Market Matters Report / Market Matters Weekend Report Sunday 29th July 2018

By Market Matters 29 July 18

Market Matters Weekend Report Sunday 29th July 2018

Market Matters Weekend Report Sunday 29th July 2018

Another extremely quiet week on the surface with the ASX200 closing up just +0.2% after struggling virtually all week before Fridays 56-point surge made everything appear rosy. The energy sectors strength stood out even though oil fell during the week but BHP carried the markets torch gaining +4.5% after announcing the $US10.8bn sale of its US shale assets, conversely AMP flagged a $290m provision for governance cost blow outs sending the stock spiralling down another -9.1% to fresh all-time lows – catching this falling knife has hurt many investors to date.

Twitter (TWTR), Donald Trump’s favourite medium, joined Facebook (FB) in the naughty corner for the week, both crashing over 20% after their respective reports. Its pretty impressive that the tech based NASDAQ only closed down -0.75% for the week considering the negative impact of these 2 household names. We keep asking ourselves a similar question:

  • Is the NASDAQ extremely strong shrugging off bad FB / TWTR reports, or are we one piece of bad news away from “the straw that breaks the camel’s back” – the NASDAQ is up 18.4% from Februarys low and over +55% since Donald Trump was elected less than 2-years ago.

One things for sure it certainly illustrates that complacent investors are walking on a dangerous tightrope.

Facebook (FB) & Twitter (TWTR) Chart

At MM we're about adding value (alpha) or simply making money, as opposed to producing “headline catching” market calls to grab attention i.e. MM prefers boring old risk reward. As we’ve written about at length,  we are looking for a decent market correction in 2018/9 but have yet to observe the required “triggers” to become aggressively cashed-up, or even net short. However, remember the famous quote by Baron Rothschild when he described the secret to his success:

  • “I never buy at the bottom and I always sell too soon” – Baron Rothschild.

Its an appropriate time to show this quote again when explaining MM’s plan moving forward in 3 simple steps:

  1. Like the Baron we are likely to often sell too early e.g. we sold our BHP ~$34 and are looking to scale out of our Suncorp (SUN) position at $15.30, and above.
  2. Also, we may slowly scale into negatively correlated “spread” positions, probably too early on e.g. buy Europe and sell the US.
  3. However we are unlikely to significantly add to our short / bear  ETF positions until we get a clear risk / reward sell trigger.

Due to the underlying positive market sentiment we still only advocate selling of strength in indices / stocks i.e. sell strength, not weakness (yet), although there will be time for that at some point.

  • MM remains in cautious “sell mode” but our decent cash levels (16%) plus negative facing positions (8%) does allow us to take long positions if the risk / reward on offer is compelling.

Later in todays report we will look at potential sell triggers that we are watching closely to increase our negative facing ETF positions (i.e positions that benefit when the market goes down)

ASX200 Index Chart

We look at the ASX200 Accumulation Index every 2-3 weeks because technically the chart pattern presently fits our profile extremely well. Assuming (a big if) this index continues to follow our anticipated path, as it has for the last 5-years, what comes next:

  1. The Accumulation Index should correct by a similar amount as in the GFC (points not %) hence targeting the lows of 2016 – if this unfolds the news will probably sound dire.
  2. Again “if” we do see a test of the 2016 lows it should represent an excellent buying opportunity.
  3. Alternatively, we may just see another 9500-point correction back towards trendline support, a more bullish scenario – this will be evaluated if/when it occurs.

A critical point is not to force any particular view onto a market but steadily move with the rhythm that it shows and then use a combination of fundamental & technical analysis to generate optimum returns.

ASX200 Accumulation Index Chart

1 Two markets with potential sell triggers for MM.

The ideal sell trigger for MM is one where investors pile into a market creating fresh highs (FOMO – fear of missing out) only to be wrong and a “false break out unfolds” i.e. the path of most pain.

The ASX200 has traded in a fairly tight range between 6182 and 6306 for over 3-weeks, the perfect sell trigger in the local market would be breakout above 6310 followed by a close below 6290 i.e. the path of most pain.

  • MM is a seller of a false spike rally above 6310 – we are likely to add to our BEAR ETF  and / or sell stock.

ASX200 Index Chart

Secondly, moving onto the US indices where we have 2 scenarios we are watching. The preferred scenario is for the S&P 500 to have  a false breakout above 2872, about 2% away, then pullback.

  • MM is a seller of US stocks if the S&P500 rallies above 2872 only to fail by breaking back below 2828 – we are likely to add to our BBUS ETF position.

NB If things “feel right we may add to our BBUS position ~2900 and then watch very carefully.

US S&P500 Index Chart

The less preferred scenario simply because of its technical set-up, and risk / reward, is with the tech based NASDAQ which made fresh all-time highs last week only to close almost 3% below the milestone.

  • MM is a seller of US stocks if the NASDAQ closes below 7050, over 3% lower – we are likely to add to our BBUS ETF position.

US NASDAQ tech Index Chart

2 Bond yields (interest rates)

In a number of reports recently we have discussed why many economists / market players are watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends.

  • Historically stocks will correct when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

Hence we will maintain this small section in the Weekend report until further notice – the current differential contracted further to +0.2848% last week.

US 2/ 10-year yield curve Chart

Moving onto the Australian bonds and the picture is extremely different – Australian bond yields are treading water at best and for the first time in over 30-years investors receive a greater yield from US 10-year bonds than our own, hence making them more attractive and subsequently putting pressure on the $A against the $US.

  • MM is looking to reinvest in the $US against the $A around the 76-77c area.

US & Australian 10-year bond yields Chart

If we now consider the shorter-dated bonds and the picture is further magnified which makes sense as the Fed is in the middle of interest rate hiking cycle while our own RBA remains on hold, concerned around falling property prices and large levels of household debt.

The US 5-year bonds are now yielding almost 0.6% more than the Australian equivalent, its easy to see why most economists believe the only way for the $A is down, we agree but believe a shorter term correction in the  $US is now a strong possibility hence our 76-77c target area to buy $US. i.e Buy $US into weakness / sell AUD into strength.

US & Australian 5-year  bond yields Chart

3 Two attractive spread trades coming into play

We’ve touched on both of these over recent weeks without “pulling the trigger” but they are longer-term views hence missing ~1% is irrelevant in the context of the opinion.

1 Buy Europe and sell the US.

Since global stocks corrected in 2015/6 the US S&P500 has rallied well over 50% while the EuroStoxx 50 has only managed to advance just over 20%. While clearly the American economy is firing nicely with US growth now at 4.1%, the highest since 2014, we believe the “elastic band” of optimism / pessimism between the US and Europe has stretched too far.

  • MM is bullish Europe over the US – buy the HEUR against the BBUS.

The US S&P500 v EuroStoxx 50 Index Chart

The BBUS & HEUR ETF’s Chart

2  Buy Emerging Markets (EEM) and sell the US.

Over the last 3-months the S&P500 has ground ~4% higher while the EEM has slipped ~5%, continuing its almost 20% decline in 2018. The divergence between the 2 markets feels like yet another elastic band stretched too tight.

  • MM is bullish EEM over the US – buy the IEM against the BBUS.

The US S&P500 v EEM Index Chart

The BBUS & IEM ETF’s Chart

4 What to expect if inflation arrives with a bang

Inflation affects equity prices in several ways. Most importantly, investors are usually willing to pay less for a certain level of earnings when inflation is high hence if rising wages pressure pushes up global inflation, likely to start in the US, then stocks may be in trouble especially if it causes interest rates to rise quicker than anticipated.

The sectors historically most vulnerable to rising bond yields are real estate investment trusts, infrastructure and utilities, and to a lesser extent the telecommunications sector. Few assets benefit from rising inflation, particularly unexpected inflation, but commodities usually do. Hence our resources sector should be a “safer” place to be invested if we see inflation accelerate, the question as always is what’s a good price to pay for the sector.

Our concern is that base metals have corrected ~15% but many stocks in the sector have held up as investors assume it’s only a correction in a rising market e.g. RIO -6.6% while BHP is basically at its 2018 high.

  • We remain keen to buy quality resources into weakness but unfortunately believe the risk / reward is not yet compelling

Bloomberg Base Metals Index Chart

Over recent weeks Fortescue Metals (FMG) has noticeably underperformed the iron ore price, not something we’ve seen since late 2017 before it fairly quickly fell back into step with bulk commodity.

  • We think FMG is getting unduly sold and are considering increasing our holding ~$4.10 in the Income Portfolio – this would be a switch from another holding.

Iron Ore v Fortescue Metals (FMG) Chart

5 What price for growth?

I saw a catchy phrase in one of the numerous articles I read this week – “GARP not GAAP” i.e. Growth at reasonable price not growth at any price!

FOMO (fear of missing out) helps drive GAAP as investors shirk away from say the banks and Telstra at any price – important to always remember investors often have short memories. In the last 48-hours we have witnessed what happens when the music stops playing on the growth machine with both Facebook and Twitter plunging over 20%.

At MM we are not suggesting the same fate is in store for the likes of CSL and Cochlear but we are concerned that fund mangers and retail investors are limit long these excellent companies hence the obvious question, where does the marginal buying come from?

  • We like CSL and COH but believe both are simply overpriced, lets see if our patience is rewarded.

CSL Ltd (CSL) Chart

Cochlear (COH) Chart

6 Gold stocks on the MM radar

Last week we probably surprised a number of subscribers by buying Newcrest (NCM) – not only on an up week but also after we said that many of our gold sector looked poised to drift lower.

First we must consider the last 18-months, NCM is clearly struggled while RRL has more than doubled.

  • We like NCM around current levels as opposed to the sector which we still can see drifting lower.

I would not be surprised to see us switch from NCM to RRL or say EVN in the coming months, fingers crossed assuming we see relative strength in NCM courtesy of a cracking production report, and relative weakness amongst the others.

Newcrest Mining (NCM) v Regis Resources (RRL) Chart

Conclusion

Again no major changes although following the recent consolidation by the ASX200 / banking sector it continues to be hard to be negative local stocks, just yet.

  • We remain net positive equities for the coming weeks (just) while the ASX200 can remain above 6250, neutral between 6250 and 6140 and bearish below 6140.
  • We will continue to slowly increase our cash position and are still firmly wearing our “sellers hat” despite taking on some lowly correlated good risk/reward stock plays this week 

“Shopping List”

  • We still need decent weakness in $US earners MQG, COH and CSL for example before we start buying.
  • Similarly we are interested in a number of resources stocks into continued weakness.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.30-$15.80 but we may reduce this large position into initial strength above $15.
  • Janus Henderson into strength between $44.50 and $45.
  • Orocobre (ORE), ideally into any reasonable strength, or potentially a switch into Kidman Resources (KDR) – see Trading Opportunities 3 weeks ago.

Standout technical chart (s) of the week

We found it impossible to go past Macquarie Group (MQG) today after their miss on earnings guidance (flat v the market at +5%) and newly appointed CEO. Our snapshot thoughts:

1 – The miss on earnings should not be ignored and it certainly stops us wanting to chase the silver donut.

2 – The new CEO has an amazing track record and we believe she’s likely to do a fantastic job, but any change at the top brings with it risk. 

  • Technically MQG looks to us set to rotate between $115 and $130, a very tradeable range.

Macquarie Bank (MQG) Chart

Trading Opportunities on our radar

People are constantly asking whether Z1P can be the next AfterPay (APT), we’re not convinced it will be but for the believers out there the recent correction has provided a decent buying opportunity:

  • Z1P looks good risk / reward buying with stops beneath 90c

ZIP Co Ltd (Z1P) Chart

Investing on our radar

We believe a battle plan is vital moving forward as a correction is overdue and although the magnitude can be debated we can set traps in quality individual stocks that we like.

  • MM likes the  ASX into the next ~$8 correction, currently below $60.

ASX Ltd (ASX) 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 Sunday!

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 28/07/2018

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