Market Matters Report / Market Matters Weekend Report Sunday 4th March 2018**Updated including CHART PACK**

By Market Matters 04 March 18

Market Matters Weekend Report Sunday 4th March 2018**Updated including CHART PACK**

Market Matters Weekend Report Sunday 4th March 2018**Updated including CHART PACK**

Last week was a tough one for the ASX200 as it fell -1.2% with volatility again raising its head courtesy of Donald Trump – surely it was just a matter of when! So Mr Trump has pretty vocally / aggressively announced a 25% tariff on steel imports and 10% for Aluminium leading to the investing world rapidly becoming concerned about a looming global trade war. Last night the US President came out with another of his amazing almost “college style prank” tweets.

“When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!” – Donald Trump.

To us this proves a few things including Donald Trump does not understand both trade and how to carry himself as the head of the US but unfortunately I guess there’s no great surprises there. History tells us in no uncertain terms that a global trade war is bad for both economies and stocks and will all likelihood lead to a recession.

Interestingly last night US stocks shrugged of President Trumps tweet with the S&P500 rallying +1.8% from its lows to close up +0.5% on the day. It feels like we’ve potentially seen exhaustion at this stage to the US tariff news, we should remember that US steel / metal producers have been rallying for weeks in anticipation of this announcement, it just wasn’t expected to be delivered in such a nuclear style manner!

We need to watch carefully for any rhetoric / action from Europe and in particular China moving forward and of course whether the US increases its list of targets for fresh tariffs – plus of course there are likely to be some exemptions within the US tariffs and it will be vital to see how broad they are. The US’s closest neighbour Canada currently looks to have the most to lose with a whopping 88% of their steel exports going to the US in 2016 – surely they are not Donald Trump’s real target.

Overall global stocks continue to follow our forecasted path which has basically been in play since mid-2015. Let’s continue to remind ourselves how we see the market evolving both short and medium-term, before we look at the reasoning and of course potential pitfalls later: 

  1. Short term – We are net bullish global equities targeting fresh all-time highs by many indices over the coming 1-2 months. We can easily see the ASX200 challenge the 6250 area minimum in March / April, a close over 6020 will reaffirm this view.
  2. Medium term – We still believe a greater than 20% correction will commence this year for global stocks, suddenly this now feels easy to comprehend as volatility rises within markets.

Below is “our best guess” of how US stocks will unfold between March & May, we have not changed the arrows in any way from recent reports. Amazingly / luckily the top and bottom of our first two arrows are smack on at this point in time, if we are correct stocks should be net higher over the next few weeks – it certainly didn’t feel like at times during the last 48-hours.

US Dow Jones Chart


MM is currently only holding 9% and 5% cash in our Platinum and Income Portfolio’s respectively i.e. we are pretty heavily invested considering our medium-term outlook for global stocks. MM’s current plan remains to significantly increase our cash levels into market strength, ideally around 6250 for the ASX200. Investors should simply not forget we are potentially in the final stages of the second longest bull market in history.

Last week’s list of major winners / losers (+/- 7%) in the ASX200 shows us reporting season is now behind us and assuming the overall market behaves itself next week we will reduce the change to +/-5%:

Winners : None.

Losers : Ramsay Healthcare (RHC) -8% and Harvey Norman (HVN) -15.2%.

Following a decent recovery session by overseas stocks on Friday night the ASX200 looks likely to open ~5950 on Monday but BHP closing down over 1% in the US will not help sentiment. We remain short-term bullish the local market with a close over 6020 required to reaffirm this stance.

Todays report is going to follow on from last week’s as we bore into how MM see’s local stocks moving over the next 8-weeks, into of course the seasonally dangerous “sell in May and go away” period.

ASX200 Chart


1 Seasonality / Statistics

 We’ve discussed the positive statistics / seasonality over recent weeks, especially when we bought into the panic low around the 9th of February. Today we are going to bring them directly into focus for next week as early March unfolds.

  • 80% of the time a market forms the high, or low of, any timeframe in the first 20% of that time frame” – The DOT Theory.

As we enter the second week of trading for March we have a high at 6016 and a low at 5902, hence if / when the ASX200 can close above 6020 we will invest / trade as if we have seen the low for March – for the sophisticated trader that is actually 5975-5883 range for the March SPI. At this stage we are holding with our bullish bias primarily due to the seasonal influences, although President Trump is trying to derail us:

  • The average rally from the Q1 low into the April / May danger time is a huge 512-points / 10.7%.
  • Assuming that we have seen the low for Q1 at 5786 that extrapolates to a target of ~6300 taking the more conservative of the above 2 statistics.
  • Historically the top usually kicks in between mid-April and early May as the below seasonal chart clearly illustrates.

 With the ASX200 struggling to hold onto 5900, let alone break over 6000 it’s pretty hard to comprehend the market soaring up towards 6250 but as we regularly say “investors must remain open-minded”.

 ASX200 Seasonality Chart

For the ASX200 to rally in a major way over the coming months we need to see our “Big 4” banking stocks regain their mojo and regain some / all of their significant losses of the last month and last week they obliged even in a down market e.g. NAB +1% and Westpac +0.7%. As you know seasonally this is a very bullish time for our banks:

  • Over the last 10-years CBA has rallied on average over +6.5% over March / April, with March being noticeably almost twice as strong as April.
  • When we look at the other big 3 banks the average gain is on average actually higher e.g. NAB +5.4% in March and +2.7% in April, for a total of around +8% with the worst March return still up +0.6%.

Suddenly if we believe the “big 4” banks can rally say just +6% over the next 2-months then a 5% rally in the ASX200 towards 6250-6300 becomes fairly easy to comprehend.

Key takeaway– wherever we look from a seasonal / statistical perspective the numbers support our bullish view targeting 6250-6300 by the ASX200 in the next 2-months.

Commonwealth Bank (CBA) Chart

Not surprisingly after looking at the local market we also find US stocks are bullish during the March / April period, over the last 20-years:

  1. Following a weak February, this year down almost 4%, the average return over March / April for US stocks is an impressive +4.7% - this targets ~2840 for the S&P500, just below fresh all-time highs.
  2. Also encouragingly after ending such a prolonged advance does not usually mean it’s time to run away from stocks i.e. over 80% of the time the market is ~6% higher 3-months later i.e. May.

Obviously we can all find statistics to support any argument but we take some short-term comfort from the market leading NASDAQ, its only 3% below its all-time high after both the interest rate / volatility wobble and Donald Trump’s tariff broadside – a pretty good solid so far.



2 Overseas Indices

 No change, while when we stand back and look at some major international indexes on a weekly basis they look relatively constructive for a rally into a potentially important April / May top, what may come next is scary:

  1. The US S&P500 looks very constructive for a rally towards 3000 although the statistics currently suggest 2900 may terminate the advance.
  2. The MSCI World Global Index has reached our target that we set back in 2015, ideally it will make one final high but we can see a major correction looming on the horizon.
  3. The Emerging Markets remain positive on a weekly basis targeting an advance of +10%.

US S&P500 Chart


MSCI Global World Index Chart


Emerging Markets (EEM) Chart


3 Interest rates / bond yields

What a difference a few days makes, Donald Trump’s tariff announcement has completely taken the markets focus away from the risk to stocks / assets by rising interest rates.

Last week US 2-year bond yields still managed small gains even with the economic risks created by a potential trade war – in other words the large and generally more rational bond market does not currently believe we will see a global trade war i.e. Donald Trump’s posturing / bluffing.

At MM we remain bullish US bond yields but following the recent strong gains over the last 6-months a period of consolidation would not surprise.

US 2-year Bond Yields Chart


 4 The US Fed & Trump.

 From an equity perspective its important to consider the 2 huge changes to the market dynamic moving forward:

 1 The Fed purchased billions of $$ worth of bonds to stimulate their economy following the GFC, they have now started reversing the process and the Fed needs to sell $US4.25 trillion of debt to fully unwind its balance sheet, that’s a huge amount of $$ to be sucked out of the financial system. The ending of QE should not be ignored, we believe it will lead to a significant increase in volatility in 2018-9 i.e. When QE1 ended in 2010 we saw the “Flash Crash” and when QE2 ended we saw an almost 20% decline in mid-2011. Admittedly we got less market action when QE3 ended but this time its for real and larger.

 2 Donald Trump’s election has been a huge boost for stocks with the S&P500 still up close to 30% from that distant memory back in late 2016. We’ve seen Trump deliver for markets on both Tax reform and the reduction of an onerous regulatory environment. Arguably his market supportive actions are behind us and its time to acknowledge there’s a lot of optimism built into stock prices.

While our preference remains for US stocks to make another all-time high into March / April we believe the market will be noticeably lower by Christmas with the above 2 points probably in the mix for the anticipated selloff.

US S&P500 Chart


5 The $US

We’ve maintained our view on the $US which was one of the cornerstones of our MM Outlook piece for 2018. No change, we are looking for a decent swing low in the $US, ideally just under 88, but its close!

The $US is close to a bottom which is likely to be very bad news for the reflation trade i.e. resources.

 NB Last weeks failed rally implies to us the low is not yet already be in place.

 $US Index Chart



On balance we still believe that stocks have found a short-term low that should be followed by an eventual rally to fresh all-time highs by many indices during March / April.

However, we still believe that a +20% correction will unfold over 2018/9 and we must now give a revised 20% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

Catching our eye in Australian stocks / sectors

1 Banks

We discussed a few times recently how we like the look of the banking sector with last weeks “Trade of the week” looking fantastic” :

  • Buy NAB at $29.78 and sell BHP at $30.68 – NAB closed at $30.08 and BHP at $29.63 hence we are making $1.35 on the spread. We believe there’s at least another $1-2 to go in the relative performance.
  • Seasonally over the last 10-years NAB has gained an average of +8% over March / April which equates to $32.58.
  • We could be buyers of NAB targeting $32.50 with a stop at $29.50, excellent risk / reward.

National Australia Bank (NAB) Chart


2 Is BHP failing?

BHP is set to open under $29.30 on Monday, down around -9% from its mid-January high after being hit with a trifecta of bad news – a weakere than expected profit report, oil correcting -12.9% and now the Trump tariffs risks.

Seasonally BHP is usually marginally lower in March courtesy of paying its dividend followed by a strong +3.9% in April. Aggressive players could consider buying BHP ~$28.50 as short-term play in the next week before its dividend.

NB BHP trades ex-dividend US55c fully franked next Thursday.

BHP Billiton (BHP) Chart

One of the first things we noticed this morning was the broad S&P500 was up +0.5% while the Dow of only 30 stocks was down -0.3%, leading me to check why the different relative performance.

The answer ignoring MacDonald’s -4.8% fall, (I still love a Big Mac), was Caterpillar which fell -2.6%. Due to the business overlap BHP and Caterpillar are highly correlated 2017 although BHP has failed to match the US machinery companies impressive performance since 2017– sounds like the whole ASX200!

Technically we can see further downside in Caterpillar but it should still challenge the 180 area moving forward. Hence while we are not presently happy with BHP this does not feel the opportune time to sell / reduce our holding but I also doubt if we will average.

BHP Billiton (BHP) v Caterpillar (US) Chart

3 Is it time to be brave with retail?

There is no doubt that retail stocks have very modest expectations built into share prices e.g. MYR is trading on 8.5x estimated 2018 earnings and even the relatively high flying Nick Scali (NCK) is on only 14.2x.

The market clearly still believes retail is in trouble which we can see by looking at the degree of shorting in the sector – JB HI-FI 15.8%, Myer 10.2% and Harvey Norman at 9.7%.

Unfortunately when we look around nothing stands out as showing the likelihood to withstand a meaningful market downturn.

We feel it’s now or never for Myer but it feels to big a punt to buy a stock falling so fast, not one for MM. Alternatively NCK does still look positioned well for an assault at $8.

Myer Holdings (MYR) Chart


Nick Scali (NCK)) Chart


4 Beware high P/E stocks.

We still expect P/E contraction to kick in during 2018/9 as interest rates rise hence we expect value stocks to outperform the high growth / high P/E over the next few years – i.e. At MM we believe “boring investing” will outperform high growth, high P/E stocks in the medium-term.

Two great examples of high P/E stocks coming down to earth with a thud are Domino’s Pizza (DMP) and Ramsay Healthcare (RHC), both market favourites back in 2016.

Recently we’ve seen “old industry” Nine Entertainment  rally strongly, perhaps Telstra will shock many and be ok in 2018!

Ramsay Healthcare (RHC) Chart

Domino’s Pizza (DMP) Chart


Nine Entertainment (NEC) Chart


“Shopping List”

Below is our essentially non-existent shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 9% of the MM Platinum & 5% of the Income Portfolio in cash so we are extremely fussy buyers :

1.       Banks – We are comfortable with current exposure but like the sector over coming 1-2 months.

2.       Consumer Services – We are comfortable with our exposure at present.

3.       Diversified Financials – We are comfortable with our position at present.

4.       Energy – We are long WPL which just feels ok at present.

5.       Food and Beverage – Happily square at present.

6.       Healthcare – Square feels ok but our favourite stock is ResMed now around $11.

7.       Resources – We have completed a lot of buying and are considering our sell levels moving forward.

8.       Real Estate – Another sector we are not keen on.

9.       Telco’s – We believe the Telcos will outperform in 2018/9 but our Telstra holding is enough at current levels.

10.   Retail – No investment buying at this stage.

11.   Gold – We have no interest considering our $US view.

“Selling List” 

1.       Resources – At this stage we are looking for another 5-10% from our holdings.

Importantly we anticipate the resources will be the first section of our portfolios that we move to cash primarily due to our $US view.

Standout technical chart (s) of the week

OZL has performed strongly over the last month gaining +2.24% while the ASX200 fell -1.7%.

We are sellers of OZL around $10.30

OZ Minerals (OZL) Chart


Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. A summary of the most likely activity next week is:

  • We are unlikely to be buying in the coming weeks.
  • We have nothing very close to our sell areas at present but anticipate our resources will be first in the cross-hairs.

Trading Opportunities on our radar

1. Last week we said “It’s simple, MM believes NAB will outperform BHP over the next 2-months” – this remains our favourite trade for now. i.e. Buy NAB and sell BHP.

2. Seasonally we have entered a seasonally awful period for Australia’s largest gold producer, Newcrest Mining (NCM) – Over the last 10-years NCM has fallen on average -13.8% between March and June, certainly not a time to be rushing into longs.

  • For the sophisticated trader we could sell NCM June calls and buy September calls for around evens, hence selling the lower strike = net bearish short-term.
  • For the less sophisticated / aggressive trader simply avoid gold stocks for now.

Newcrest Mining (NCM) Chart

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

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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.


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 3/3/2018. 9.00AM.
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