Market Matters Report / Market Matters Weekend Report Sunday 2nd December 2018

By Market Matters 02 December 18

Market Matters Weekend Report Sunday 2nd December 2018

Market Matters Weekend Report Sunday 2nd December 2018

The ASX200 had a very disappointing week appearing to latch onto any negative news it could, as opposed to the more plentiful positive influences, basically we were very much in a “glass half empty” mode as we said goodbye to a tough November. The local index finally closed the week down -49-points / 0.86% compared to the Dow which soared +1253-points / 5.2%, while Europe and most of Asia also closed positive, overall the MSCI World Equities Index closed up +3.3% illustrating perfectly the very lacklustre performance by our local stocks, let’s hope December is better!

Under the hood it was a mixed picture with a strong performance from the IT sector overshadowed by the energy and resources sectors which underperformed noticeably both falling over 2%. From a broad perspective things looked ok with 47% of the market closing in the black but when BHP and RIO both get thumped and the “big 4” banks only tread water it’s hard for our index to get up off the canvas.

The major damage was obviously inflicted on Friday when the market was hit by heavy selling in the SPI futures which fell almost 100-points from an initial positive open. The selling was pretty much unrelenting throughout the day leading to waves of arbitrage hitting the stocks i.e. traders buy the “cheap discounted” futures and sell stocks. We saw similar activity in the futures market in mid-November which took the index down to its 5594 multi-year low – as we have explained previously when investors want to exit the ASX200 quickly, and in a big way, the SPI is usually the easiest vehicle.

MM has been calling a choppy recovery into the end of 2018 but I would say the degree of weakness on Friday was larger than we expected. Assuming nothing too negative emerges from the G20 over the weekend the ASX200 should open back around the 5700 area on Monday, a close back under 5650 early next week would cast doubt in our minds as to whether we’ve seen the worst 2018 has to offer.

MM remains bullish the ASX200 into Christmas / 2019 targeting the 5950 area +/- 50-points.

The ASX200 is set to open up 30-points on Monday helped by another strong performance by US stocks but BHP fell over 1% on the ADR’s and is set to open around its lowest level since April – I feel the market bulls should be cautious while the resources remain vulnerable to further declines.

ASX200 Chart

Until further notice we will regularly be showing the below chart which illustrates our view for local stocks into 2019. Monday the 3rd is the first trading day for December so let’s reconsider the seasonal statistics which are often referred to as “the Christmas rally”:

1 - If the Christmas rally starts in November, which occurs over 50% of the time, the Dec high is usually in the last 48-hours of December but it then usually kicks a little higher into mid-January, or even early Feb. To evaluate this scenario it’s important to see if Novembers 5594 low holds firm.

2 – The average gain for December over the last decade is +1.56% which only targets the 5750 area but considering the 779-point / 12.2% decline since August our preferred scenario is for a larger bounce.

3 – Since the GFC we have enjoyed a seasonal rally every year except in 2011, Decembers low on average comes in around the 9th i.e. don’t panic if we struggle early on, the majority of the gains are usually at the back end of the month.

ASX200 Chart

Global Indices

Global equity markets were very strong last week after being ignited by Fed Chair Jerome Powell’s dovish speech suggesting to many that US rates will rise slower than many had expected.

We can still see the Dow making fresh all-time highs in the coming weeks months, not a big call now its less than 6% away.

When trying to understand stock market volatility / swings its often best to “keep it simple stupid” (KISS).

1 – This year the US stock market was factoring in 12% growth on earnings, the same as last year – crazy in our opinion considering the tax cuts benefits were largely behind us, the $US was up, Emerging Markets were wobbling and interest rates were higher.

2 – It’s extremely hard for stocks to rally when they are missing earnings expectations but now growth expectations have come back to 9%, maybe still too high but much closer to reasonable levels.

US stocks enjoyed their best week since 2011 ahead of the much discussed Trump-Xi dinner. Considering valuations are now more reasonable and fund managers have almost “lemming like” become scarred / bearish into 2019 it’s easy to envisage, if we see an amicable meeting, further strength in US equities. We believe the path of most pain for fund managers is definitely up as we approach 2019:

A – Fund managers are the most bearish on the global economy since November 2008, not long before the longest bull market in history exploded out from the blocks – the cited reasons for this negativity are a trade war, interest rates and a Chinese slowdown.

B – However cash levels did drop from 5.1% to 4.7% with Emerging Markets back on the menu following their savage decline.

C - 30% of fund managers already believe US stocks have peaked with the others only looking for ~10% further upside.

D – Two of the most crowded trades remain the FAANG stocks and long $US. The later we believe is a quasi-hedge and very probably wrong.

US Dow Jones Chart

Technically global equities look really good, even if they don’t feel it! Assuming an escalation of the US – China trade war is averted we can see a  break of the 2018 high over the coming months.

1 – The bullish uptrend from its 684 low back in March 2009 remains intact.

2 – The chart pattern has been literally copybook stuff since the GFC low including two exact retracements of 355-points.

The close above 2040 has reignited our short-term bullish view.

MSCI World Index Chart

Updated Macro Outlook

As touched on earlier Jerome Powell lifted the anxiety of higher interest rates from many investors concerns following his dovish speech last week.

Bond yields retreated and the $US gave back some ground – we believe both of these moves have further to unwind which is theoretically positive for equities.

Higher interest rates is one of the 3 concerns fund managers have with regard to the global economy just imagine if this now calms, Trump & Xi reach an agreement plus Xi again stimulates the Chinese economy all 3 reasons fund managers are bearish the global economy are gone – a distinct possibility in our opinion.

US 10-year bond yield Chart

US markets went into the weekend remarkably comfortable considering “the big dinner” with stocks rallying close to 1% and the VIX (Fear Index) falling 4%, closing below the psychological 20% level.

If Trump delivers it looks like the huge volatility of 2018 may be well and truly behind us.

US Volatility Index / Fear Gauge (VIX) Chart

1 Short-term implications of Labor’s actions on franking credits.

The Liberals keep digging themselves an election hole with next May the likely date we will all trudge down to cast our vote – personally I wish I was supporting somebody I passionately respected and believed in.

I was set to write this piece before the AFR beat me to it on Saturday with their similar article which we fundamentally agree with.

MM believes an avalanche of buybacks could easily hit the ASX200 over the coming months due to Labor’s intended crackdown on the use of franking on dividends. Simply many boards will / should look to announce off-market buybacks and / or special dividends before the franking credits go up in a puff of smoke.

This could easily become the perfect recipe for some type of blow-off top i.e. forced, almost unnatural buying.

Prime stocks for such capital management are companies with surplus capital and excess franking credits – BHP and RIO have already started walking the path.

One concern for these companies could be a lack of cash preventing them from launching a buyback or paying special dividends to reduce their franking balance. While buy-backs require a large cash component to distribute franking, a dividend reinvestment plan (DRP) on a special dividend can counteract this problem where the franking is paid away by giving new shares to shareholders instead of cash while the company underwrites the DRP to eliminate the risk of a shortfall.

Overall if the stock itself looks good this is a potentially solid tailwind in the next few months - HVN stands out to me, Gerry owns 344m shares in HVN or ~30% of the company – I’m sure he won’t want to lose the credits.

Companies with relatively large franking credit balances Chart

2 The banks remain solid into 2019

The Australian banking sector has started to regain its “mojo” over the last month with CBA up almost 3% while the ASX200 is down almost -3%, it’s been a while since we’ve since that level of outperformance!

Even on Friday when the market was savaged by the SPI futures selling, much of the sector managed to outperform even though it would be very much in the cross hairs of the arbitrage players. We simply believe the fallout from the Hayne Royal Commission is fully priced into the sector.

Last week for the first time in a decade Citi Group went overweight with the bank saying the sector was trading at a 30% discount to the market – the large players are jumping to our side of the fence.

MM continues to like the banks into 2019 and believes their largely sustainable dividends will lead to sector outperformance over the next few years.

Bendigo trades ex-dividend in February and its currently yielding a very healthy 6.55% fully franked – I wonder if they might reward the faithful with a special dividend, as you can see from the chart above they have plenty of franking credits on hand.

Bendigo & Adelaide Bank (ASX: BEN) Chart

Commonwealth Bank (ASX: CBA) Chart

3 Still No hurry buying the Resources Sector.

The Australian Resources Sector again struggled last week, even when we look beyond the energy stocks, over the last month BHP (ASX: BHP) is down -4.7% and RIO Tinto (ASX: RIO) -4.1%.

MM currently has direct exposure to resources via RIO Tinto (ASX: RIO) and Western Areas (ASX: WSA) which although being well below an index weighting has definitely felt enough recently.

BHP is set to open down over 1% on Monday around $30.35, well below the $34 where we exited our position in May, but it’s still not cheap enough for us just yet.

MM still has no interest in the big Australian until under $30, now only 3% lower.

BHP Billiton (ASX: BHP) Chart

Slowly but surely the stars are starting to align in the resources sector, we have been bearish S32 for months targeting sub $3 i.e. a 30% correction.

This aggressive call fell only 3c short last week, my “Gut Feel” is that MM will increase its resources exposure next week.

Our preferred purchases in the sector remain BHP Billiton (ASX: BHP), Iluka (ASX: ILU) and Sandfire Resources (ASX: SFR) plus a potential increase of RIO Tinto (ASX: RIO) holding but price / value will determine any purchases.

South 32 (ASX: S32) Chart

4 Oil stocks remain a fair “punt”.

Crude oil has now plunged almost 36% from its October high but last week we final saw some support creep into the commodity below $US50/barrel. The US Energy Sector was the only one in the S&P500 to close in the red on Friday but a fall of just -0.24% almost feels like a win compared to the last 2-months.

For the brave we like Beach Petroleum (BPT) at current levels for a 20% bounce.

Crude Oil Chart

Beach Petroleum (ASX: BPT) Chart

5 The $US still looks bearish

The $US remains MM’s best call of 2018 year and we believe its has again shown its hand, especially following the dovish speech from the Fed Chair.

MM remains bearish the $US targeting a ~3% decline in the short-term, back to its late September lows. The $US currently feels like its “hanging in there” because of volatility in US stocks and uncertainty around  a trade war, not a reason to chase the greenback in our opinion.

NB long the $US is a very crowded trade as we said earlier.

$US Index Chart

The $US is strongly correlated to a number of markets and if we are again correct some interesting moves should unfold:

1 - the $US has received a “safe haven” bid whenever stocks have tumbled in October & November, a weaker $US implies equities will recover, or at least not fall aggressively into 2019.

2 - If the $US Index corrects it should be good news for our resources holdings as the Bloomberg Base Metals Index is inversely correlated to the $US – doesn’t feel right just yet as discussed earlier BUT close.

3 – If the $US Index corrects it should be good news for our Newcrest Mining (ASX: NCM) position as gold is inversely correlated to the $US – our current target for NCM is ~$21.80, around 5% higher.

4 - If the $US Index corrects it should be good news for the Emerging Markets (EEM) which are inversely correlated to the $US and especially so in 2018 due to the escalation of fears around serviceability of EEM debt denominated in $US. This makes both technical and fundamental sense to MM.

$US Index v Emerging Markets Chart

6 The high growth / value stocks look great

MM went aggressively long this battered sector last Wednesday and the results so far is a great example of adding value / alpha for the active investor.

We allocated 9% of the Platinum Portfolio equally across Appen Ltd (ASX: APX), Altium Ltd (ASX: ALU) and Xero (ASX: XRO) all of whom become standout performers last week with an average gain of almost 9% – all 3 stocks are in the Software and Services Sector.

Its important to remember these are “active positions” and we would not be surprised if we exit at least one of these volatile stocks next week, our current targets are:

APX - $15, ALU $24, and XRO - $45.

The current performance of these purchases are great examples of ideal trade location and exactly what we are hoping for with the resources stocks we are currently “stalking” at present.

Xero Ltd (ASX: XRO) Chart


As subscribers know in the bigger picture we are looking for a more defensive portfolio at this point in time i.e. stocks that provide a constant dividend and stable earnings regardless of the state of the overall stock market.

However we remain mildly positive short-term targeting a Christmas rally ideally towards 5950 where MM will significantly increase our cash position.

We continue to consider increasing our exposure to the resources space if they correct as expected e.g. BHP ~$29.50 and this would obviously be via a  “switch”.

Also, we like BPT early next week around $1.50.

Chart of the week.

We are showing 2 in today’s report, with the first the perfect scenario that unfolded from our selection last week:

1 After pay Touch (ASX: APT) $14.42


“We are not fans of this business and the regulatory risks it carries with it but the chart pattern is a corker looking for a rally back towards $14.50.

MM likes APT as an aggressive play at current levels for a  +25% rally.”

Last week the stock rallied 27% from its $11.34 low, we would now take the $$ had we gone long.

Afterpay Touch (ASX: APT) Chart

2 Microsoft (US: MSFT) $US110.89

We are bullish global heavyweight Microsoft targeting fresh all-time highs up towards $US120, or 10% higher.

An excellent sign for global equities into Christmas / 2019.

Microsoft (US: MSFT) Chart

Investment of the week.

We got this well and truly wrong last week with our bullish view on Aristocrat (ASX: ALL) which we hold, it had an average / poor report and fell 8.75% for the week – pressure on this week!

MM continues to like Charter Hall targeting fresh highs above $5, or around 10% higher.

MM likes CQR with stops below $4.35, good risk / reward.

Charter Hall (ASX: CQR) Chart

Trade of the week.

One for the VERY brave, hopefully not stupid, this week:

MM likes AMP into fresh all-time lows below $2.25 targeting a 20% bounce.

AMP Ltd (ASX: AMP) 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 2/12/2018

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