has again become the main game in town with comments from the likes of Messrs Donald Trump & Joe Biden taking a most definite backseat from a market perspective. As we said earlier the US recorded its worst ever virus day on Friday taking their number of confirmed cases up towards 2.6m, over 25% of the world’s ~10m cases. Most definitely not a statistic to make the world’s largest economic power proud of and one that’s going to test President Trumps campaigning skills to the n’th degree.

At MM we have remained concerned with how the US has struggled to deal with the virus citing it as the likely reason for the next decent pullback by stocks and right on cue unfortunately we appear to be correct. MM believes the virus will remain a major market influence until a vaccine is discovered plus of course we have the US election now just 4-months away which undoubtedly will cause a few spikes in volatility along its journey i.e. investors should expect 2020 to maintain its label of the most volatile year of the last decade.

We still feel the path of least resistance is up courtesy of central banks hence when things are “ok” on the news front we expect equities to rally.

Confirmed cases of COVID-19 in the US Chart

With the market potentially headed lower sooner rather than later today I have focused my attention on stocks /  ETF’s we are considering for the 4 MM portfolios, keeping things simple and clear as we largely summarise / update the last few weeks reports:

MM Growth Portfolio.

Importantly we only hold 8.5% in cash hence we intend to be very fussy moving further up the risk curve, but this is still something we intend to do if the pullback described earlier does actually unfold.

1 - Aristocrat Leisure (ALL) $25.60 – we like this gaming machine business back under $24, or 7% lower.

2 – Newcrest Mining (NCM) $31.14 – we’re keen on this gold stock ideally below $30 & / or other gold miner Ramelius (RMS) around $1.85, or 7% lower.

3 – Bingo Industries (BIN) $2.23 – MM likes the waste management and recycling business back towards $2 where we may increase our position.

4 – Boral (BLD) $3.77 – we still like this building stock back towards $3.35, alas now 10% lower.

5 – Whitehaven Coal (WHC) $1.45 – there is certainly no hurry to buy this out of favour coal stock but back towards $1 it will become extremely tempting.

6 – Western Areas $2.72 – this remain our preferred stock for exposure to nickel with an ideal entry ~$2.60, only 4-5% lower.

7 – Flight Centre (FLT) $11.32 – lastly a fresh addition but as an aggressive thematic we like FLT back towards $8 for exposure to a relatively rapid economic recovery, never say never on how far travel stocks can fall in today’s environment with our buy area over 20% lower.

What we decide to buy from the above will obviously depend on the market’s dynamic at the time.

*watch for alerts.

Flight Centre (FLT) Chart

MM Income Portfolio.

Again importantly we only hold 5% in cash hence we will be very fussy moving further up the risk curve.

1 – Transurban (TCL) – MM likes this toll road operator about a $1 lower, again never say never if we see increased speculation of further lockdowns in Australia. We may add to our existing position at that point.

Transurban (TCL) Chart

MM International Portfolio.

We hold 10% in cash with this portfolio offering a little more flexibility to accumulate stocks in to weakness.

1 – Starbucks (SBUX US) $US71.57 – we like this coffee / café business for quasi-exposure to the growing Chinese middle class, our optimum entry level is under $US70, not too far away now.

2 – Visa (V US) $US189.27 – we are considering adding to our holding in this payment business around $US180, or 5% lower.

Visa Inc (V US) Chart

MM Global Macro ETF Portfolio.

We hold 24% in cash in our macro portfolio offering a little more flexibility to take positions as markets unfold along the path we have been expecting.

1 – we like the Australian based European equities ETF (IEM) around the 56 area, or 6% lower.

With the numerous variables and by definition opportunities that COVID-19 creates we like a reasonable cash level just in case we witness another “sheer panic” moment in financial markets.

iShares European equities ETF (IEU) Chart

Conclusion

MM is looking to increase our exposure to risk / stocks around 5% lower.

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.

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