Market Matters Report / Market Matters Weekend Report Sunday 2nd June 2019

By Market Matters 02 June 19

Market Matters Weekend Report Sunday 2nd June 2019

Market Matters Weekend Report Sunday 2nd June 2019

The scary to many “sell in May and go away” period is behind us but all it has delivered in 2019 for the average Australian investor was massive outperformance by the ASX200 courtesy of the surprise Liberal Federal election victory and an increasingly dovish RBA. We settled the month up +1.1% compared to the Dow which fell a meaningful -6.7%. However while the price action in the US has been undoubtedly weak, regularly assisted by an unpredictable President Trump, history tells us that its usually recovered by ~3% over the following 3-4 months, in other words if you aggressively sell a weak May the odds are it will prove to be poor judgement just a few months’ down the track.

At this stage MM has no bearish triggers for the local stock market but we remain mindful that all good things in markets do eventually come to an end with the current over 10-year bull market the longest in history. However the fuel of basically “free money” which has driven the post GFC gains remains available and its potentially about to become even cheaper, although not necessarily as readily available on our own shores as others. The US stock market has been hurt by ongoing trade concerns with US – China front and centre although Fridays re-introduction of Mexico into the mix sent shudders through stocks.

President Trump is playing a huge game of “dare or chicken” with China but he has a clock on him unlike the Chinese i.e. The next US Presidential election is on November 3rd, 2020. We feel America has most of the cards in the pack plus and good reason to confront China, especially around intellectual property, but China is a communist country with no real election cycle. This is like a big game of Chess or Mahjong depending where you sit which we still believe will ultimately be resolved but let’s just hope its quicker than the fiasco named BREXIT.

However, what is more  concerning to MM is the signs emerging from bond markets that a recession is looming on the horizon, trade concerns appear to be compounding already present worries around future global economic prospects. Importantly in our opinion global equities are not vaguely factoring in the risk of a meaningful economic downturn i.e. recession. – more on this concerning phenomenon is the next section.

Short-term MM remains bullish the ASX200 while it can remain above 6350 with an initial technical target above 6525.

On Friday night US indices fell fairly aggressively following Trump’s threats to thump tariffs on Mexico with the tech based NASDDAQ leading the declines falling 1.6%. The SPI futures are calling the ASX200 down 20-points early on Monday but with some US  indices hitting our retracement targets we would not be surprised to see a recovery in most indices next week.

ASX200 Chart

Alarm bells have been slowly ringing in a number of various global bond markets implying that the next chapter of our economic story may be a problem, below are some examples:

1 – US 10-year bonds have fallen below the US 3-month Bill rate by the most since just before the GFC.

2 – Australian bond yields have fallen to their lowest level in history as local economic concerns grow – a worry as the RBA has limited monetary flexibility with official rates already at 1.5%, perhaps we will see domestic QE.

3 – German 10-year bond yields like our own have made fresh all-time lows BUT theirs are now negative -0.202% i.e. you pay for the privilege of lending someone money.

4 – Similarly the likes of Canada and the UK have bond markets closely impersonating the pre GFC.

We  believe there are  2 very important factors to continually evaluate because if either prove to be incorrect the market will have a to undergo a significant readjustment.

1 – While stocks remain comfortable that central banks will lower rates & QE can stave off a recession “buy the dips” will remain the profitable mantra.

2 – Fund managers are now mostly positioned for a lower interest rate environment as they assume the economic cycle has peaked and central banks will move back into easing mode.

MM believes stocks will remain firm until bond yields start to increase, or perhaps just plateau.

US 10-year Bonds v 3-month rates  Chart

The commodities Index (CRB Index) illustrates perfectly the lack of growth / inflation in the global economy. At this stage a break of the 2015 lows looks a strong possibility implying any buying of the Australian resources sector should be very stock / sector specific.

Our preferred scenario is the CRB Index makes breaks its 2015 low  to provide a potentially excellent buying opportunity.

The CRB Index Chart

1 –  Platinum Portfolio

The MM Platinum Portfolio had an average week courtesy of a hand grenade called Costa Group (CGC) which closed the week down -20.2%; considering this plunge only underperforming the index by ~1% is acceptable. We actually took advantage of the dive by the fruit / vegetable grower and distributor to increase  our position, generally we like buying stocks exposed to seasonal factors into weakness - MM now holds 12% of the MM Platinum Portfolio in cash:  https://www.marketmatters.com.au/new-portfolio-csv/

With the ASX200 falling ~1% last week only Iluka (ILU) in our Platinum Portfolio managed to make a meaningful move on the upside, rallying over 6%.

Interestingly 2 of our solid performers which are in striking distance of MM’s profit targets are now close to triggering stops on the downside:

1 – Iluka (ILU) $9.74 : the mineral sands operator has rallied nicely with our target remaining close to $11 but a close below $9.70 will concern us that the appreciation is complete.

2 – Bingo (BIN) $1.845 : we have been targeting the $2.10 area but a clear break beneath $1.85 will send a clear warning signal but at least we will still be sitting on an almost 30% profit.

Iluka (ILU) Chart

Bingo (BIN) Chart

Again the resources weighed on the ASX200 with Energy the standout loser, as we said earlier the CRB Index remains vulnerable to fall further falls hence we continue to remain patient with increasing our resources exposure – iron ore still remains a preferred option.

Heavyweight RIO Tinto (RIO) surged early in the week following an upgrade by Goldman’s before correcting ~8%. We are keen buyers around $95 in RIO and a similar degree of weakness in Fortescue (FMG), after the bulk commodities stellar run pullbacks are almost inevitable.

MM is still looking to switch part of our banking exposure into resources over the weeks ahead BUT we are in no hurry just yet.

RIO Tinto (RIO) Chart

Iron ore Chart

The broad market threw up very few  fresh ideas this weekend with many stocks / sectors feeling heavy and tired while the banks which are so influential on our index remain solid plus the resources will be interesting lower as touched on above.

Our major concern as we kick of June is EOFY (end of financial year) selling we have a number of stocks in our “dog group” that could easily have a tough time in June as investors lock in some losses, hence MM is considering seriously sweeping the decks of all / some of Bingo (BIN), Pact Group (PGH), Ausdrill (ASL) and Emeco Holdings (EHL).

In most cases we should have taken the quick money they threw up but hindsight is a great investor, what matters is avoiding a quick +10% drops in the group plus higher cash levels would not concern us at this point in time.

Pact Group (PGH) Chart

2 Income Portfolio

The Income Portfolio https://www.marketmatters.com.au/new-income-portfolio-csv/ had a quiet week not transacting hence it still holds 9% in cash following the recent purchase of Flight Centre (FLT) and Whitehaven Coal (WHC).

Fortunately we have no obvious candidates in this portfolio for “tax loss”  selling  hence at this stage we may be looking at a quiet June for the Income Portfolio (famous last words!).

Until we see any indications that bond yields have bottomed MM sees no major reason to reduce our large market exposure, or re-position / skew holdings towards higher rates.

Australian 3-year Bonds v RBA Cash Rate Chart

3 –  International Equites Portfolio

No change, were sticking with this for now - “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a careful process.” President Trump has continued to create significant uncertainty around US  - China trade plus we now have Mexico & inverting bond yields entering the mix, it makes the short-term picture tricky from a risk / reward  perspective.

We have been targeting for the US small cap Russell 2000 to test below 1470 prior to resuming its uptrend, this has unfolded after President Trumps shot at Mexico on Friday hence this week we are on the lookout for a reversal higher by US stocks.

US Russell 2000 (small cap) Index Chart

The Emerging Markets Indices still look capable of falling another 10% implying there maybe be no “quick fix” solution to the US – China trade talks. Interestingly last week we saw Emerging markets significantly outperform US stocks on trade concerns showing the “weak money” is primarily long American equities.

Yet again we see no reason to jump “boots and all” into overseas stocks, especially those Asian facing, but as always there will always be bargains / value to be enjoyed.

Emerging Markets ETF (EEM) Chart

The correction by a number of quality stocks deepened last week hence we’ve again refined our pick of stocks that we would accumulate at today’s levels and into weakness:

1 – Apple (AAPL) $US175.07 -  Apple is now 25% below its all-time high with concerns around China weighing on the stock, we now feel the risk / reward is attractive for the backfoot accumulator.

2 – PingAn Insurance (2318 HK) HK86.60  – we are bullish Ping targeting at least 15% upside.

3 – Trade Desk (TTD US) $US195.90 is a slightly smaller company albeit with a growing ~$US8,700m market cap, we remain bullish targeting ~$US250.

Watch for the launch of the MM portfolio in the next few weeks but we will play our way in slowly unless the market has a deeper correction in June.

Trade Desk (TTD US) Chart

4 - MM Global ETF Portfolio

This remains a new concept to MM but this portfolio will replicate our macro opinion primarily around global stock indices, different market sectors, interest rates and currencies – this can very often be played by investing in ASX listed ETF’s but when required we may also turn to overseas listed ETF’s. We have regularly discussed our views across these economic themes and its time to put theory into practice.

We still believe there are a couple of great scenarios worth considering and preparing for but remember major macro views don’t change too often:

1 – A potential spike towards 65c by the $A discussed throughout 2019 will represent great risk / reward buying in our opinion.

2 –  Two weeks ago MM said : “Sell Emerging markets v buy the ASX200 equal dollar exposure BUT this is already very stretched hence we would be implementing on say 50% usual size. This position is working nicely and while we would lock in half profits overall it appears to have further to run.

ASX200 v Emerging Markets ETF (EEM) Chart

3 – No change, consider short facing Equity ETF’s into fresh 2019 highs, if they materialise!

Above 6525 for the ASX200 and above 3000 for the US S&P500 we are likely to become neutral / bearish equities hence we could / may buy the BBOZ or BBUS but also we may still be bullish gold (QAU) or the Resources (QRE) hence we can create a mosaic of positions which at times have limited exposure to the underlying index itself as opposed to which sectors outperform – a very exciting prospect for all at MM.

BetaShares Leveraged Bearish S&P500 (BBUS) ETF Chart

Conclusion

No change, short-term stocks look ok but as the ASX200 advances we are slowly switching from a bullish to neutral stance, ideally our first tweak to portfolios will be to reduce our banking exposure.

US stocks need to reverse higher from current levels to avoid us evolving our view to neutral / bearish.

Chart of the week.

CYB has been a volatile beast in both directions over the last 12-months but unfortunately we believe it’s again time for the bears. Perhaps BREXIT and the UK can get even worse!

MM is bearish CYB targeting $3, or lower.

CYBG (CYB) Chart

Investment of the week.

Last week our “Trade of the Week” has unfolded perfectly :

“A sell then buy scenario for a change, we are bearish PDL targeting $7 or even lower from where we will be looking for buy triggers e.g. a “DOJI” week – a candle set up.

MM is bearish PDL targeting ~$7 from where it will start to look for support / value.”

Here we are and PDL has fallen 6% into our potential buy area, we would normally be looking for buy signals but we are in no hurry because MM already holds Macquarie (MQG) and Janus Henderson in the sector.

MM is looking for a buy trigger in PDL around here.

Pendal Group (PDL) Chart

Trade of the week.

This is definitely not one for the faint hearted but the risk / reward is attractive. The Eclipx Group shot higher on Friday after releasing their half year results. While we are not keen long-term on the business we are targeting ~$1.40 technically  while we can run stops below $1.04, well over 3:1 risk / reward.

MM is bullish ECX targeting ~$1.40, or over 25% higher.

Eclipx Group (ECX) 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

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

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