Market Matters Report / Market Matters Weekend Report Sunday 3rd February 2019

By Market Matters 03 February 19

Market Matters Weekend Report Sunday 3rd February 2019

Market Matters Weekend Report Sunday 3rd February 2019

The ASX200 had its first negative week since the explosive 505-point / 9.3% recovery commenced back in late December with nervousness in the banking sector ahead of the release of Hayne Royal Commission Banking report on Monday evening, unable to offset some excellent gains in the resources sector. On the stock level the first few companies to report results saw some big volatility while  unfortunately the awful disaster in Brazil where a tailings dam failed and production there and at other Vale operations was halted,  drove up the iron ore price which helped the Australian Iron Ore miners. While the index closed down just -0.7% we saw 41 members of the ASX200 close the week out +/- over 5%, over 20% of the index moving by over 5% would usually be regarded as major volatility but not during reporting season – one of the reasons we currently hold elevated cash levels.

Winners: G8 Education (GEM) +7.6%, Sky City Entertainment (SKC) +6%, Credit Corp (CCP) +6.5%, Beach Energy (BPT) +8.4%, Bellamy’s (BAL) +9.7%, Fortescue Metals (FMG) +23%, Newcrest Mining (NCM) +8.6%, Regis Resources (RRL) +8.9%, Northern Star (NST) +7.7%, RIO Tinto (RIO) +10%, BHP Billiton (BHP) +7.3%, Sims Metal (SGM) +10.2%, St Barbara (SBM) +11.2%, South32 (S32) +5.7%, Saracen Mining (SAR) +14%, Evolution Mining (EVN) +6.7%, Independence Group (IGO) +5.6%, Iluka Resources (ILU) +13.9%, Lynas (LYC) +6.9%, Western Areas (WSA) +7%, Aveo Group (AOG) +6.4% and Abacus Property (ABP) +7%.

Losers: GUD Holdings (GUD) -5.4%, CYBG (CYB) -8%, Seek (SEK) -5.3%, Ardent Leisure (ALG) -6.9%, Flight Centre (FLT) -6.4%, Eclipx Group (ECX) -13.8%, AMP Ltd (AMP) -11.8%, Elders (ELD) -7.6%, Fisher & Paykel (FPH) -7.8%, Aust Pharma (API) -13.4%, ResMed (RMD) -20.3%, Sigma Health (SIG) -6%, Steadfast (SDF) -6.4%, Nufarm (NUF) -5.2%, Galaxy Resources (GXY) -5.7%, Orora (ORA) -5.5%, Syrah Resources (SYR) -26%, Mayne Pharma (MYX) -5.4% and QANTAS (QAN) -13.1%.

The usual suspects keep cropping up amongst the losers like AMP, Ardent Leisure and Syrah but ResMed falling over 20% demonstrated what happens when high valuation (P/E) stocks that are largely owned by the market miss overly optimistic expectations when they report. As we said above the winners were dominated by the resources space with the gold names in particular enjoying a stellar week, we will evaluate later whether we have been too pedantic with our buying intentions in a few of these names.

Our earlier call that the ASX200 was set to correct its entire 963-point / 15% decline has proved correct, let’s hope we can back It up with our ongoing forecast (s) for 2019:

1 – We are looking for at least a 2.5% pullback from the 5900 resistance area - from an index perspective we are accumulators below 5775

2 – If / when this correction occurs we anticipate further strength in Q2 of 2019, potentially testing the large psychological 6000 area. The Feds fresh dovish stance (less aggressive outlook on interest rate hikes) should help fuel this anticipated ongoing strength in equities – risk on!

3 – If the market does follow the above path we are currently intending to move to a very defensive stance ~6000.

NB Monday evenings release of the Hayne Banking Report is likely to move the local market substantially over Tuesday / Wednesday with around 30% of our index bank related, that’s major short-term noise that may skew the above levels at least temporarily.

ASX200 Chart

The US S&P500 has now rallied  over 15% from its late December low and we are looking for a reasonable correction to basically commence around now – our best guess is a 6-8% correction. Global equities became super bearish / pessimistic in late 2018  before an  almost vertical 3500-point snap back up by the Dow. The psychological turnaround has been huge  but with both extremes comes risks:

December – The market decided we were heading into global recession sending the US small cap Russell 2000 plunging 17.4% in December taking the entire correction from its August high to a massive 27.3%.

January – We saw the US economy remain strong with solid jobs numbers while wage growth cooled reducing inflation fears. The Fed has become more dovish / market friendly than all but the most optimistic hoped for plus the US – China trade tussle looks likely to find a resolution – what could go wrong!

It feels like everyone’s gone from bearish to bullish in just a few weeks, pretty much in line with our anticipated elevated levels of volatility for 2019/2020.

We believe the January “melt up” is very close to completion as marginal buyers are likely to become few and far between. We are now again focusing on the Russell 2000 which so often leads US stocks with our ideal pullback target around the 1375-1400 area.

US Russell 2000 Index Chart

Its important not to lose sight of the bigger picture as the short-term market gyrations throw up enormous opportunities for the nimble, financially flexible and of course prepared – it’s hard to buy a plunging market if you’re not cashed up with clearly identified buying areas.

We continue to believe that equity markets are in the late cycle of their decade long post GFC bull market.

Hedge funds appear to have largely missed Januarys stock market gains but the data now shows they have finally bought back into equities, this suggests to the cynic in me that a pullback is close to hand as these guys have been “cold” of late.

MSCI World Index Chart

The VIX has collapsed from the panic levels of December and its now resting back around its 200-day moving average, the elastic band is clearly slack here. We actually believe this is about right as we anticipate sideways chop, with an upward bias over the following few months.

The Volatility / Fear Index (VIX) Index Chart

1 US bond yields look currently unconvinced.

US 10-year bond yields remain relatively close to their December lows following Fed Chairman Jerome Powell’s lower for longer spiel on Thursday morning our time, this new dovish stance by the central bank should help risk investments at least for now i.e. stocks – it will be a real worry if it doesn’t.

We question whether moving forward another bout of recession concerns are around the corner as bond yields are hardly representational of an economy that’s about to be reignited by the Fed. Also, the short interest in the largest high-yield bond (Junk) ETF remains near a record as many professionals forecast doom for this market sector, a bad indicator for stocks who need to raise $$ as cheaply as possible through bond markets especially if that stock market tailwind called buybacks is going to continue in earnest.

We believe the US economy is in a very precarious position with  the main question remains how long can central banks keep us in this sweet spot for assets while fighting to maintain its balance:

1 – Raise rates too fast and the economy is not strong enough to withstand the headwind and we’re rapidly tipped into recession i.e. Decembers concerns which sent stocks tumbling.

2 – Keep interest low to let the economy breath and grow but risk an outbreak in wages pressure / inflation which will (at some stage in the future) also be bad news for equities.

US Junk Bonds v the S&P500 Chart

2 The banks will dominate the ASX200 early next week.

With the much discussed Hayne Banking Report due to cross the newswires on Monday evening we expect at least a market of 1% swing on Tuesday morning courtesy of initial market interpretations – as we’ve touched on earlier its all about being prepared. We can see reasons on both sides of the fence for an initial rally or drop by the sector:

Rally – Markets are expecting the worse with shorts across the sector basically doubling since October – the crowd is often wrong.

Fall – The price action in the sector last week “smelt” to us like some people have a sniff of what’s to come and it’s not looking pretty e.g. last week Westpac (WBC) fell -4.4% and ANZ Bank (ANZ) -3.8%.

We have no intention of second guessing what comes next but we looking to buy any panic weakness if it were to unfold.

MM likes WBC around $23 and NAB similarly ~$22.

Westpac Bank (ASX: WBC) Chart

National Australia Bank (ASX: NAB) Chart

3 The gold sector looks great

We have been looking to buy gold stocks for too long in hindsight, the pullback we have been anticipating hasn’t eventuated so we ask the simple question “do we chase / buy now?”.

We currently like Regis Resources (RRL) with stops below $4.90, Newcrest (NCM) with stops under $23.80 plus a number of others into weakness.

MM is bullish gold and is looking to gain exposure through probably 2 miners in the near future.

My initial thought is to take small positions now and add if we get a decent opportunity.

Regis Resources (ASX: RRL) Chart

Newcrest Mining (ASX: NCM) Chart

Saracen Mining (ASX: SAR) Chart

4 We remain cautious Healthcare (heavily owned stocks)

Last week we again saw a heavily owned healthcare stock fall from grace with a large thud i.e. ResMed fell close to 24% from fresh all-time highs in just a few days. Over the last few months we have seen some other market favourites from this sector suffer their largest ever declines:

CSL LTD (CSL) -25.6%, Cochlear (COH) -30%, Ansell -29% and now of course ResMed (RMD) -24%.

We are currently now long RMD after its fall last week and Cochlear from its decline in October a touch early as it didn’t bottom out until a few weeks later. We believe these quality companies in the Australian healthcare sector are going to remain more volatile into 2019 / 2020 hence MM does not anticipate staying long for years to come, any decent strength by either of these stocks and we are likely to take profit.

ResMed (ASX: RMD) Chart

Cochlear (ASX: COH) Chart

5 The $US remains on track.

No change, MM remains bearish the $US targeting a ~3% decline in the short-term, back towards its late September lows. We’ve held this view for well over a month and things are now unfolding as expected especially following the dovish comments from the Fed. Last week we asked the question that if we are correct and the $US does continue to pullback should this cause a nice spike higher in Australian resources – we said yes and its certainly happened in a big way.

The $A has hit our mid / high 60c targeted area perfectly and we wouldn’t be surprised to see 80c in 2019 – MM remains very wary the crowded US earners trade this year, just as we have seen with the $US earning healthcare stocks discussed earlier.

$US Index Chart

The Australian Dollar ($A) Chart

6 We are considering a “bucket” of the market dogs.

We’ve discussed previously whether this year could be the year of the dog when it comes to stocks, as opposed to the pig for the Chinese New Year.

There are now a handful of stocks that have been smacked so hard that the elastic bank is potentially becoming too stretched on the downside:

1 - CYBG (CYB) $3.22 – CYB has fallen 51% since its August high, technically it looks interesting below / around $3 for a minimum 20% bounce.

2 – IOOF Holdings (IFL) $5.11 – IFL has fallen 65% since its late 2017 high, technically it looks interesting below / around $4 for a minimum 20% bounce.

3 – GUD Holdings (GUD)  $11.50 – GUD has fallen 32% since its August high, at current levels we expect a 9% bounce i.e. this buying opportunity has probably been missed on the spike below $11 last week.

4 – Invocare (IVC) $12.28 – IVC has fallen 44% from its late 2017 high, at current levels we expect a ~20% bounce i.e. still value in this instance.

Catching a fallen knife is a very dangerous game but we believe the above basket, plus a few additions that will probably present themselves, offer good risk / reward if we allocate a small % to each.

CYBG (ASX: CYB)  Chart

Invocare (ASX: IVC)  Chart

Our basket of stocks on our buy radar include:

Macquarie Group (MQG), NIB Holdings (NHF), Pact Group (PGH), Sims Metal (SGM), CSR Ltd (CSR), Northern Star (NST), Whitehaven Coal (WHC), Costa Group (CGC), Star Entertainment (SGR), ResMed (RMD), Vocus (VOC), CIMIC Group (CIM), gold stocks and our “dog” basket.

Obviously with our preferred scenario a reasonable correction for stocks in the next few weeks ideally we will be looking for optimum risk / reward buying opportunities into short-term market weakness.

Conclusion

We remain mildly positive medium-term targeting a choppy advance through Q1/Q2 however a decent pullback is well overdue- our best guess remains an eventual upside target is ~6000 after a test below 5800.

We continue to see MM being active moving forward with our “buyers hat” now in place as we’ve cashed up both portfolios.

Chart of the week.

We’ve discussed US indices throughout today’s report but many investors still think in terms of the Dow when they consider American stocks / indices.

Technically Friday showed a degree of exhaustion on the part of US stocks with the Dow rejecting fresh 2019 highs and closing near the days low.

MM is bearish the Dow from here targeting a minimum 1000-point correction.

US Dow Jones Index Chart

Investment of the week.

We’ve clearly been too fussy in our approach to the gold sector following its strong break out last week which looks to us in its early days.

We are bullish the Market Vectors Gold ETF while it can hold above last week’s low.

MM likes gold stocks even after their recent strength.

Market Vectors Gold ETF (GDX) Chart

Trade of the week.

The lithium sector has been a tough space for more than a year now, however this ones for Hans! PLS generated an excellent risk / reward buy signal on the close last week.

We are bullish PLS initially targeting 90c with stops below 62c – excellent 3-1 risk / reward.

MM likes PLS here with stops below 62c.

Pilbara Minerals (ASX: PLS) 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

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 2/02/2019

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