Market Matters Report / Market Matters Weekend Report – Sunday 2nd July 2017

By Market Matters 02 July 17

Market Matters Weekend Report – Sunday 2nd July 2017

Market Matters Weekend Report – Sunday 2nd July 2017

FY17 came to an end on Friday with the ASX 200 having its best year in the last three - the index up +9.3% and around 14% on an accumulation basis (incl dividends). It was a choppy year and it was coming off a low base given we’d just had BREXIT on the 23rd June 2016 and the FY16 year only saw a gain of 2%. Still, we’ll take it and look forward to FY18 as we prepare for the year of potential turning points for global markets. Looking bigger picture for a moment, global stock markets based out in March 2009 at 667 points on the S&P 500. That market closed on Friday at 2423 which is a rally of +263% over 8.25 years. We are currently in the second longest bull market in history – the longest was from 1987 to 2000. On average, a bull market typically lasts a bit over 2 years before a 20% correction halts it’s progress. We’ve now gone 8 years without a correction greater than 20%. Simple statistics should be enough to warrant some caution going forward.

In the shorter term, the typical May/June weakness has played out on the Australian market as expected with the ASX 200 trading from a May 1 high of 5959 to a low of 5629 on the 8th June – a drop of 5.5%. We entered the period with high cash levels in the Market Matters Portfolio and have gradually bought stock into weakness – while currently holding 9.5% in cash. This is a shallower pullback than what we’ve typically seen post the GFC, which has been an average decline over May/June of 6.9%. Turning to July, the ASX200's average gain since the GFC is an impressive 4.3% with it closing positive 7 out of the 8-years. Also, on those 7 bullish occasions the market closed out July around the highs of the month telling us early monthly strength usually follows through at this time of year. We start the first trading day of July on Monday with Futures pricing in a rise of 21pts, a small recovery from the big sell-off on Friday.

At this juncture however, there are two competing forces at play. The Australian market looks reasonable with the internals of the market improving towards the back end of June. Banks found some support while the resource stocks have moved strongly up from their recent lows – an impulsive move higher throughout last week which we had flagged in the Weekend Report last Sunday. July is usually strong for these sectors and looking solely at Australia, we remain comfortable in our overall bullish stance here.

ASX 200 Material Sector – FY17

ASX 200 Banking Sector – FY17

However, looking at US markets, they look set for a further decline led by weakness / profit taking in the technology stocks. The NASDAQ was down -3.18% for the week to close at 5646 and now targets 5500 on the downside, another ~2.5% lower.

US NASDAQ Weekly Chart

We are currently holding 9.5% of our MM portfolio in cash which feels perfect just here, our general plan is to buy further weakness and continue to sell strength where appropriate i.e. our anticipated action plan for the next 6-12 months before we foresee a move more heavily into cash. Recently we’ve sold Janus Henderson (JHG) into strength booking a very good profit while last week we cut Telstra (TLS) for a small profit, bought Wesfarmers for income, suggesting a Buy Write Option strategy for those that have experience in options, while we also added another 3% into QBE around ~$11.60 and added to Westpac on Friday by 2.5% around ~$30.60 taking our holding to 7.5%. This leaves us with a big overweight position in Insurance – which we covered during the week – a big position in the banks and a big position in the resource sector. In other words, we’re very heavy in the ‘reflation trade’ – the trade that benefits from higher global interest rates.

Importantly, we’re not in the sectors that have clear headwinds, areas such as Real-Estate and Infrastructure that will come under significant pressure as interest rates globally head higher – A theme we discussed with Charlie Aitken this week in the weekly MM video.

For the ASX 200 over the next week, we continue to remain neutral until the market shows it’s hand. Last week we had one very bullish session followed by one very bearish session. We also had the end of quarter and end of financial year, and therefore trends can often be impacted by external factors. Next week is an important juncture for the market and strength early is a very good sign for continued buying throughout the month. On a medium-term basis, the ASX200 continues to trade in a very clear Neutral Pattern with support 5582-5628 and resistance 5909-5956.

ASX200 Monthly Chart

Standout technical chart of the week

The US Dollar is likely to track lower – most likely to our targeted 92 area for the dollar Index. US interest rates are obviously going higher which would normally correlate with a higher US currency however the rate at which the various ‘denominators’ are also appreciating such as the Euro and GBP and the crowded nature of the long US Dollar Trade means that the US currency is likely to go lower even though interest rates in the US are going up. This is obviously positive for commodities which filters into our long commodities call.

US Dollar Index – Weekly Chart

US 10-year bond yields Weekly Chart – big weekly move in US rates

Investing opportunities for the coming week(s)

  1. Our priority remains buying weakness and selling strength.
  2. In terms of selling strength, we have a large holding in Suncorp (12%) and we will look to trim this by 4% on a move over $15.50
  3. We may look to take short term profits on Fortescue (FMG) ~$5.50 i.e +5% higher with the view of buying back at lower levels
  4. The current sell off in the yield stocks will likely go too far and opportunities may arise in Transurban below $11.50

Trading Opportunities on our radar

Last week we highlighted Fortescue, Rio Tinto and Seek. Fortescue and Rio Tinto did particularly well.

Myer (MYR) is a stock everyone loves to hate, and the vortex of negative news hitting the retailers is hard to overcome, however as suggested in weeks gone by, there remains good risk / reward in Myer buying on a break below 80c

Summary

No major changes, we continue to believe that US and local stocks can add to their recent gains into 2017, but short-term we are a little 50-50. At this stage we are comfortable holding 9.5% of the MM portfolio in cash. Bigger picture, we continue to believe the ASX 200 will break over 6000 in 2017

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 1/07/2017. 4.00PM.
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