Market Matters Report / Market Matters Weekend Report Sunday 4th December 2016

By Market Matters 04 December 16

Market Matters Weekend Report Sunday 4th December 2016

Market Matters Weekend Report Sunday 4th December 2016

Overview

Last week the ASX200 pulled back 1.2% which is an overall solid effort after the explosive 468-point (9.3%) rally since Donald Trump's win of the White House. The banking sector, which we remain bullish, still managed to advance 1.5% but the energy sector won the week gaining 1.6%, the main drags on the market were the large resources stocks with BHP -5.6% & RIO - 6% plus the Telco sector which was savaged 11.3%. There are a number of fascinating topics unfolding at present and today we will cover those that we are monitoring closely. We have now entered December and our Christmas tree goes up today – with two very excited kids ready to decorate it. Investors regularly talk of the "Santa Rally" but does it mean you should just buy the market on the 1st of December?

  1. Seasonally we often see a pullback into mid-December, for both local and US stocks, prior to an explosive rally to finish off the calendar year.
  2. Over the last 20-years the ASX200 has rallied on average 1.8% for December, closing in positive territory 75% of the time.
  3. Over the last 20-years in an election year US stocks have added to November's gains by rallying in December on average ~1.8%.
  4. Over the last 26-years December has been the best month for US stocks with an average gain of over 1.8%.

The above statistics are clearly powerful with the next 4-weeks looking like a great time to maintain solid exposure to the stock market. Ideally we will see a December low in around the next 10-days but investors / traders should remain open-minded when to buy the market for a potential "Santa rally". Ideally for MM we will see a test of ~5400 by the ASX200, prior to a test of 5600 minimum.

ASX200 Daily Chart

Probably the largest market thematic over recent weeks has been the sharp rise of bond yields, both locally and overseas. The win by Donald Trump has accelerated the gains because of his promises of aggressive spending (fiscal stimulus) but interest rate had already been rallying since August – it seemed that trump was just the ‘can of petrol’ that really saw the theme ignite. There are some very important points that should be clearly understood at this juncture.

  1. In terms of the long-term bear market for interest rates the recent 1% rally in the yield of Australian 10-year bonds is hardly a "blip" considering they were at 14% in the late 1980's and even around 6% after the GFC.
  2. Long-term bond rates are more important than short-term RBA rates e.g. last week Westpac and CBA raised fixed home loan rates by up to 0.6% with no change by the RBA.
  3. We believe that interest rates have hit a major bottom, the 35-year bear market is over, this culminated by the panic buying of billions of dollars of global bonds paying an unfathomable negative yield.
  4. If we are correct and the 35-year bear market for interest rates is over then asset prices will eventually come under significant pressure - we are forecasting a ~25% correction by US equities over the coming years.
  5. The tipping point is often quoted at 5%, if you can get 5% risk free from money in the bank why take the risk of buying stocks? Local bank 3-year term deposits are now paying over 3% so no panic just yet.

If we are correct and interest rates are going higher the recipe is in place for a major correction to the bull market which stocks have enjoyed since early 2009 – the real questions is all about when to get off the train!

Australian 10-year bonds generic yield Monthly Chart

History shows us that US stocks usually rally into the start of an interest rate hiking cycle but then fall 3-5% in the following quarter. The market is pricing in a 100% probability of a rate hike by the Fed on December 14th. The statistics around a potential Santa Claus rally are strong but we definitely will be looking to reduce our market exposure for the first quarter of 2017, this statistic adds to our overall caution for next year.

Interestingly we are currently holding two stocks in our portfolio that are actually exactly what we do NOT want exposure to into 2017, rising interest rates, i.e. Transurban (TCL) and Westfield (WFD). Both of these positions are showing a paper profit and if they follow their equivalent sectors in the US they should open up on Monday. For those that were confused with these purchases they were simply looking to take advantage of something that we believed had fallen too hard too fast, our current target for these two stocks are $10.80 and $9.50 respectively - we will not be patient with these positions in coming weeks as we definitely intend to be sellers of both holdings before 2017.

Stock Market Performance as interest rates rise Daily Chart

 

Some "Value investors" have endured a very tough run since September with many of their favourite stocks tumbling ~30%, that's crash style numbers, e.g. REA Group (REA), Healthscope (HSO), Carsales.com (CAR) and iSentia (ISD). In simple terms money managers have been caught by the recent strength in banks and large resource stocks, which they were underweight, leading to an aggressive rebalancing which has smacked many quality mid-cap companies. We believe this trend may continue through December as fund managers want their recent actions to look good at the end of the calendar year. We will watch this so called named value sector if further weakness unfolds this month e.g. ISD under $2.30.

iSentia (ISD) Daily Chart

The ongoing selling of stocks trading on large valuations unfolded aggressively on Friday after Bellamys (BAL) disappointed the market – with their Chinese facing product lines struggling. Market consensus was that 2017 revenue would rise 45% to $375m but they announced a confusing update stating that revenue for the first half of 2017 would only be $120m. The update was poor combined with personal selling of stock by the Chairman and Chief Executive earlier this year was enough for the market to jump ship on mass sending the stock down over 40%. We see nothing in these numbers to attract us to the stock short-term, they will take many months to regain the markets confidence.

Overall the China story has been a tough space recently, whether it be Blackmores (BKL) -41% for the year, or Crown Resorts (CWN) tumbling when the Chinese government clamped down on junkets and arrested staff. The simple problem is China facing stocks have been priced expensively for the potential growth with no allowances in the price for Chinese regulatory risks. There are better places to be invested for us at this point in time.

Bellamys (BAL) Weekly Chart

Standout technical chart (s) of the week

The local market is unfolding perfectly on both a seasonal and Elliott / Symmetry Wave basis. We are buyers of the SPI around 5410, which coincide with 5405 for the ASX200, stops will be 40-points lower with a target of over 5550 for the ASX200 i.e. excellent risk / reward over 3:1.

December Share Price Index (SPI) 60-mins Chart

Summary

Our view remains that US and local stocks will rally over the coming weeks prior to a decline in the first quarter of 2017. We intend to significantly increase our cash holdings towards the end of this month / early 2017.

Our favorite sectors locally into 2017 are the Financials (including banks), $US earners and Healthcare which is still not yet listening to us. We are not keen on Europe at present as more disgruntled elections may see the end of the EU in our opinion.

What Matters this week

The ASX200's is set to open up 20-points on Monday, short-term we can see consolidation around the 5450 area, ideally with a spike down to test 5400.

Potential Investing opportunities for the coming week(s)

We are only holding 11% in cash after taking profit on half our ORG position but we are happy buyers of situation stocks for a rally into 2017. On our radar at present is PRY, ISD, REA and HSO if they experience weakness.

Potential Trading opportunities for the coming week

On the index front we still especially like the Hang Seng and Japan over coming weeks.

For the index traders we think the market will again rally into Christmas but be patient, a pullback towards 5400 is anticipated for the ASX200 - see Standout chart of the week.

* Watch out for trading alerts*

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 25th November is below. An updated portfolio will be provided on Monday afternoon

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-25th-november-2016/

We are currently holding 11% in cash after taking a nice profit on 50% of our Origin position..

Australian ASX200

The ASX200 pulled back last week after its strong 470-point rally, we expect 1-2 weeks consolidation prior to further gains.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

 

Chart 3 – ASX200 Daily Chart

 

Chart 3a – December Share Price Index SPI) 60-mins Chart

Chart 4 ASX200 Banking Index Monthly Chart

Chart 5 US S&P500 Banking Index Monthly Chart

 

Chart 6  Volatility (VIX) Index Weekly Chart

 

Interest Rates

Short-term interest rates in the US have moved sharply higher since the Trump win, beware we believe this move higher for interest rates has only just commenced. However short-term we can see some consolidation at current levels e.g. Australian 3-year bonds have reached psychological and technical 2% support area.

Chart 7a – Australian 3-year bonds Weekly Chart

 

Chart 7b – The US 10-year Interest Rate Monthly Chart

Chart 7c – The US 2-year Interest Rate Monthly Chart

American Equities

As we all know the US stock market has surged since Donald Trump's victory with the Dow, Russell 2000 & Russell 3000 making fresh all-time highs. Eventually we expect all US indices to play catch and achieve fresh highs, once this has occurred we will be far more cautious stocks, our best "guess" at present remains ~8-10% higher. Seasonally US indices should now have a rest for 1-2 weeks before rallying strongly into the end of 2016 - very similar to the local ASX200.

Chart 8 – Dow Jones Index Monthly Chart

 

 Chart 9 – Russell 3000 Quarterly Chart

 Chart 10a – US S&P500 Index Monthly Chart

 

Chart 10b – US S&P500 Index Daily Chart

Chart 10c – US S&P500 Healthcare Index Quarterly Chart

 

 Chart 11 – NYSE Composite Index Monthly Chart

 

Chart 12 – Russell 2000 Index Monthly Chart

 

 Chart 13 – US NASDAQ Index Monthly Chart

 

Chart 14 – The Canadian Composite Index Monthly Chart

 

European Indices

European indices remain tricky and neutral, they have continued to struggle even after the Trump victory which sent most global indices soaring. The fundamental risks to the future of the EU are growing fast and we continue to advocate avoiding the region.

Chart 15 – Euro Stoxx 50 Index Monthly Chart

 

Chart 16 – UK FTSE Index Weekly Chart

 

Chart 17 – Spanish IBEX Index Monthly Chart

 Chart 18 – German DAX Index Monthly Chart

 

Asian & Emerging Markets Indices

The Hang Seng index remains very strong looking poised to rally 8-10% while the Nikkei closing over 17,500 is also bullish targeting ~22,000 i.e. 20% higher!

Conversely the Emerging Markets ETF have remained bearish since the US election.

Chart 19 – Hang Seng Weekly Chart

 

Chart 20 – China Shanghai Composite Index Weekly Chart

 

 Chart 21a – Emerging Markets MSCI ETF Weekly Chart

 

 Chart 22 – Japanese Nikkei 225 Index Monthly Chart

 

Australian Stocks

The Australian stock market consolidated recent gains last week, seasonally we should see another 1-2 weeks of sideways chop before the Christmas rally kicks off.

Chart 23 – BHP Billiton ADR ($US) Monthly Chart

 

Chart 24 – BHP Billiton (BHP) Weekly Chart

 

Chart 25a – Woodside Petroleum (WPL) Monthly Chart

 

Chart 25b – Origin Energy (ORG) Weekly Chart

 

Chart 25c – Oil Search (OSH) Weekly Chart

 

 Chart 26 – RIO Tinto Ltd (RIO) Weekly Chart

 

Chart 27 – Fortescue Metals (FMG) Monthly Chart

 

Chart 27b – Independence Group (IGO) Weekly Chart

 

Chart 28 – Newcrest Mining (NCM) Monthly Chart

 

Chart 29 – Regis Resources (RRL) Weekly Chart

 

Chart 30 – Barrick Gold (US) Monthly Chart

 

Chart 31 – Market Vectors Gold ETF Monthly Chart

Chart 32a – Commonwealth Bank (CBA) Quarterly Chart

 

Chart 32b – Commonwealth Bank (CBA) Daily Chart

 

Chart 33 – ANZ Bank (ANZ) Weekly Chart

 

Chart 34 – Westpac Bank (WBC) Daily Chart

 

Chart 35 – National Australia Bank (NAB) Weekly Chart

 

Chart 36 – Macquarie Group (MQG) Monthly Chart

 

Chart 37a – Bank of Queensland (BOQ) Monthly Chart

 

Chart 37b – Bendigo & Adelaide Bank (BEN) Monthly Chart

 

Chart 38aAMP Ltd (AMP) Monthly Chart 

 

Chart 38b – Henderson Group (HGG) Weekly Chart 

 

Chart 39a – Sydney Airports (SYD) Monthly Chart

 

Chart 39b – Transurban Group (TCL) Monthly Chart

Chart 39c – Mantra Group (MTR) Daily Chart

Chart 40 – Suncorp Group (SUN) Monthly Chart

 

Chart 41 – Insurance Australia (IAG) Monthly Chart

 

Chart 42 – QBE Insurance (QBE) Monthly Chart

 

 Chart 43 – Wesfarmers Ltd (WES) Weekly Chart

 

Chart 44 – Woolworths Ltd (WOW) Weekly Chart

 

Chart 45a – Seek Ltd (SEK) Monthly Chart

 

Chart 45b – REA Group (REA) Monthly Chart

Chart 45c – iSentia Group (ISD) Daily Chart

Chart 46 – Telstra Corp. (TLS) Monthly Chart

Chart 47 – Vocus Communications (VOC) Weekly Chart

 

Chart 48 – TPG Telecom (TPM) Weekly Chart

 

Chart 49 – Westfield Corp. (WFD) Monthly Chart

 

Chart 50– CSL Ltd (CSL) Monthly Chart

 

Chart 51 Ramsay Healthcare (RHC) Monthly Chart

 

Chart 52– Healthscope (HSO) Weekly Chart

 

Chart 53 - Ansell (ANN) Monthly Chart

 

Chart 54 – Amcor Ltd (AMC) Monthly Chart

 

Chart 55a – Crown Resorts (CWN) Monthly Chart

 

Chart 55b – Star Entertainment (SGR) Weekly Chart

Chart 56– Bellamys (BAL) Weekly Chart

 

Chart 56b– Blackmore's (BKL) Monthly Chart

Chart 57– JB Hi-Fi (JBH) Monthly Chart

 

Chart 58– Harvey Norman (HVN) Monthly Chart

 

The $A is trickly at present, we are comfortable with our eventual target of the ~65c region, short-term we were 50-50 around ongoing strength towards the 81c area but the Trump victory / $US strength has turned our bias towards a lower $A now.

The $US is looking very strong after Donald Trump's victory as the market adjusts for higher US rates. We are targeting ~105 minimum but surprises are likely to be on the upside, but we are looking for this rally to ultimately fail.

Chart 59a– Australian Dollar (AUD) Monthly Chart

 

 Chart 59b– The $US Index Quarterly Chart

 

Commodities

Cracks appeared in gold recently as its fallen hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which has now been broken. We still think it's best to be an observer for now.

Copper remains in a negative downtrend, even after the last few weeks fireworks, on a longer-term basis we are targeting the 150 area.

Our target for Crude Oil of +$US60/barrel looks a strong possibility after the OPEC decision, it still needs to punch through $US52/barrel to look good.

Iron Ore achieved our initial +$US70/tonne target, technically we remain neutral after the "abc" target of ~$US80/tonne was achieved this month.

Chart 60 – Gold Monthly Chart

Chart 61 – Copper Monthly Chart

Chart 62 – Crude Oil Monthly Chart

Chart 63 – Iron Ore Monthly Chart

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 04/12/2016 9:00AM

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