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

By Market Matters 29 October 17

Market Matters Weekend Report Sunday 29th October 2017

Market Matters Weekend Report Sunday 29th October 2017

The ASX200 had a choppy week with most of the action concentrated in one crazy hour on Friday, courtesy of some extremely pedantic laws around our parliament. The end result looks likely to be a by-election win for Barnaby Joyce on December 2nd with the Liberals Coalition maintaining the slimmest of majorities i.e. no change, it’s just embarrassing! Although on Friday the index closed the week down less than -0.1% following the gains in the US on Friday night the local market is poised to open stronger on Monday, very close to its highs of 2017.

We keep discussing the main game in town is stock / sector rotation as this 8-year bull market matures and this can be portrayed perfectly by the below 3 points, basis Fridays closes:

  1. Over the last 2-months CBA has rallied +6.9% while BHP has fallen -0.4%.
  2. Over the last 3-months the Australian banking sector has rallied +6.8%, while retail is down -10% and the telco’s are even worse at -14.4%.
  3. Over the last 10-years household name BHP is down -24%, Woolworths (WOW) -24% and QBE Insurance (QBE) -68%.

Points 1 & 2 illustrate we are witnessing some significant variances in performance from different stocks / sectors over the relatively small timeframe of just a few months, this is simply why at MM we are currently more active than over previous years – we are simply listening to the market. For example our simple “avoid retails it’s too hard at present” view has saved us significant money while adopting an active approach to Telstra (TLS) has made us money over the last 2-years. The Australian share market is very exciting at present but we believe investors simply must remain flexible and open-minded.

Lastly there are obviously some great stories to match the horrible last 3 examples in point 3 but it clearly shows that over the last decade buying and holding a “nicely balanced” portfolio leaves huge room for improvement, we have quoted the legendary investor Warren Buffett before on this subject:

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” – Warren Buffett.

Hence today’s report is going to be focused on 2 major trends / correlations moving into Christmas / 2018 which we believe will provide optimum returns to our subscribers. e.g. honing in on when do we switch from banks to resources?

The list of major winners / losers last week shows the lack of commitment within the market as the winners notched up another victory, but this time only 4 to 2:

Winners : Star Entertainment (SGR) +7.2%, Resmed (RMD) +6.6%, Healthscope (HSO) +7% and South32 (S32) +8.5%.

Losers : IOOF Holdings (IFL) -5.2% and Qantas (QAN) -6.7%.

Below is the ASX200’s “trading patterns” which we believe are still controlling the local market as we move into November, an eventual break over 6000 now feels almost inevitable moving forward:

  1. Following its strong 286-points advance from 5652 the ASX200 is bullish while it remains over 5800.
  2. Medium-term we still have a Neutral Pattern between 5582 and 5956 – 38 weeks to-date.
  3. October’s range to-date is 5650-5938 i.e. 288-points, almost exactly matching Mays range when the market experienced a sharp decline.

We remain bullish the ASX200 at MM targeting a decent break over 6000 in 2017 / early 2018 assuming the 5800 area holds, however short-term another begrudging pull back towards the 5850 area would not surprise.

ASX200 Daily Chart

A falling $A

As we discuss later in this report in “Standout technical chart of the week” we have now become very bearish the $A targeting ~65c against the greenback – over 10% lower. Hence we put a big tick against the names of offshore earners, for example:

  • Ansell (ANN), Aristocrat Leisure (ALL), Amcor (AMC), Boral (BLD), Brambles (BXB), Cochlear (COH), Computershare (CPU), Corporate Travel Mgt. (CTD), CSL Ltd (CSL), Incitec Pivot (IPL), James Hardie (JHX), Macquarie Group (MQG), Magellan (MFG), Nanosonics (NAN), QBE Insurance (QBE), Resmed (RMD), Sirtex (SRX), Treasuring Wines (TWE) and Westfield (WFD).

Interestingly when the $A was rallying the big miners, who sell a large amount of their products overseas, were among the winners thanks to rising commodity prices - this potentially adds weight to our view to be patient buying the likes of BHP and RIO a present.

We already own ALL, NAN and QBE in the above list, others that are interesting around current levels from a risk / reward basis, or if we get another spike down with their bearish trend:

  1. Ansell (ANN) $23.82 – We are bullish initially targeting over $26.
  2. Westfield (WFD) $7.81 – If we get a correction back towards $7.
  3. Sirtex (SRX) $14.07 – If we get another spike lower it would look good ~$10.

Unfortunately the simple conclusion from looking at this list of overseas earners is the “horse has bolted” and the market has already chased the group hard. The top quality stocks like CSL, MQG and COH have already surged. At this stage the only useful thoughts we see are:

  1. If / when a company with large overseas earnings gets sold off on adverse news look at it closely.
  2. Be patient in taking profits on ALL, NAN and QBE.

Technically the $US looks to have the potential to form one more low around the 90 area, if this were to eventuate it may offer up one more opportunity to buy additional offshore earnings exposure.

The $US Weekly Chart

Switching Banks to resources

Obviously this is made up of 2 parts i.e. (1) when to reduce / sell banks and (2) when to buy resources, and of course they may not coincide. Currently we hold a huge 32.5% of the MM Platinum Portfolio in banks but only 5% in resources – easy to see where we are currently overweight. We have discussed this topic a few times over recent weeks but getting this spread correct from  a timing perspective has enabled us to stay overweight / long banks during their recent strong rally while avoiding the weakness in the resources.

When to sell banks?

One characteristic our market regularly sticks to like clockwork is its seasonality patterns. As we have pointed out a few times in MM reports our banks love October which makes sense considering the large dividends on offer in November from the likes of ANZ, NAB and WBC – it also helps with the Christmas rally because these dividends get paid out into relatively thin December markets. Let’s again simply consider CBA’s performance in October since the GFC: 

  1. The average return since the GFC for CBA in October is +3.8% - so far +4% this month.
  2. Importantly seasonally CBA remains strong into the first 1/3 of November, since the GFC the ideal selling time is ~10-12th.
  3. Since the GFC CBA has corrected over 6% at one point in November.

So seasonally CBA should rally / remain firm for another week, or two. When we look at the daily chart pattern of CBA it’s pretty exciting as assuming Fridays $77.82 low holds we have a technically pretty clear picture.

  • CBA looks set to rally towards $80.50 - $81 before experiencing a classic “November pullback” i.e. remain patient just for now with selling banks.

NB The banks generally move in tandem through November, obviously taking dividends into account, hence we may sell a different one of our holdings even if we get a sell signal on CBA.

Commonwealth Bank (CBA) Daily Chart

(2) When to buy resources?

We currently only have 5% exposure to resources and this position is now showing a -5% paper loss implying we pulled the trigger a little early on our accumulation of the sector.

As we have shown before the base metal index has broken a decade long down trend but this does not mean it won’t pullback just to scare everybody.

Bloomberg Industrial Metals Index Monthly Chart

On Friday night copper fell over 2.3% and looks poised to probably do the same again over the next few weeks, the question is how closely is OZ Minerals (OZL), who we have been targeting as a buy, correlated to the copper price. The answer is closely, the last time Copper fell under $US300/lb OZL was around $1 / 12% lower than Fridays close. 

We are cancelling our purchase of OZL under $8.25 for now and re-evaluate moving forward.

OZ Minerals (OZL) v Copper Daily Chart

On Friday even with strong global markets BHP fell another ~10c. Considering the picture for likes of copper and iron ore we will remain patient with our level to commence accumulating BHP ~$25.50.

Hence over all, just like with selling the banks, buying the resources remains as a “not yet, be patient”.

BHP Weekly Chart

Australian sectors

Resources

As discussed previously we remain patient adding to our IGO position within the Australian resource stocks. There is no change to our overall outlook but the short-term strength in the $US may assist us with some buying levels:

1. We are positive the reflation trade hence are keen on the likes of BHP and RIO into weakness but still do not plan to chase strength.

2. We currently prefer the base metals over the more volatile and currently weak iron ore sector.

We are specifically looking to buy BHP around and $25.25.

Plus, we have cancelled our bid in OZ Minerals (OZL) under $8.25.

OZ Minerals (OZL) Daily Chart

Energy

We remain bullish crude oil for now, especially with Iran back in the news who are responsible for ~11% of OPEC production - a test of $US60/barrel still feels a definite possibility.

Unfortunately we see no great risk / reward opportunity within the sector at present.

Crude Oil Monthly Chart

Gold

We recently took profit on our Regis Resources (RRL) position last week at $4. We may consider a “trading buy” around $3.80 but feel the easy money has gone for now.

Regis Resources (RRL) Weekly Chart

Banks and bond yields / interest rates

We remain both positive and overweight the banking sector as we fully move into reporting season and of course the Novembers dividends.

We continue to keep 3 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is just another ~4% higher, they made fresh highs for 2017 last week.
  2. Between 10th – 14th is usually a poor time for our banks we may take some money off the table from part of our holdings in the next few weeks - either pre / post dividends.

CBA, the only member of the “big 4” who does not pay a November dividend looks strong at current levels with a move towards $80.50 now on the cards – as discussed earlier CBA usually corrects ~6% at some stage in November.

Australian and US 10-year bond yields are moving pretty much in tandem, currently shirking off any great concerns around our domestic economy – we believe they may be wrong!

Australian 10-Year Bond Yield v US 10-Year Bond Yield Monthly Chart

US S&P500 Banking Index Weekly Chart

Diversified Financials

The Diversified Financials remain bullish with a target ~13% higher. Last week we executed the planned purchase of IFL within the sector: 

1. IOOF Holdings (IFL) $10.84 – We went long at ~$10.91 last week and although a little more weakness would not surprise following the capital raising we very much like the position.

ASX200 Financial Index Quarterly Chart

IOOF Holdings (IFL) Weekly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will be prepared to buy panic weakness in some select stocks if the opportunity arises.

We remain bearish Woolworths with an ugly potential target under $20.

Woolworths (WOW) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly was the weakest sector last week falling over -2% by Fridays close. However the local equivalent was strong due to its make-up of mainly overseas earners, the hot sector at present.

On balance we will in general avoid the local healthcare stocks for now because if the US sector falls as we anticipate the currency will only be able to help so far – the long-term correlation is very close as the following chart illustrates.

However, we are happy with our purchase of Nanosonics (NAN) in the short / medium-term.

US S&P500 Healthcare Sector Quarterly Chart

Nanosonics (NAN) Monthly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is only a few % away for the broad Russell 3000, considering we are ultimately looking for a correction of over 20% we are understandably avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the Russell 3000 has rallied an impressive 24% with only one small 5.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet another ~5% pullback simply feels overdue but perhaps too many people are hoping / looking for it.

However, the press are now talking more about a potential “melt-up” as opposed to an imminent fall and they usually get it wrong! Also we are getting some divergence within US stocks, on Friday the NYSE and Russell 2000 indices fell while the NASDAQ soared almost 3%.

US Russell 3000 Quarterly Chart

A small tweak with our view on European stocks following Fridays strong gains assisted by Mr Draghi and the ECB maintaining QE indefinitely.

We are bullish European stocks while last week’s lows hold.

German DAX Weekly Chart

At MM we’ve been very bullish the Japanese Nikkei for all of 2017 but we’ve now reached our 22,000 target area after rallying over 30% since late 2016. We are now neutral but no sell signals are vaguely apparent.

Japans Nikkei Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 10% of the MM Platinum Portfolio in cash: 

  1. Banks – We like our overweight banking position just for now.
  2. Consumer Services – Nothing is close at present.
  3. Diversified Financials – Following our purchase of IFL that’s enough for now.
  4. Energy – Were positive but see no value at current levels.
  5. Food and Beverage – No interest currently.
  6. Healthcare – We like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We like BHP around $25.25 while OZL buying is hold for now.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage.
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have enough exposure at this time with NCM but Regis Resources is a potential trading buy ~$3.80.

Potential “Sells”

A few of our MM Platinum Portfolio stocks are close to our current sell targets: 

  1. Challenger (CGF) around $14.00 – note this has been lowered slightly.
  2. Telstra (TLS) around $3.70.
  3. Aristocrat (ALL) around $25.
  4. Commonwealth Bank (CBA) around $80.50-$81 – alternatively BOQ, WBC or NAB within the sector around the same time.

Standout technical chart (s) of the week

We believe the $A has now broken back down within the direction of the trend, we have an ultimate target of ~65c. This ties in with our significant concerns around the Australian economy, especially when compared to our global piers.

The important point here for MM is that companies who benefit from a weaker $A are yet again positioned well moving forward.

The $A Monthly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report. A summary of the most likely activity next week is:

Buys –BHP ~$25.25.

Sells – A bank basis CBA ~$80.50 - $81.

Trading Opportunities on our radar

We only have 1 trading idea this week which have mentioned a few times in this report but it comes in 2 parts:

  • Sell CBA ~$80.50 looking for a $3 pullback following both the technical picture and seasonality.
  • If we get a ~$3 retracement from around $80.50 go long targeting ~$82 for the Christmas rally.

Commonwealth Bank (CBA) Daily Chart

Summary

We are now confident in our medium-term forecast of the ASX200 breaking over 6000 in 2017/8  with a “guess” target around 6200.

We remain comfortably overweight the banking / financial sector but may take some moiney off the table in the next 2 weeks keeping one eye firmly on the resources sector for buying opportunities.

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.

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 27/10/2017. 4.00PM.
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