Market Matters Report / Market Matters Weekend Report Sunday 28th May 2017

By Market Matters 28 May 17

Market Matters Weekend Report Sunday 28th May 2017

Market Matters Weekend Report Sunday 28th May 2017

The ASX200 continues to trade in a choppy manner which coincides with our previously anticipated classic "sell in May and go away" seasonal pullback. Conversely global indices remain strong with the broad US market making fresh all-time highs on Friday night, hence while we have witnessed a 4.3% correction from the May high it remains the comparable index underperformance that catches the eye at present. So far for May the ASX200 is down -2.9% while the US S&P500 is up +1.3%. The local banking sector which supported our market for the first 4-months of 2017 has since become the villain tumbling 11.8% in just 4-weeks; with the "Big 4" banks making up over 25% of the ASX200 it's extremely hard for our index to trade positively under that much pressure. However, we are seeing some positive sector turns on the horizon that are actually slowly transitioning us to a neutral / positive stance for June!

The following statistics and views should be kept firmly in mind with June commencing late next week:

1. The average correction for the ASX200 over the May-June period since the GFC is 6.9%, which targets 5545 - so far, we have seen a 4.3% pullback. If the ASX200 is going to correct the full 904-point advance since the US election in November the initial technical target would be the 0.382-Fibonacci retracement at 5610, just above major support at 5582. These statistics / levels imply to us that if the opportunity arises around the 5600 area it represents great buying.

2. CBA has already corrected $8.91 / 9.3% from its recent high, whereas the average pullback for CBA during May / June since the GFC is just over 10% targeting ~$79 from the $87.74 high i.e. a slight break of the recent panic low around budget time.

We remain comfortable holding 23.5% of the MM portfolio in cash as buying opportunities look very close at hand.

Importantly subscribers must remember how we believe the market is positioned going forward to understand our alerts / positioning i.e. We only anticipate another 6-8% upside for global equities before the major 8-year bull market is complete and then a painful +25% correction unfolds. Hence, we are in very clear "buy weakness and be prepared to sell strength" mode. Most MM alerts over the coming months from the buy side are likely to be targeting a quick 10-20% gain, or a free dividend - we believe the time in this cycle to buy and hold a stock for 20-30% gains are well behind us in the vast majority of cases.

ASX200 Daily Chart

Global Indices

Global shares continue to follow our script which does not bode well for stocks over the coming years. The MM view for global / US indices moving into June are outlined below:

1. We still see stocks rallying a further 6-8% from current levels but a 5% pullback feels relatively close at hand - we will be a buyer of such a retracement if it were to unfold.

2. The Dow looks positioned for another 2% upside into June, we would turn short-term negative on a close back under 2400 by the S&P500 and to a lesser extent 21,000 for the Dow.

MSCI World Global Index Quarterly Chart

Dow Jones Index Daily Chart

Banks and Financials

As we touched on earlier the majority of our local markets weakness in May has been firmly down to the banks who have been sold down due to the new govt. bank tax plus 3 of the "big 4" banks trading ex-dividend in the last few weeks. Fridays weakness relayed a clear message to us that the selling of our banking sector is not finished but the following graph illustrates clearly that the downside momentum is running out of steam and we believe there's a strong possibility of at least an intermediate low for our banks next week. Hence, we will maintain our order in the market for CBA that was placed by alert on the 18th of this month, now only 1.4% below Fridays close:

Commonwealth Bank (CBA) $80.14 - We are currently on the bid for an additional 2.5% allocation under $79.

*Watch for alerts in case we tweak this.

Medium-term we remain bullish the local financials index targeting ~17% higher prices, the current 9.5% correction has now reached our target area and downside momentum has fallen, similar to the banks. The US Banking Index continues to look 50-50 at best hence unfortunately it's giving us no clues at present.

Australian Banking Index Weekly Chart

Resources

Happily, no major change, we remain bullish the resources space looking for the big cap miners to add to their recent strong gains.

RIO looks great and is now less than $7 from our +$70 target area for 2017, an excellent performance considering equities have been weak and the underlying commodities have only just stopped falling, they definitely have not enjoyed a meaningful bounce.

We believe the position of Fortescue (FMG) is important to our short-term outlook moving forward. FMG will generate a buy signal if it falls another 4-5% at some stage next week, far from out of the question after falling 4.5% on Friday and 7.4% last week - see standout chart of the week.

If this view on FMG proves correct and it rallies ~20% after dipping lower early next week then our view for the resources as a sector looks on track.

RIO Tinto (RIO) Daily Chart

To reinforce our confidence in the resources sector over the medium / long term is the ongoing strength being exhibited by the Emerging Markets index, our initial target is ~45 / over 7% higher and our next target is ~50 / almost 20% higher!

Emerging Markets Monthly Chart

Today we are going to bring together two significant pieces of the puzzle to illustrate how we see the ASX200 evolving into June:

1. We see CBA testing the $79 area where we are attempting to add to our position i.e. a potential pullback of another 1.5%.

2. We see FMG poking its nose under $4.60 prior to a 20% rally, ideally 5% lower and then a strong rally.

Hence if we see both the banks and resources make one move lower prior to being a buy the ASX200 is likely to dip under its May low of 5697 to generate an excellent buying opportunity.

Standout technical chart (s) of the week

Fortescue (FMG) has corrected ~36% from its February high well over $7, tracking the iron ore price which has fallen 39%. On Friday night iron ore fell almost 4% to challenge levels not seen since October 2016.

Next week we will be buyers of FMG at fresh lows for 2017 below $4.66, ideally close to $4.50 targeting a minimum 20% rally.

Fortescue Metals (FMG) Daily Chart

Summary

No major change, we continue to believe that US and local stocks can add to their recent gains into 2017, and potentially 2018. Our current thoughts:

1. Buy CBA under $79 - 2.5%.

2. We are buyers of FMG under $4.66, likely a 5% investment.

3. We are losing confidence that the ASX200 will fall much further this May-June.

4. We are still watching SEK, CPU, QBE, MQG and HSO carefully.

Bigger picture we continue to believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open up ~5-points on Monday, we believe the market will struggle to add to these small gains short-term.

Potential Investing opportunities for the coming week(s)

1. Buy CBA under $79 - 2.5%.

2. We are buyers of FMG under $4.66, likely a 5% investment.

3. We are watching SEK, CPU, QBE, MQG and HSO carefully.

* Watch out for trading alerts.

Potential Trading opportunities for the coming week

For the trader, similar to above, we can buy FMG via stock / or options targeting a 20% rally over the next 3-4 weeks.

*Watch out for trading alerts.

Portfolio / Trade Holdings

The Market Matters Portfolio today is below, no change last week but a few things are on our radar this week. We have been more active than usual over recent weeks/ months which is to expected as we believe this major 8-year bull market matures over the coming months.

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-26th-may-2017/

Weekend report Charts / Chart Pack

The Market Matters Weekend report charts can be found below:

https://www.marketmatters.com.au/chart-pack/

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.

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 20/05/2017. 10.00PM.
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