Market Matters Report / Market Matters Weekend Report Sunday 3rd September 2017

By Market Matters 03 September 17

Market Matters Weekend Report Sunday 3rd September 2017

Market Matters Weekend Report Sunday 3rd September 2017

Last week the local market remained volatile on the stock level as reporting season came to an end but yet again the ASX200 ended with a net change of less than 0.5%. The banks remained weak along with consumer services, financials, healthcare, media, retail and telco’s but further strength from our large cap resources stocks, assisted by the utilities, insurance and real estate sectors reigned in any major weakness for the index. The ASX200 closed marginally lower for August, down only -0.1%, a better performance than the average -0.87% that this poor seasonally month has endured since the GFC.

The list of major winners / losers for the week shows smaller moves on the extremes than we’ve been used to for most of August, this was to be expected as reporting season wound up:

Winners : Treasury Wines (TWE) +4.1%, Resmed (RMD) +4.3%, Medibank Private (MPL) +6.6%, Northern Star Resources (NST) +5.3% and Spark Infrastructure (SKI) +5.4%.

Losers : Domino’s Pizza (DMP) -4.8%, Tatts Group (TTS) -5%, Coca-Cola Amatil (CCL) -4.6%, Ramsay Healthcare (RHC) -8.7%, Boral (BLD) -5.7%, BlueScope Steel (BSL) -4.4%, JB Hi-Fi (JBH) -7.2%, Harvey Norman (HVN) -10.7%, Telstra (TSL) -6.4%, Vocus (VOC) -7.3% and QANTAS (QAN) -5.3%.

Let’s yet again look at the ASX200’s “trading patterns” which continue to contain the ASX200 as we commence September: 

  1. Short-term Neutral Pattern between 5629 and 5836 – 13 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 30 weeks to-date.
  3. September’s range to-date is 5700-5734 i.e. 34-points.

When we stand back and look at the ASX200 since its May 5956 top it’s not that pretty on a simplistic level, having dropped 327-points fairly quickly the market has proceeded to track sideways for almost 3-months, accepting the lower levels, and not really challenging a break back over the 5800 resistance area.

Conversely while technically MM is ideally still targeting correction towards the 5500 area i.e. ~4% lower in the weeks ahead we remain conscious that the local market has experienced good buying into any decent declines.

ASX200 Monthly Chart

September has now arrived and its seasonally also a pretty poor time for stocks. 

  1. The average return for September since the GFC is -0.44%, not good considering the strength of the bull market since March 2009.
  2. Twice during that period the ASX200 has closed down over -5.5%, although it has also twice closed up over +4% suggesting index volatility may be close at hand.
  3. Our banking sector usually drifts for the first 3-weeks of September prior to rallying well over 4% into the end of October i.e. as investors get positioned for Novembers chunky dividends.
  4. For the last 50-years September has historically been the weakest month of the year for the US S&P500, returning only $71 for a $100 investment, compared to December, the best month at $204.

Hence while our market has remained resilient in August this September has a high probability of providing at least some weakness for the bears.

Global Indices

No change, in the bigger picture while we believe the bull market for equities which began back in March 2009 is approaching completion we still don’t believe it’s yet time to jump ship. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s).

However we remain confident that US stocks are looking for / have found a decent top at least for now – note we always have to give bull markets the benefit of the doubt that they can push higher just one more time but on balance this is not our preference.

NB We have remained bullish the Russell 3000 since early 2016 but note our long-term target of ~1550 is approaching reasonably fast, hence we are being particularly careful with purchasing stocks as this 8-year bull market slowly reaches maturity – our current best guess at a major top would be early 2018.

US Russell 3000 Quarterly Chart

Medium-term the US stock market has played along with our forecast (s) for the vast majority of 2016/7, if this continues the recent consolidation / pullback has further to play out with our target ~2350 for the S&P500 almost 4% lower.

The tech NASDAQ chart continues to remain the clearest pattern to us presently and were still targeting ~5575 for this volatile index i.e. 6.8% lower. For this negative view to prove correct we would not want to see US stocks close higher next week.

US S&P500 Weekly Chart

US NASDAQ Weekly Chart

No real change for European stocks which have been in correction mode since May, the German Dax currently sits 6.2% below its 2017 high. We are only targeting ~11,700 before we would be looking for “backfoot” buying opportunities i.e. we only see another 3.6% downside before we become neutral / bullish.

In the bigger picture we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

Asian Indices traded strongly last week led by the Hang Seng which made fresh highs for 2017, however we continue to see strong resistance around the 28,000 area and would prefer to sell strength as opposed to buy the current breakout.

Hang Seng Weekly Chart

Resources

Australian large cap resource stocks propped up the ASX200 last week with BHP +2.8%, RIO +1.4%, NCM +4% and S32 +3.2%. However we warn subscribers that these stocks are now rapidly approaching our targets from mid-2017. We are only looking for both BHP and RIO to rally ~3.5% higher before we will be sellers and potentially become bearish. With BHP looking set to open around $27.70 on Monday there is a strong possibility MM will continue to lighten our resources exposure into strength, in particular BHP and AWC.

It’s important to remember that resource stocks depend on cyclical commodities and are price takers, hence if the commodities like iron ore and copper which have been very strong recently fall the shares in the respective sectors are likely to follow suit.

Also, the emerging markets index which is highly correlated to our resource stocks while still bullish, medium-term looks ready for a decent correction having rallied ~30% without a pullback – there is no sell signal but it’s a warning.

BHP Billiton (BHP) Weekly Chart

Emerging Markets MSCI ETF Monthly Chart

Banks and interest rates

On Friday night US employment disappointed the market but after a knee jerk lower US bond yields rallied and closed close to their highs for the week, a bullish sign – we may have seen the lows for US 10-year bond yields in 2017.

No change, our view remains that US interest rates will again start to move higher in weeks / months to come and if this proves correct banks should benefit, of course assuming the rally in rates is orderly.

When we consider the September seasonality of the local banking sector two thoughts spring to mind from the move by US bonds on Friday:

1. If US bonds are about to fall / interest rates rally we think the recent bounce in the “yield play” sector e.g. Transurban / Sydney Airports (SYD) is close to completion.

2. If the local Australian banks decline into the 3rd week of this month they will become excellent risk / reward buying.

US 10-year bond interest rates Weekly Chart

US S&P500 Banking Index Weekly Chart

Retail plus Coles and Woolworths

A lot has been talked about Amazon’s potential damage to Australia’s $300bn retail industry but we now feel it’s going too far i.e. if they capture say 10%, more than in the US, that leaves a healthy $270bn industry, hardly crumbs at the table even with the average Australian more indebted than ever before in history. We are just going through a period of rationalisation and inefficient / non-competitive businesses will undoubtedly fall by the wayside but some will survive and flourish and the current decline in stock prices will undoubtedly present some opportunities e.g. over the last year JB Hi-Fi (JBH) is -20% and Harvey Norman (HVN) -26%.

Harvey Norman is again catching our eye after the 10.7% whack they received last week following their recent profit report. While the momentum and sentiment is clearly against both the sector and the stock we would be buyers again of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

We have discussed our preference in the short-term for Wesfarmers (WES) over Woolworths (WOW) during recent reports and this played out again last week with WES rallying +1.9% while WOW fell -1.1%.  WES recently reported a large increase in profit and increased its dividend by 20% with the main driver being their coal division which enjoyed record earnings over $400m. However at MM we are sceptical that the almost 300% appreciation in coal since early 2016 will continue, in fact we are rapidly becoming bearish.

On a fundamental level the International Energy Agency recently came out and stated that on a global level clean energy was now the cheaper alternative, not good news for coal.

Also, WES often is put in the basket of “yield play” stocks that will struggle if our view on US bond yields proves correct.

WES looks a sell around the current $42.50 area.

Coal Index Weekly Chart

Wesfarmers (WES) Weekly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week: 

  1. Banks – We like the banks but our 37.5% exposure is currently enough, if we added to this position it would not likely be for ~3 weeks..
  2. Consumer Services – Aristocrat (ALL) ~$20.
  3. Diversified Financials – IOOF Holdings (IFL) if it again pulls back to around $10.85.
  4. Energy – No interest currently.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and now we are long HSO, that’s enough.
  7. Resources – Were almost sellers, not buyers.
  8. Real Estate – Another sector we are not keen on but Lend Lease (LLC) under $15.50 looks great.
  9. Telco’s – We are buyers of Vocus (VOC) under $2.30 and Telstra (TLS) under $3.50 as trades.
  10. Retail – We like Harvey Norman (HVN) under $3.50.

Potential “Sells”

Three of our MM Platinum Portfolio stocks are close to / at our current sell targets:

1. BHP Billiton (BHP) over $28.

2. Alumina (AWC) over $2.20.

3. Wesfarmers (WES) over $42.

Standout technical chart (s) of the week

Market darling Ramsay Health Care (RHC) fell almost 9% by the end of the week, following a disappointing profit report on Thursday, even after the stock managed to bounce over $2 / 3% from its lows. The stock is still trading on a relatively rich valuation of 23.5x for 2018, compared to 17x for Healthscope.

Many investors are in the dangerous comfort zone for RHC even though it’s now $17 / 20% below its 2016 high.

We like RHC as a business but will only show interest under $60.

Ramsay Health Care (RHC) Monthly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sells” earlier in the report.

We are looking to liquidate our resources exposure a few % higher but are unlikely to add to our banking position for at least a 2/3 weeks. In general we are still keen to buy the index / market ~5500.

ASX200 Monthly Chart

Trading Opportunities on our radar

Yet again have 2 trading situations on our radar and although one is  repeat from last week and a bit scary we like it technically:

  1. Sirtex (SRX) – SRX is a good buy under $15.50 targeting ~$18 with stops under $15 i.e. great 5-1 risk / reward.
  2. Vocus Communications (VOC) – VOC looks a good “high risk” trade ~$2.25 but stops are hard to assess hence we advocate a relatively small position.

Sirtex (SRX) Weekly Chart

Vocus Communications (VOC) Daily Chart

Summary

We remain short-term bearish the ASX200 ideally targeting a correction back towards the 5525 support area, however we are aware that the local market is demonstrating excellent resilience into any weakness leading to a slightly reduced conviction with this view.

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 02/09/2017. 4.00PM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here