Market Matters Report / Market Matters Weekend Report Sunday 3rd June 2018

By Market Matters 03 June 18

Market Matters Weekend Report Sunday 3rd June 2018

Market Matters Weekend Report Sunday 3rd June 2018

May is now behind us and it didn’t live up to its negative reputation closing up +0.5% compared to the average return over the last 10-years of -2.2%. In our opinion an excellent performance considering the heavyweight banking sector closed down -3%, led by Commonwealth Bank (CBA) which on Friday actually made lows not seen since July 2013. Last month undoubtedly saw some market favourites get hammered including Treasury Wine (TWE) and  A2 Milk (A2M) which hurt market sentiment, while perennial disappointment Telstra (TLS) continued its 3 ½ year decline but the broad based index remains ok. Investors can easily interpret the local share market in 3 different ways, simply depends on how closely they focus on the daily news (noise) flow and their mood on the day:

  1. Bearish view - The ASX200 closed on Friday -2.5% below its May 15th high and is down -1.2% for the calendar year.
  2. Bullish view -The ASX200 remains +4.5% above its April lows, a pretty solid performance.
  3. Neutral view – The ASX200 remains rangebound between 5724 and 6150, with the mid-point at 5937 – less than 1% below Fridays close.

The market undoubtedly feels a bit “twitchy” but considering its been rallying for over 9-years its no great surprise – we saw what can happen with A2M and TWE when investors become too optimistic / complacent. At MM we are on alert for a significant downturn but the way stocks are shrugging off macro threats makes us believe the bull market is not done just yet e.g. BREXIT / Italy threatening the EU, Trump risking a global trade war, interest rates and inflation rising plus of course we have North Korea for some extra unneeded noise. The April Bank of America’s fund manager survey showed their allocation to stocks at an 18-month low, led by their positions in technology shares at a 5-year low – this doesn’t feel like a top,  these guys need to be squeezed back into the market first.

  • At MM we remain mildly bullish the ASX200 in the short-term, ideally targeting the 6250-area / around 4% higher.

The seasonal factors are something we watch carefully at MM, especially when they produce reliable statistical data with low deviations but we are not slow to acknowledge when “this year feels different”, :

  1. The average return for January over the last 10-years is -1% and in 2018 we closed down -0.5% - an ok correlation.
  2. The average return over the last 10-years for February-April is +5.2% but in 2018 even after a stellar April we closed down -0.9% - a clear miss.
  3. The average return for May over the last 10-years is -2.2% but this year we closed up +0.5% - a clear miss.
  4. The average return for June over the last 10-years is -2.5%, time will obviously tell the tale in ~4-weeks’ time .

We often use a markets seasonality as a trigger / catalyst to buy / sell a stock, or underweight / overweight our market exposure BUT the fundamentals / technical picture must align first. Most of us would agree that 2018 is running a different path primarily because of the banks / royal commission hence we are not putting as much weight behind seasonal influences as we have in past years.

ASX200 Index Chart

The combination of EOFY and a mature bull market are testing many investors resolve / nerves as stocks slip in and out of favour with enormous regularity. Last week again saw serious volatility “beneath the hood” in the ASX200 with 6 stocks moving by 5% or more, plus an additional 10 ending the week more than +/-4%.

  • We remain committed to our view that the local market is looking for an important top in the coming months but ideally we will rally ~4-5% first.

From a technical perspective the ASX200 Accumulation index chart below looks good so far! Its targeting a top in the coming months / quarters, only a few % above Fridays close. Hence its very important to understand our thoughts at the moment:

  • MM is holding a 17% cash position in our Platinum Portfolio – note 3% of this is being held in $US through an ETF.
  • MM will have no hesitation increasing this cash position as / when we feels it appropriate and / or initiating bearish positions over the market via ETF’s.
  • MM is and will continue to be very cautious averaging our existing positions that are “under water”.

Readers may be getting a touch bored reading these numbers but we must remain focused - markets are cyclical and go and up down e.g. since the post GFC low the ASX200 Accumulation Index has corrected 20.4% and 17.6%. These corrections have occurred roughly once every 3-years and the latest rally since the 2016 low is approaching 2 ½ years in duration, another reason for our caution.

ASX200 Accumulation Index Chart

It’s now been almost 4-months since the panic in global equities caused by huge stops surging through the volatility gauges, which were initially set off on concerns around rising global bond yields. Since the GFC we’ve seen 6 major spikes in market uncertainty / “Fear” that are highlighted on the following chart. These spikes have generally occurred from the relatively complacent 10-15% region with an average of over a year between each, hence don’t be surprised if the market now mulls through much of 2018 in a quiet fashion – it’s been the norm over the past ~10 years.

The US Fear Index / Volatility (VIX) Index Chart

Global Indices

US stocks remain strong in the bigger picture with the broad based Russell 3000 less than 4% below its all-time high while the tech heavy NASDAQ is knocking on its milestones door, now only 1.5% away. The small-cap based Russell 2000 is already surging to fresh all-time highs, we don’t believe this is a classic case of divergence, our leaning is the others will play catch up at some point.

  • We remain bullish US indices targeting fresh all-time highs, around 5% higher.

Interestingly if we are going to witness a major top similar to the last 3 in characteristics the Russell 3000 should trade up into the 1700-1800 region, probably in July-September, with the next quarter of low range (others circled in purple below) generating alarm bells / sell signals – unfortunately its rarely that simple but we will be watching closely.

US Russell 3000 Chart

The NASDAQ looks poised to surge to fresh all-time highs this month, and potentially next week. As we’ve discussed previously “picking tops” is a very tricky game and while we have our targets discussed earlier simple risk / reward is our favourite method of investing when we use technicals, 2 are staring me in the face this morning:

  1. Bullish – buy the NASDAQ on Monday morning (US time) targeting close to 7500 with stops below 6960 – excellent 3:1 risk reward, in the direction of the trend.
  2. Bearish – If / when the NASDAQ breaks back above 7200 sell failure back below 7050 targeting 6250 and running stops above the high – exactly the same set up that unfolded in March before the 12% correction into April.

US NASDAQ Chart

1 Our best decisions recently have been avoiding averaging losers

Most investors have heard the phrases “don’t catch a falling knife” and “run your profits and cut your losses” but this financial year has been without doubt the biggest demonstration of these 2 investing “laws” that I can remember.

Last weekend we touched on how tough / tricky the market has felt in 2018 and I feel one of the reasons for this is fund managers are struggling to find value in local stocks and hence simply keep pushing quality companies like CSL and Cochlear higher and higher with the perception they are relatively low risk – a potentially dangerous game as we witnessed last week is some well held names.

One of my personal favourite investing catch cries is “look after your losses and the profits will look after themselves” which is actually very similar to the ones mentioned earlier. In 2018 some of the best moves MM has made has been backing off from the planned averaging of  our losers when they sank against us – they just felt wrong. The following 3 are probably the best examples:

IOOF Holdings (IFL) – we initially planned to add to our IFL position under $10 but the washout from the royal commission was and felt more damaging to the stock. We believe IFL is cheap at current levels but the current negative sentiment continues to hold us back from adding to our holding.

IOOF Holdings (IFL) Chart

Telstra (TLS) –TLS has been the ultimate wealth destroyer over recent years but were sticking to our guns that its gone too far. We initially planned to average our holding around $3.20 but so far patience has been rewarded.

MM likes TLS into weakness and it is now trading below $2.80 – a level we previously flagged to average our holding – which we may well do.

Telstra (TLS) Chart

Westpac (WBC) – WBC is a proxy for how we’ve played the banks in 2018, unfortunately only ok is the result to-date. MM has been underweight the banking sector for much of the year but we have underestimated the fall out from the banking commission. We also remain concerned over personal debt levels in Australia and subsequent knock on effect for bank earnings hence are activity has been relatively conservative.

We currently hold 27% of the MM Platinum Portfolio in the major Australian banks compared to their current market weight of 21% i.e. we’ve fired the trigger too soon on increasing our position.

Although we believe the local banks may fall a touch further, we continue to think they are presenting value at today’s prices hence I’m afraid we’re going to be boring and say they are a “hold” – we are looking to average our CBA position a few % lower.

Westpac (WBC) Chart

2 Investors memories are too short-term

We’ve discussed human psychology a number of times in 2018 but unfortunately investors regularly get caught up in the markets short-term sentiment.

When we bought A2 Milk into recent weakness it felt like many subscribers followed us in, probably as A2M has been a “hot” stock of recent years - unfortunately we are currently down a few % on the latest purchase.

However if we sent out an alert that we were buying say a bank and especially TLS I’m confident it would be dismissed by many subscribers. We should all remember that BHP was totally friendlies at the start of 2016 but its subsequently doubled.

The message remains be open-minded, things look the worst around market bottoms.

CBA has now fallen almost 30% since Q1 2015 when we were ironically criticised for selling our holding. Australia’s largest company is now trading on a PE of 12.5x  while yielding 6.26% fully franked. We believe the brave who accumulate CBA into current weakness will outperform the index over the coming years – MM plans to average our CBA position a few percent lower if the opportunity arises.

A2 Milk (A2M) Chart

BHP Billiton (BHP) Chart

3 The elastic band keeps stretching.

The resources v banks elastic band has stretched further than we expected but as we said earlier 2018 has been a year of trend continuation. For most of the last 5-years WBC has traded at a premium to BHP but today its reverted by over $5.

At MM we can easily see ongoing relative strength by BHP compared to WBC but resource stocks are historically very cyclical in nature hence we question how things will look in say another 5-years’ time.

Economically interest rates and inflation both appear to be rising which generally assists both sectors assuming it remains controlled. The Chinese economy remains strong but the exponential growth in infrastructure is surely behind us, not perfect for BHP. For the banks moving forward they’ve been cleaned up, so hopefully no skeletons will be found in their closet for a long time, the big question is will technological advancements reduce costs and generate growth in profitability for the banks or will it lead to increased competition – probably a bit of both.

At this stage we will invest in both sectors on their individual merits at the time but moving forward we do believe there will again be a time when we want to hold zero exposure to resources, as we basically did between 2014-6.

Westpac (WBC) v BHP Billiton (BHP) Chart

4 How to invest when you feel like “vomiting”.

One thing that we are proud of at MM is our transparency in owning up to mistakes, we’re all human and have made them, and will inevitably make more. Earlier we looked at 3 of our positions causing us financial pain on paper and it made me think about 2 other positions that have been shockers for MM in the last 5 years.  Importantly we consider how MM “played them” looking to improve moving forward – one of our main goals at MM is continual improvement both in service and results.

Firstly one of my personal favourite comments around trading / investing on this topic was by Martin “Buzzy” Schwartz in the original Market Wizards book – it went along the lines of “when I have a position that’s making me want to vomit I often double up, place a stop and walk away”. This approach makes sense because as we discussed earlier stocks / markets usually look and feel their worst around a bottom. Moving onto our 2 tales of woe:

1 Platinum Asset Mgt (PTM) – We sold our position in PTM around $4.40 in May 2017 following the company changing their fee structure in a manner we didn’t like. We took a loss of ~15% on our latest purchase in the February. The stock subsequently fell another 4% before doubling, a big ouch. This gives me confidence not to panic out of our positions in IFL and JHG, the Australian Superannuation business is not going away and while the sector is clearly on the nose courtesy of the royal commission we feel its providing a buying opportunity longer-term i.e. the sector’s cheap.

2 Vocus (VOC) – we dumped VOC in April 2017 around $3.80, jeez it felt good waking up the next day not holding that stock in our portfolio! This was by far our worst experience at MM although the stock did then drop another 50%. We did add to our position “Buzzy” style but in hindsight failed to utilise an appropriate stop i.e. our loss was too big on one holding.

Hence we can look at our current positions that are under water in different ways but if we do add using a stop to manage risk in case we are wrong makes sense.

Platinum Asset Mgt. (PTM) Chart

Vocus Communications (VOC) Chart

5 EOFY is upon us

The EOFY is upon us and one of our trading ideas of recent weeks has played out well with DMP rallying strongly, hurting the huge 16.2% short position along the way. We’ve previously touched on tax loss selling and book squaring into this months end but we thought today we would apply it specifically to 2 positions currently in the MM Platinum Portfolio:

1 Independence Group (IGO) $4.97 - the nickel and gold producer has a large 9.9% short position which has enjoyed the recent 20% correction in the stock but last week’s strong 10% rally felt like some of these shorts might be getting nervous into EOFY as the underlying nickel price challenges its 2018 highs, last time that occurred IGO was flirting with $6. We continue to like the nickel space and can easily see a 10% squeeze in IGO this month when we will probably take some $$ off the table.

2 Orocobre (ORE) $5.63 – the lithium company has a large 11.7% short position as hedge funds bet against the value of the new age battery stocks. This latest foray into the lithium space has been a rollercoaster style ride illustrating our opinion that the easy money has gone from the sector and the companies now need to start making some money. Our position is close to breakeven and if we see any strength / short squeeze into months end we are again likely to cash in our position - a stock that’s regularly swinging 20% per month is likely to provide plenty of opportunities to re-enter at cheaper levels.

Domino’s Pizza (DMP) Chart

Independence Group (IGO) Chart

Orocobre (ORE) Chart

6 Amazon’s move is a shot in the arm for Australian retail

Amazon have announced they will no longer ship to Australia except from their domestic site as of July 1st when GST will be charged on purchases below $1000 from overseas sites. Unfortunately for local consumers the Australian offering is only around a tenth of the international sites plus of course prices have gone up by 10%. Scott Morrison has levelled the playing field for Australian businesses which we endorse, especially considering how many Australians are employed by retail businesses. Lets considers the huge $$ involved:

  • Australians spend $25bn per year on-line with well over 20% of this on overseas platforms.

Hence there’s now over $5bn in sales that local retailers can fight for without being unfairly disadvantaged. We have no doubt this will only be a bump in the road for Amazon but it does open the window for the smart / nimble Australian operator to show their quality.

At MM we believe there’s a huge amount of water to go under the bridge before we see the clear winners in the rapidly evolving retail space but 2 things are working in the favour of local heavyweights Harvey Norman (HVN) and JB HIFI (JBH) in the short-term, one is the GST news above and the second is the large short positions in both stocks i.e. JBH 14.58% and HVN 8.26%. We can envisage short squeezes in the near future:

  • We particularly like HVN targeting $4.40 with close stops under $3.45 – exciting risk / reward.

Harvey Norman (HVN) Chart

7 Is it time for a punt on Star Entertainment (SGR)?

After discussing a few of our tougher decisions / positions earlier In this report its nice to touch on one we got correct! MM took a healthy 20% profit on SGR at $5.65 in mid-2017, it did rally a bit higher as is usually the way but its since corrected -23% from its 2018 high. The question we ask, is it time to buy back in? Historically casinos show positive growth during booms and no growth during recessions – not a bad mix.

Australia is potentially facing tough economic times with household debt sitting at one of the highest levels globally and our safety net, property prices, falling for the first time since many can remember – not perfect for discretionary spending like a night at the casino although Lotto does well when moneys tight.

  • SGR is not particularly cheap trading on an est. P/E  of 17x while yielding 3.3% fully franked.

MM remains very keen the tourism space and SGR clearly fits the bill, especially with visitors from China.

  • We are bullish SGR over the years ahead but the short-term momentum suggests lower prices ahead – i.e. accumulate into weakness but not just yet.

Star Entertainment (SGR) Chart

Conclusion

Again no major changes following last week’s continued market drift:

  • We remain net positive equities for the coming weeks (just) with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position and are firmly wearing our “sellers hat”.
  • We will consider some more active positions on the long side especially with EOFY looming fast. 

“Shopping List”

  • None long-term, , we are wearing our sellers hat but we are considering more active ideas like HVN and FMG below.

“Selling List”

  • General selling is / when the ASX200 challenges the 6250 area.
  • Webjet (WEB) above $13.
  • Independence Group (IGO) and Orocobre (ORE) as discussed earlier.

Standout technical chart (s) of the week

We like to often ask the question, what if were wrong? In the bigger picture for global equities we often turn to the NASDAQ simply because its been the market leader since the GFC. In this case the picture actually looks different to the S&P500:

1 The NASDAQ looks like its going to make fresh all-time highs followed by a 1000-point / 13% correction.

2 The S&P500 looks like it may make a fresh all-time high followed by a +20% correction.

The important point here is if we are wrong and NASDAQ path unfolds as investors we can still remain comfortable selling / reducing market exposure into fresh all-time highs.

US NASDAQ Chart

US S&P500 Chart

Trading Opportunities on our radar

Fortescue Metals (FMG) has been our most successful investing vehicle for the Platinum Portfolio since our inception with zero losses to-date. This time the risk / reward looks pretty good at almost 3:1. 

  • Buy Fortescue Metals (FMG) targeting ~$5.30 with stops below $4.600 – excellent 3:1 risk / reward.

Fortescue Metals (FMG) 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.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . 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 2/6/2018. 3.00PM.
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