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

By Market Matters 28 October 18

Market Matters Weekend Report Sunday 28th October 2018

Market Matters Weekend Report Sunday 28th October 2018

The ASX200 was battered -4.6% last week as the US led steep declines in most global indices, on the local front we saw every sector close in the red except the gold stocks as investors flocked to any form of safety, with cash clearly popular. The true degree of weakness under the hood of the local market was very disturbing when we consider the bigger picture moving into 2019/2020.

1 – Only 18 Stocks in the ASX200 closed positive for the week, or 9%, while 13 of these were in the perceived safe havens of gold & real estate.

2 – 99 stocks in the ASX200 fell by over 5%, amazingly almost half of the market.

3 – 24 stocks in the ASX200 fell by over 10%, or 12% of the index.

The retail sector was the standout causality falling -10%, with all 8 stocks in the sector down by more than 6%, as the market was clearly giving the economy the thumbs down going forward. At MM we’ve been lamenting our concerns for weeks around household debt in Australia and suddenly the theme was embraced on mass.

The MM Platinum Portfolio avoided the majority of the hand grenades being thrown at the market last week but we still lost ~2% on paper and as we’ve expressed previously we’re not about beating the ASX200 but making money.

Today’s report is going to focus on the 11 sectors within the ASX200 plus some stocks we particularly like / dislike within some sectors enabling us to continue the restructure of our portfolio (s) – sorry the report is longer than usual but it’s a very busy market.

When we stand back and look at history it’s clear that stocks are the best long term investment and its only when people become too caught up in the short-term emotions of  “Fear & Greed” do stocks get a bad name – the ability to get caught up in the day to day roller coaster type swings in sentiment has been compounded over the last decade because it’s so easy / cheap to buy and sell shares.

Firstly and very importantly we believe this stage of the market cycle is not a time for leverage, the longest bull market is threatening a decent correction making the time for gearing up 5-10 years too late, or probably a few years early.

Secondly solid returns can be made in market pullbacks / bear markets but investors need to be acute with their sector / stock selection.

To help subscribers put recent events into perspective we have increased the Chart pack to now includes some major international shares, its available on the MM website plus through a link at the bottom of this report – it usually gets updated twice a week.

The current equity markets outlook

The pessimism in today papers is almost nauseating, journalists love to write about doom & gloom, it gets more hits on-line! Who would buy a house today, if you believe the press it will be 10% cheaper next year, mass hysteria regularly becomes almost self-fulfilling.

We all know the major issues facing stocks today – rising bond yields (interest rates), US – China trade concerns, overvalued assets / stocks, the end of huge QE, BREXIT looks a mess but to us the main issue = economists are now calling a recession in the US by 2020.

Having outlined the above for a long time we question whether the market has got a tad ahead of itself, we can see 3 very real scenarios that would spike equities higher short term:

1 – China has vocally flexed its muscle around supporting its stock market, their index actually closed positive last week. What if the vocal message became another bazooka of cash / policies.

2 – Trump goes to the polls on the 6th of November, he and the Republicans would prefer a calm stock market. A resolution, to some degree with China, could tick all the boxes making him look good, calm markets plus it would send Asian stocks soaring.

3 – Theresa May has been digging in on BREXIT, something she was very anti before the fateful vote. The market is now expecting a bad outcome but in our opinion the surprise is more likely from the positive corner. Last week 700,000 people marched to demand a fresh vote, c’mon Britain everyone wants it go back to the polls, our politicians do it all the time!

Longer term Picture

Firstly the bigger picture now looks more negative,  technically we must now give a 75% weighting to the post GFC bull market being complete – not a huge call considering the ASX200 has already fallen 11.8% below August’s high.

Our optimum technical target is sub 5000, well over 10% lower but considering the bull market took 9-years to evolve we would expect it to take ~1/2-years before the market to reaches its ultimate low / inflection point.

The market has quickly fallen ~4% from when MM went from bearish / short to long but this now feels wrong, hence it’s no surprise we are ideally looking to reduce our market exposure into strength.

ASX200 Chart

The broad based US Russell 3000 looks to have completed a perfect technical advance, very much in sync with what we have observed over the last 20-years.

Putting things into perspective both of the scenarios we are considering moving forward suggest lower prices:

1 – The current decline is mature and will find support ~1500 before attempting to regain its bullish stance i.e. another 4% lower.

2 – The post GFC rally is over and the US broad market will correct back towards the 1250 area i.e. almost 20% lower.

The US Russell 3000 Chart

Following those thoughts towards the bigger picture we must now consider what’s likely to unfold in the short-term, remember my favourite ping pong ball analogy:

“A ping pong falling down a staircase will ultimately reach the bottom but it will have some significant bounces along the way”.

Lets consider that horrendous time just over a decade ago, now referred to by all as the GFC.

1 The ASX200 declined 3731-points / 54% in about 1 ½ years as the financial stability of the world was challenged following the collapse of firstly US investment bank Bear Stearns and then almost the entire US property market.

2 During this decline the local market bounced 18.7%, 18.6%, 16.5%, 16.1%, 10.9% and 8.8% as periods of relatively fleeting optimism raised its head.

We are not suggesting the average subscriber should sit glued to their screens becoming active traders but we believe there will be some very real opportunities on both the buy and sell side, if the bull market actually is over.

Short-term picture for stocks

Both local and US markets showed glimmers of strength to finish last week, the ASX200 SPI futures soared 70-points / 1.2% on the last 30-mins of trading on Friday.

Even with US stocks falling aggressively on Friday the SPI is calling the ASX200 to open unchanged on Monday morning. We have 2 scenarios on our radar for next week, too micro for many I know but we do have a pool of subscribers who are active traders:

1 – The ASX200 has put in a decent low, just above 5600, and the market will bounce 4-5% over coming weeks.

2 -The ASX200 will have a relatively quiet week and oscillate between 5600 and 5700.

NB We are looking to identify recovery levels for the ASX200 so we can reduce our market exposure.

ASX200 Chart

American indices bounced over 1% into Fridays close offering a glimmer of hope for next week, there certainly cannot be any “weak longs” left this morning.

The small cap Russell 2000 index that we’ve focused on for the last 2-months has reached our targeted area, we can no longer be bearish short-term.

US Russell 2000 Chart

The macro outlook

Due to our relatively lacklustre economy and very large household debt burden Australian 10-year bond yields have only increased to ~2.6% from a low base of ~1.8% in 2016. An extremely small increase compared to the US who have seen 10-year yields more than double to 3% from almost 1.3% - similarly the RBA have kept the official cash rate at its lowest level in history of 1.5% compared to the US who have seen 7 rate hikes with their target rate band now sitting between 1.75% and 2% - its easy to see why the $A has been weak.

Our view at MM was that Australian 10-year bond yields should be heading higher with ~3.5% the obvious next target area, however the weakness in the domestic property market is likely to create a significant headwind for rising Australian interest rates. The auction clearance rates need to stabilise / turn higher before higher intertest rates are likely to be an issue for Australians.

Moving forward we still want our portfolios to be structured for higher interest rates / inflation, historically the play is as below:

Outperformers when interest rates rise – financials incl banks and insurers, consumer discretionary, and cyclicals (energy and resources) and to a lesser extent defensive sectors like industrials, consumer staples (food & beverage) and telco’s.

Underperformers when interest rates rise – Utilities, transport, real estate and healthcare stocks.

Not surprisingly the above has played out more in the US than locally over recent years because their economy is much stronger and rates have been rising.

Importantly a very new concern has raised its head over the last few weeks, economists are calling a US recession by 2020.

If this proves accurate the gloves are off and the above would be wrong! Last weeks -10% drop in our retail sector tells us many are concerned, we’ve mostly  steered away from the sector due the large burden of household debt in Australia but a global recession would alter the outlook in a very meaningful way.

It’s worth keeping in the back of our minds If we are approaching a recession the below sectors are usually the best places to hide:

Consumer Staples, grocery stores & discounters, drinks makers and death / funereal services – Invocare (IVC) is one of our favourite charts technically across our stocks universe.

Australian 10-year bond yields Chart

So considering the change to the investment landscape a recession would create, let’s quickly look into this ugly economic outcome in more detail - firstly the average duration of the 13 US recessions, since the 1929 depression, is 334-days i.e. close to one year, rarely a quick flash in the pan.

One important question comes to mind, do shares start to correct before or after a recession begins?

The answer is markets generally do perform below average in the year leading up to and especially during a recession but perform well in the years following the end of a recession – are we in the 12-months before a recession is the question.

Since the second World War the average return from the Dow during a recession was on average -6.0% but since the current expansion has been so long the next recession maybe an outlier, say the 20% we have discussed over time.

However we must remember there are few economic signs of a recession at this stage in the US, just a few economists who are often wrong, jumping on the same band wagon.

1 The Financials Sector

This is by far the largest Australian sector comprising of over 30% of the ASX200 and it includes the banks, asset managers and insurers – as a group the sector yields close to 6% but it’s down over -20% from its May 2017 high. The underperformance of our banks in particular is the reason the ASX200 is languishing well below its pre GFC high i.e. the big 4 banks alone make up 21% of the local index.

Following last week’s sharp decline the financials are at the bottom end of their trading range since the March 2015 high, technically we are neutral, but our “Gut Feel” is we will see an eventual break of the early 2016 low, targeting around ~4% lower. As we all know the sector has been hammered by the Hayne Royal Commission with AMP tumbling over 26% last week as the business / market acknowledges its future.

Banks – The banks appear to have largely moved on from their regulatory issues and we feel it’s a sector to now consider into decent weakness, not strength. MM holds 27% of the Platinum Portfolio in the “big 4” banks, i.e. overweight and may still add to CBA around $61 if it got there.

Diversified Financials – This group of stocks has experienced a varied 12-months with the ASX (ASX) and Macquarie (MQG) both up, while Perpetual (PPT), AMP Ltd (AMP) and IFL Holdings (IFL) are all down over -30%. MM holds 7% in Janus Henderson, the cheapest of the asset managers on paper and one who would certainly benefit from a reasonable BREXIT resolution.

Insurers – Over the last 3-months the insurers have fallen over -7%, better than the ASX200 but still down. We have a 8% exposure in the MM Platinum Portfolio through Suncorp (SUN) and QBE Insurance (QBE) – we are considering selling the SUN position around $14.40.

MM currently holds 44% of the Platinum Portfolio in the financial sector which fits our macro view of rising interest rates / bond yields, assuming central banks don’t push too far creating a recession, but it’s pretty aggressive weighting and more likely to be slightly trimmed rather than increased short-term.

ASX200 Financials Sector Chart

Commonwealth Bank (CBA) Chart

2 Materials / Resources  Sector

This is the second largest sector comprising of almost 17% of the ASX200 – as a group the sector now yields over 4% but is now down -14.2% over the last 3-months.

Historically the resources sector performs ok as interest rates increase because its indicative of rising inflation and hence commodity prices but the recent aggressive pullback can be mostly put at the feet of China where investors fear an economic slowdown, with the US – China trade concerns clearly not helping.

We now feel following the recent aggressive correction that the risk / reward is returning to the buyers, especially since Chinas muscle flexing around their share market – on Friday we bought nickel producer Western Areas (WSA) following its 45% correction.

MM currently only holds 16% of the Platinum Portfolio in the sector through Newcrest (NCM), RIO Tinto (RIO), Mineral Resources (MIN) and Western Areas (WSA) i.e. basically index weight.

MM is looking to increase its resources exposure with stocks like BHP or OZL on the radar but both at lower levels.

ASX200 Materials Sector Chart

3 Health Care Sector.

This is the third largest sector comprising of almost 10% of the ASX200 – as a group the sector now yields just under 1.5% but it’s been ravaged -13% over the last 3-months.

While we believed the “easy money” had been well and truly made from the sector early in the month we felt both CSL and COH offered good risk / reward  after being slammed but we clearly fired too soon, the stocks have now corrected 24.9% and 22 9% respectively, and between 5 and 10% further than we expected.

MM now holds 12% of the Platinum Portfolio in the sector through CSL Ltd (CSL), Cochlear  (COH), Ramsay Healthcare (RHC) and Healthscope (HSO) and is hence slightly overweight.

MM is not comfortable being overweight this sector and will look to reduce into strength.

ASX200 Healthcare Sector Chart

4 Industrials Sector.

This is the fourth largest sector comprising of over 8% of the ASX200 – as a group the sector now yields just under 1.5%.

There is a wide mixture of stocks in the sector from Brambles (BXB) , CIMIC (CIM), Cleanaway (CWY), Seek (SEK), Transurban (TCL) and Sydney Airports (SYD).

A number of its members are in the “yield play” group of stocks who are likely to underperform noticeably if global bond yields continue to rally i.e. our view – but not if we / the US enters a recession.

Technically we are bearish the overall sector believing the next 10% is more likely down than up.

MM has a 5% exposure in its Platinum Portfolio through CIMIC (CIM) which looks reasonable after a solid trading update but we may liquidate back towards ~$48 if the opportunity presents itself.

ASX200 Industrials Sector Chart

CIMIC Group (CIM) Chart

5 Consumer Staples Sector.

This is the fifth largest sector comprising of over 7.5% of the ASX200 – as a group the sector now yields just under 3.4% and like the overall market has been peeling off of late.

The sector also comprises of a diverse group of stocks like A2 Milk (A2M), Treasury Wine (TWE), Bellamys (BAL), Costa Group (CGC) plus supermarkets Woolworths (WOW) and Wesfarmers (WES).

We believe probably more than any other sector this is the one where specific stocks should be considered with less attention on the underlying sector. MM currently has no exposure for the Platinum Portfolio to the sector.

We are comfortable with zero exposure at this point in time preferring the resources for a play around improved China sentiment.

NB BAL looks interesting for the aggressive and active amongst you.

ASX200 Consumer Staples Chart

6 Real Estate Sector.

This is the sixth largest sector making up 7.5% of the ASX200 and is actually the newest sector to enter the group.

Technically the sector looks capable of making a fresh post GFC high but we would be sellers of this breakout – it received some love last week, noticeably outperforming by closing down less than 1%.

Both fundamentally and technically MM has no interest in the real estate sector.

ASX200 Real Estate Sector Chart

7 Energy Sector.

This is the seventh largest sector comprising just under 6% of the ASX200 – a few of the individual stocks are close to our targeted buy areas but crude itself looks set to decline further and the sectors ideal support is 5-6% lower.

MM is neutral the energy sector and sees no reason from a risk / reward perspective to chase at current levels.

We continue to consider heavyweight diversified player BHP below the psychological $30 area i.e. significant oil exposure.

ASX200 Energy Sector Chart

8 Consumer Discretionary Sector.

This is the eight largest sector comprising of 5.5% of the ASX200 – these stocks have been “on the nose” recently as investors focus on Australians household debt, there’s no reason to buck this trend in our opinion.

Another sector that comprises a very varied group of companies including Domino’s (DMP), oOh!media (OML), Nine Entertainment (NEC), Flight Centre (FLT), Harvey Norman (HVN) and Webjet (WEB).

We should not forget that this has been the most bullish sector in the US over the last 12-months and any signs that housing prices are again rising and / or household debt is falling should be a catalyst to jump into the consumer discretionary space. MM has no exposure to the sector at this point in time.

We are neutral at this stage but will generally be interested buyers ~10% lower if the above economic changes become evident – which stock will depend on the market at the time.

However we do like funeral operator IVC which is in a subsection of this group, the consumer services.

ASX200 Consumer Discretionary Sector Chart

9 Information Technology Sector.

This is the ninth largest sector comprising of 3.4% of the ASX200 – as a group this is very much the “growth” end of town which has been hammered over recent weeks.

A relatively small sector with some excellent performers since 2015 but not this month e.g. Computershare (CPU), Xero (XRO), NEXTDC (NXT), Afterpay (APT), REA Group (REA), WiseTech Group (WTC), Appen (APX) and Carsales (CAR). Obviously this group of stocks largely falls into the high valuation / growth basket which we are now concerned around at this stage of the cycle but a little more panic and a number of them should become interesting.

Technically we can easily see another 6-8% downside for the sector but it would then become interesting for a more short-term aggressive play.

MM likes the sector ~8% lower and may consider 1 or 2 forays if this unfolds.

ASX200 Information Technology Sector Chart

10 Telco Sector.

This is the tenth largest sector comprising of over 3% of the ASX200 – as a group the sector now yields just over 4% and it’s been a solid performer since the announcement of the planned TPG Telecom (TPM) – Vodafone merger.

MM is overweight the sector holding 7% of our Platinum Portfolio in Telstra (TLS) and although our entry was a touch early the positions now showing a profit. 

MM likes our position but will consider taking all / part profit into strength of  ~6-8% higher.

ASX200 Telco Sector Chart

11 Utilities Sector.

This is the smallest of the 11 sectors making up just under 2% of the ASX200 – as a group the sector now yields just over 5.5% but has struggled over the last year.

This small sector comprising the likes of APA Group (APA), AGL Energy (AGL) and Spark Infrastructure (SKI).

MM holds no exposure to the sector and technically it looks destined to fall another ~3%.

MM still is not keen on the Utilities Sector fundamentally but technically they are close to major support and will perform if the recession story gathers momentum.

ASX200 Utilities Chart


On balance we are now bearish stocks longer term and hence in general looking to reduce our market exposure into strength.

As subscribers know we have been looking for a more defensive portfolio at this point in time including stocks that provide a constant dividend and stable earnings regardless of the state of the overall stock market; plus ones we believe can generate some decent gains in the short-term.

Of the 11 sectors within the ASX200 below is a summary of our views:

1 - Financials - remain overweight.

2 - Resources – look to move overweight into current weakness.

3 – Healthcare - now looking to reduce into strength.

4 - Consumer Staples, no position feels ok although Bellamy’s feels ok as an aggressive play.

5 - Consumer Discretionary – may look to buy around market weight ~10% lower but we do like funeral operator Invocare (IVC) at todays level.

6 - Information Technology – may look to move to market weight around 6% lower, likely short-term play.

7 - Telcos’ potentially reduce our large overweight position 6-8% higher.

8 - Energy – no major interest except BHP below $30.

9 - No interest in Industrials, Real Estate and Utilities.

If / when some of these sectors start moving as outlined above MM will evaluate individual stocks in more details through our AM reports.

Investment of the Week

No surprise here to our diligent readers, technically we are bullish Invocare (IVC) looking for 15-20% upside – interestingly a classic outperforming sector in a recession.

Invocare (IVC) Chart

Trade of the week

You only have to look at the chart below to know this is relatively high risk stuff but it is clearly a stock that can move against the market which is not a bad thing.

We like BAL from a risk / reward perspective, especially on a close above $7.70, looking for a potential rally back towards $10.

Positive economic / stimulus news from China should also be supportive of the stock.

Bellamy’s (BAL) Chart

Chart(s) of the week

Today we have selected 2 charts of similar structure, one who has almost satisfied our sell call (IRE) and one who has a fair bit further to travel:

1 – Seek (SEK) we are bearish SEK with an ideal target under $12, or around 30% lower.

2- Iress (IRE) we remain bearish targeting under $10, or 8-10% lower.

Seek (SEK) Chart

Iress (IRE) 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


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.


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 27/10/2018

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