Market Matters Report / Market Matters Weekend Report Sunday 29th January 2017

By Market Matters 29 January 17

Market Matters Weekend Report Sunday 29th January 2017

Market Matters Weekend Report Sunday 29th January 2017


A positive week for global equities with the ASX 200 adding +1.05% which compares reasonably well with the 1.34% advance made by the Dow Jones, the 1.15% advance in China, the 1.58% gain by the German Dax and especially against the -0.19% decline by the FTSE 100 in London. A few obvious trends over the past week that are worth reflecting on.

  • The US market made new all time highs as we’ve been predicting with the Dow Jones trading above 20,000 for the first time in history. At the depth of the Global Financial Crisis in March of 2009 the Dow reached a low of 6469 and has since rallied 13,624pts or +210%. Before the GFC, the Dow peaked in October 2007 at 14,198, meaning US stocks are now 41.5% above their pre-GFC peak. A phenomenal rally for US stocks over the past 8 years (almost). This provides a good level of context when we discuss the likelihood for a ~25% correction, probably within the next two years.
  • The FTSE had a poor week losing ground while other markets advanced. The UK has been enjoying the benefits of a weak currency following the BREXIT vote however this week the GBP rallied strongly against the USD reducing the appeal of British stocks. It’s becoming more evident that the UK leaving the EU is unlikely to be economic suicide as many predicted.
  • The $US Index continued to decline overall last week however a bounce on Friday helped reinvigorate the ‘long $US’ trade with the likes of QBE and Macquarie moving higher. We called the crowded long $US trade well but now we’re more 50/50 while it remains above 100 on the dollar index.
  • Cyclicals have been doing exceptionally well over the past few months with resources the main standout. We discussed BHP two weeks ago calling a move the $28.00 which was satisfied ($27.96), however we believe that a reversal of recent trends may be around the corner - a pullback in cyclicals and a bounce in defensives seems close at hand. Importantly though, this will be a BUYING opportunity for cyclicals and a SELLING opportunity for defensives.
  • The above views can be seen in the current positioning of Market Matters portfolio. We think we’re in the final stages of a bull market and therefore our cash position remains high and we’ve got a shorter term focus on positions. We’re now more positive on the GBP so we own Henderson Group (HGG) for a more diversified exposure to that theme. We’re 50/50 right now on the $US bit think interest rates will continue to go up over time so we own QBE and Macquarie who benefit from a higher $US / higher rates while we also own a Gold exposure in Newcrest which will benefit if the $US breaks down through the 100 support and drops sharply. We bought ANZ into weakness last week given banks do better as rates go up and we’ve continued to hold CBA, albeit a smaller weighting for the dividend next month.  We have no resource exposure (other than Newcrest) after selling out of Origin Energy, given we think that trade will pullback presenting us with a better entry point.

Overall, US stocks made new all time highs early last week and a pullback now seems close at hand.

We remain buyers of weakness and sellers of strength while comfortably sitting on 30% cash in the MM portfolio.

Technically a close over 5750 for the ASX200 is bullish targeting 5850-75 with stops under 5710. Conversely, a break below 5590 would turn us bearish.

ASX200 Daily Chart

US Dow Jones Daily Chart

BHP reached our targeted region of ~$28 while RIO has been exceptionally strong. We believe both are nearing short term tops and for those holding, book profits and look for a lower entry in coming weeks / months.

Rio Tinto (RIO) Weekly Chart

Standout technical chart (s) of the week

WES has been a strong relative performer versus Woolworths in recent years however the share price has remained within a range. Now at the mid point we would expect WES to at least test the bottom extremity of the range – a drop of ~10%

Wesfarmers (WES) weekly chart


Our view remains that US and local stocks will rally over the coming 3-6 months but the next month or so is likely to be a little testing for the bulls. Medium term after a rally of ~8% by US stocks we are targeting a 25% correction over a couple of years.

What Matters this week

The ASX200's is set to open down 10-points on Monday, short-term we see consolidation / pullback to 5650

Potential Investing opportunities for the coming week(s)

We are now holding 30% in cash and are wearing our sellers hat into strength BUT our buyers hat into weakness.

We are looking to average our existing position in Platinum Asset Management (PTM) on a decent move below $5.00, we are looking to add to our position in Newcrest (NCM) into weakness and add to Henderson Group (HGG) around ~$3.60.

Potential Trading opportunities for the coming week

We will be looking for evidence of a top in the resource space and may look to take a short term (bearish) option position on BHP or RIO.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 27th January is below:

We are currently holding 30% in cash.

Australian ASX200

Short term mildly negative, medium term positive with a move to 6000 possible before a deeper, more protracted selloff.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 – March Share Price Index (SPI) 60-mins Chartas at Australian close on Friday

American & Canadian stock market indices

US stocks made new all time highs last week and now look susceptible to some consolidation / weakness. We are becoming more cautious stocks, our best "guess" at present is ~6-8% higher in the medium term. Importantly US indices are in a very clear final "Phase 5" of a major bull market since early 2009. NO CHANGE -  We see further upside in what should be a choppy / volatile year prior to a major downturn that is likely to last a number of years and correct ~25%.

Chart 5 – Dow Jones Index Monthly Chart

Chart 6 – Dow Jones Index Daily Chart

Chart 7 – S&P500 Index Monthly Chart

Chart 8 – S&P500 Index Daily Chart

Chart 9 – Russell 3000 Quarterly Chart

Chart 10 – NYSE Composite Index Monthly Chart

Chart 11 – Russell 2000 Index Monthly Chart

Chart 12 – US NASDAQ Index Monthly Chart

Chart 13 – The Canadian Composite Index Monthly Chart

European stock market Indices

European indices have broken out to the upside and technically look more bullish than US stocks from current levels with targets for the German DAX of 13000. The FTSE remains technically bullish while above 7000 however the currency will have a major impact during the weeks ahead – as it did last week. A rally in the Pound will create a headwind for the FTSE 100

Chart 14 – Euro STOXX 50 Index Monthly Chart

Chart 15 – UK FTSE Index Weekly Chart

Chart 16 – German DAX Index Monthly Chart

Chart 17 – Swiss SMI Index Quarterly Chart

Chart 18 – Spanish IBEX Index Monthly Chart

Asian & Emerging stock market indices

Asian indices remain bullish with the Hang Seng index looking poised to rally ~10% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher.

Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Weekly Chart

Chart 21 – Japanese Nikkei 225 Index Monthly Chart

Chart 22 – Emerging Markets MSCI ETF Weekly Chart

Interest Rates & volatility

Interest rates are clearly going higher, however the move up in a short period of time has been impulsive. We expect the theme to reverse in the short term as higher rates start to dampen US economic data (housing starts an example of that theme last week) and we see ebb and flows around rate expectations- and thus movements in bond yields.

Volatility is exceptionally low – or in other words, complacency exceptionally high. That will change at some point. Buying options is cheap in this environment

Chart 23 – Australian 3-year bonds Weekly Chart

Chart 24– The US 10-year Interest Rate Monthly Chart

Chart 25 – The US 2-year Interest Rate Monthly Chart

Chart 26   Volatility (VIX) Index Weekly Chart

Australian stocks & sectors

The Australian stock market added 1.05% last week which was a good performance given Monday was a horrible da. Short-term we can see a pullback / consolidation down to 5650

Banking sector

The local banking sector pulled back early last week and we bought  ANZ Bank with a 5% weighting. We have CBA,  ANZ and SUN in the portfolio and remain keen on the sector given rising interest rates.

Chart 27 ASX200 Banking Index Monthly Chart

Chart 28 US S&P500 Banking Index Monthly Chart

Chart 29 – Commonwealth Bank (CBA) Quarterly Chart

Chart 30 – Commonwealth Bank (CBA) Daily Chart

Chart 31 – ANZ Bank (ANZ) Weekly Chart

Chart 32 – Westpac Bank (WBC) Weekly Chart

Chart 33 – National Australia Bank (NAB) Weekly Chart

Chart 34 – Bank of Queensland (BOQ) Monthly Chart

Chart 35 – Bendigo & Adelaide Bank (BEN) Monthly Chart

The Insurance  sector

Suncorp (SUN) gave a poor update in terms of claims recently and the stock dropped – but has since recovered. The impact on earnings will be minimal. We remain bullish Suncorp. QBE rallied strongly after we bought the stock at $10.49. Now $12.33 the stocks looks susceptible to some consolidation / weakness given our view that bond yields have gone too far too fast even though the longer term trend is clearly up.

Chart 36 – Suncorp Group (SUN) Monthly Chart

Chart 37 – Insurance Australia (IAG) Monthly Chart

Chart 38– QBE Insurance (QBE) Monthly Chart

Diversified Financials  sector

Some weakness crept into the financials this week, particularly HGG after their new partner Janus gave a poor trading update and the stock came under pressure. We remain comfortable here and will look to add to our position around $3.60 if the opportunity arises.  

Chart 39 – ASX200 Financials Index Quarterly Chart

Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart

Chart 41 – Platinum Asset Management (PTM) Daily Chart 

Chart 42 – Henderson Group (HGG) Weekly Chart 

Chart 43 – Challenger Ltd (CGF) Monthly Chart 

Chart 44 – IOOF Holdings (IFL) Monthly Chart 

Resources / Materials  sector

Copper remains in a negative downtrend long-term, even after the recent months fireworks, we are eventually targeting the 150 area.

Iron Ore has significantly exceeded our initial $US70/tonne target, technically we now remain neutral / negative after the "abc" target of ~$US80/tonne was recently achieved.

Heavyweights BHP and RIO have shown strength however are now susceptible to a pullback

Chart 45 – Copper Monthly Chart

Chart 46 – Iron Ore Monthly Chart

Chart 47 – BHP Billiton ADR ($US) Monthly Chart

Chart 48 – BHP Billiton (BHP) Weekly Chart

Chart 49 – RIO Tinto Ltd (RIO) Weekly Chart

Chart 50 – Fortescue Metals (FMG) Monthly Chart

Chart 51 – Independence Group (IGO) Weekly Chart

Energy  sector

Our target for Crude Oil of +$US60/barrel remains a real possibility, however it seems the market has been ‘caught short’ energy and even though Crude has been mixed of late, Energy stocks have been doing particularly  well (other than Santos). We sold our energy exposure recently (ORG) and will look to buy again into weakness

Chart 52 – Crude Oil Monthly Chart

Chart 53 – Woodside Petroleum (WPL) Monthly Chart

Chart 54 – Origin Energy (ORG) Monthly Chart

Chart 55 – Oil Search (OSH) Weekly Chart

The Gold sector

We are now long Newcrest (NCM) and will look to increase our weighting or buy another Gold play into weakness. We like EVN, RRL & NCM

Chart 56 – Gold Monthly Chart

Chart 57 – Newcrest Mining (NCM) Monthly Chart

Chart 58 – Regis Resources (RRL) Weekly Chart

Chart 59 – Barrick Gold Corp. (US) Monthly Chart

Chart 60 – Market Vectors Gold ETF Monthly Chart

The "yield play" stocks

We have been bearish bonds / bullish interest rates since mid-2016 and this view has not wavered. Short term however, we think a move out of cyclicals into defensives may play out and this would present another selling opportunity for those still holding the ‘yield play’.

Chart 61 – Sydney Airports (SYD) Monthly Chart

Chart 62 – Transurban Group (TCL) Monthly Chart

The Property sector

Some value emerging in the property sector however given the outlook for interest rates we have little interest in holding them in the portfolio. Shorter term trades may be considered

Chart 63 – Westfield Corp. (WFD) Monthly Chart

Chart 64 – Mirvac Group (MGR) Monthly Chart

Food & retailing  sector

We remain negative Wesfarmers, confused by WOW although concede that it is likely to re-test ~$26 and think that Amazon and others present too big of a risk for our retail sector to contemplate buying stocks in this sector - especially given JBH has been exceptionally strong of late.. Niche / specialist retailers are more immune from rising competition.

Chart 65 – Wesfarmers Ltd (WES) Weekly Chart

Chart 66 – Woolworths Ltd (WOW) Weekly Chart

Chart 67– JB Hi-Fi (JBH) Monthly Chart

Chart 68– Harvey Norman (HVN) Monthly Chart

The internet / Technology sector

Although no chart below, we bought Altium (ALU) last week which is an interesting Technology stock developing software used in the production of circuit boards. The more mature tech companies such as Seek, CarSales & REA seem too risky at this stage. CarSales looks particularly bearish with a target ~$9.00

Chart 69 – Seek Ltd (SEK) Monthly Chart

Chart 70 – REA Group (REA) Monthly Chart

Chart 71 – (CAR) Monthly Chart

The Telco sector

Telstra looks negative and we continue to favour a move to ~$4.50 while Vocus is trying to find support . Short positions are high in VOC (~11%).

Chart 72 – Telstra Corp. (TLS) Monthly Chart

Chart 73 – Vocus Communications (VOC) Weekly Chart

Chart 74 – TPG Telecom (TPM) Weekly Chart

The Healthcare sector

Enduring a period of consolidation at present globally, however CSL’s profit upgrade was a clear positive for that stock. We continue to hold 5% of the portfolio in CSL.

Chart 75– US S&P500 Healthcare sector Quarterly Chart

Chart 76– CSL Ltd (CSL) Monthly Chart

Chart 77 Ramsay Healthcare (RHC) Monthly Chart

Chart 78– Healthscope (HSO) Weekly Chart

Chart 79 - Ansell (ANN) Monthly Chart 

Chart 80 - Sirtex Medical (SRX) Weekly Chart 

Chart 81 - Cochlear Ltd (COH) Monthly Chart 

The Gaming / Tourism sector

This sector had a volatile an overall pretty average 2016. We like Star City (SGR) around $4.60. We sold Mantra (MTR) in the mid $2.90’s given the stock looked terrible technically. Not long after a major broker downgraded the stock and it has subsequently fallen to $2.71

Chart 82 – Crown Resorts (CWN) Monthly Chart

Chart 83 – Star Entertainment (SGR) Weekly Chart

Chart 84 – Mantra Group (MTR) Daily Chart

The China speculative sector

Blackmores looks interesting technically however the sector remains too expensive for the amount of risk involved

Chart 85– Bellamy's (BAL) Daily Chart

Chart 86– Blackmore's (BKL) Monthly Chart

Australian Dollar (AUD) / FX Markets

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region.

The 100 level for the $US is now the key. A break there and a move back into the mid 90’s seems likely . At that point we would likely buy $US exposed stocks for another run higher in the currency.

Chart 87– Australian Dollar (AUD) / FX Monthly Chart

Chart 88– The $US Index Quarterly Chart


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.


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 29/01/2017.  10.00AM.

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