Market Matters Report / Market Matters Weekend Report Sunday 4th November 2018

By Market Matters 04 November 18

Market Matters Weekend Report Sunday 4th November 2018

Market Matters Weekend Report Sunday 4th November 2018

The ASX200 finally enjoyed a positive week closing up a healthy +3.25%, this advance would usually have been met with euphoric fanfare but it’s gone largely unnoticed in this case as it was just limiting Octobers losses to -6.1%. The two standouts to us last week was the unsurprising sharp bounce in high risk / valuation stocks and the return to favour of the resources sector e.g. BHP Billiton (BHP) +7.4%, OZ Minerals (OZL) +6.9% and Western Areas (WSA) 7.6% - we’re bullish resources from here looking for a further +15% upside from our recent purchase of WSA.

The gains were savoured across most of the board except the short-term “safe havens” of real estate and gold, the underlying strength “under the hood” of the market was excellent and can be illustrated by the below:

1 – 78% of the market closed positive and with the exception of Corporate Travel (CTD), which fell -26.5%, only 6 stocks fell by more than 3%.

2 – An impressive 26% of the winners rallied by over 5% and 8 stocks surged by more than 10%.

So the markets bounced after the savage sell-off which most of October delivered, at MM we called this pretty well but the obvious question is what next – “you’re only as good as your last trade” is regular catch cry on our trading desk.

MM is now neutral to mildly  bullish the ASX200 with a preference that it tests above 5925 but we expect the market to chop around between 5775 and 5925 for 1-2 weeks – arguably a bigger call than simply saying its going up , or down.

Subscribers who follow the index closely should remember that November has a number of high profile names trading ex-dividend including 3 of the “Big 4” banks i.e. National Australia Bank (NAB), ANZ Bank (ANZ) and Westpac (WBC).

The dividends will take over 20-points from the index and are a major contributor to Novembers negative reputation for the ASX200 – over the last 10-years the average decline in November is -1.86%, although if October is  weak, November is generally positive.

ASX200 Chart

Global Indices

The US high valuation / growth end of town started Octobers decline which led to an almost contagion like sell-off in global stocks. At MM we followed the Russell 2000 (small cap index) closely to help us keep in sync with the markets rhythm through the volatile month and at this point in time we believe it’s still providing the best road map for what comes next.

On Friday night most US indices reversed down led by heavyweight APPLE which fell close to 7%, but the Russel 2000 remained positive mitigating any major concerns we have at this stage.

Considering the small cap index has been leading US stocks lower for ~8-weeks we think its unlikely that a 5-day / 98-point bounce is the only reprieve investors will get – although many “bears” would argue that a 35% correction of the aggressive decline is not too bad and we would agree it is definitely not inconsequential.

Our preferred scenario is the Russell 2000 will continue its choppy bounce towards 1600 (around +3%) for at least another 1-2 weeks – similar to our ASX200 view.

Russell 2000 Chart

Interestingly one of our holdings Aristocrat Leisure (ALL)  that has significant $US earnings is very closely correlated to the Russell 2000.

ALL has corrected over 22% from its late July high with most of the damage unfolding in September / October before we purchased it.

After falling for 13-weeks we believe its unlikely that ALL’s ~10% bounce in just 1-week is all that we will get.

MM Is looking to take a small profit on our ALL position above $29 in the coming weeks.

Aristocrat (ALL) Chart

The most regular criticism we receive at MM is “you’re too active, it’s not for me”,  I will take this opportunity to counter this on 2-levels:

1 – For investors who want to remain very passive with their investing focus on our Income Portfolio and respective reports / alerts.

2 – Markets generally rotate / chop around 85% of the time hence some decent alpha / value can regularly be added to the average portfolio with simple portfolio sector rotation and variable cash weightings.

Consider the US NASDAQ index which includes heavyweights like APLLE, Google, Facebook, Netflix and Amazon.

Our view is the NASDAQ is likely to spend the next 1-2 years consolidating recent gains in a very similar manner to 2015-6 – our “best guess” is between 8000 and 6250.

Between 2015 & 2016 the market corrected -19.3% and -18% while also enjoying a +25% rally and thats just the major swings.

So far in 2018 we’ve already seen corrections of -12%, -12.2% and -14.6% plus a huge rally of +21.8%. The point I’m making is this is an extremely exciting time for active investors with their finger on the pulse – our job at MM is to help subscribers with this very topic.We believe we are in a period where human emotions, led by “Fear & Greed”, can destroy an investors returns.

MM will be keen buyers of NASDAQ / IT style stocks below around 6250 and sellers above 7500, exactly the opposite to what feels comfortable and the press are suggesting.


Updated Macro Outlook

Stocks got a huge bee in their bonnet last month as a number of high profile analysts / economists started forecasting that the Fed’s hiking policy was going to push the US into a recession by 2020. We always become cautious when too many people jump on the same bandwagon but stocks definitely were too expensive considering the headwinds that were looming on the horizon like a potential US – China trade war and rising interest rates.

However things have calmed down recently into next weeks US mid-term elections with the Dow bouncing almost 1500-points from its low. However the market gave us some mixed signals at the end of the week following President Trump’s Tweet that “The discussions with China are moving along nicely”:

1 – Stocks largely reversed early gains to close mostly lower but still the best week in 6-months – it potentially needed a rest like our market.

2 – Copper surged over 3% implying that the market believes that we’ve seen the worst in the US – China trade tensions.

3 – Emerging markets rallied the most in over 2 ½ years for the same reasons as copper.

4 – US bond yields and the $US rallied as wage gains passed 3% for the first time in 9-years.

5 – Analysts continue to doubt earnings forecasts moving forward, Apple’s disappointing outlook sent the stock down almost 7%, dragging the NASDAQ down almost -1.5%.

If we are correct and the relative performance between the US S&P500 and Emerging Markets is about to come into line the implication is we will get a resolution in the US-China trade issue sooner rather than later.

The Republicans / President Trump looks set to lose their majority in Congress on Tuesday, the surprise (probably positive for stocks) would be another Trump victory against the odds.

Perhaps the positive comments towards a deal with China are his last throw of the dice into the mid-term elections as the average US person and many businesses are seeing prices rise on a number of goods due to the tariffs.

US S&P500 v Emerging Markets Chart

The US wage data was no surprise to MM, we remain bullish bond yields and inflation with the strength led by the US.

We stick with our opinion that global bond yields are going higher hence we have no interest in the “yield play” end of town, even if they do enjoy a “bid tone” in periods of unease i.e. Real Estate and Utilities not for us until further notice

US 10-year bond yields Chart

1 Materials / Resources Sector

We’ve kicked off with the resources sector today because last week was exciting as they unfolded as we’ve been forecasting plus importantly right after we invested 5% of our Platinum Portfolio into nickel producer Western Areas (WSA). As touched on earlier, copper surged over 3% in the US on Friday, a move that should help ignite the already bouncing local resources sector on Monday.

We are bullish copper short-term targeting another 4% upside minimum but a close above $US300/lb is required to regain our confidence medium-term.

Similarly the Blomberg base metals index looks perfectly positioned to rally 5-6%, no great achievement after an almost 20% decline.

Copper Futures Chart

Bloomberg Base Metals Index Chart

We remain bullish WSA targeting the $2.80 area, or 15% higher – for those interested in charts and relevant risk / reward set-ups check our recent notes on Kidman Resources (KDR) which is very similar to WSA -  the lithium  stock has now rallied over 40% since we first wrote about it in just 2-weeks!

Western Areas (WSA) Chart

Moving onto the large end of town BHP remains strong, although it’s still around 2% below where we sold the last of our position back in May.

We like BHP and the announcement last week around capital returns is very positive BUT it’s not fresh news, our concern remains that this is an extremely “owned stock / story”, hence where will the marginal buyers now come from?

MM remains a buyer of BHP but under $30.

BHP Billiton (BHP) Chart

2 The Banking Sector

Westpac reports on Monday and dividend season kicks strongly into gear on Thursday with NAB trading ex-dividend 99c fully franked – it’s now yielding over 11.2% when grossed up.  Fellow banks ANZ and Westpac also follow closely this month rewarding patient shareholders.

We can see the banks making fresh lows for 2018 but it may just be the dividends that take them down there.

MM is bullish the banks from fresh 2018 lows targeting a 6-8% bounce minimum – a good sign for the overall market into Christmas. We’ve already seen ANZ and NAB report ok and maintain their dividend, were sticking with our unpopular thesis that the banks will be fine over the next 1-2 years while providing excellent yields e.g. ANZ 6.27% fully franked.

ANZ Bank (ANZ) Chart

3 Energy Sector.

Crude oil has fallen almost 20% from its October high as the commodity has been associated with other struggling “risk assets” like stocks but noticeably oil failed to bounce with equities last week – over the month the correlation between oil and stocks was actually ~80%. Both the equity and crude markets have been under pressure by a slowdown in global economic growth, rising U.S. interest rates and rising concerns around a prolonged trade dispute between the United States and China but why did crude not rally last week?

The issues appear to be both supply and demand with both pointing in the same direction i.e. everyone except Iran is pushing more oil onto the market while oil demand now appears to be growing slower than many expected.

Crude has now reached our targeted retracement area but we don’t like buying anything that cannot rally on apparent good news.

At this stage if we want to buy “risk” it will be through equities giving both oil and oil stocks a miss.

Crude Oil Chart

4 Health Care Sector.

MM holds 4 stocks in this popular sector and we’ve previously aired our desire to sell into strength which finally started to materialise towards the end of last week.

We now believe the decade of outperformance by the growth stocks has come / is coming to an end, hence our decision to reduce our holdings in the healthcare sector.

1 – CSL (CSL) – the ideal sell level for us is above $195.

2 – Cochlear (COH) - the ideal sell level for us is above $182.

3 – Ramsay Healthcare (RHC) - the ideal sell level for us is above $58.

4 – Healthscope (HSO) - the ideal sell level for us is above $2.25, or into a successful takeover.

Two of the above were very close by Fridays close. The plan is to sell at least one fairly quickly and then we can slowly become more pedantic moving forward.

CSL Ltd (CSL) Chart

5 Mixed signals from growth stocks.

Octobers correction in high valuation / growth stocks has dominated huge parts of the press as these previous high flyers came down to earth with a bang e.g. over the last month Wisetech (WTC) -22.2%, Xero (XRO) -17.3% and NEXTDC (NXT) -16.4%.

Its likely to take a while before burned investors forget the risks of GAAP – “growth at any price”, we warned subscribers about this for a while and although it lasted longer than we expected their demise felt as inevitable as bitcoins. The mixed signals we are now receiving from some growth stocks is more a function of what timeframe you are considering.

Short term WTC looks set bounce towards $18, or around 8% higher.

Wisetech Global Ltd (WTC) Chart

Conversely market old timer in comparison Seek (SEK) looks set to correct back towards $12, significantly lower but this is a medium / long term call.

Seek (SEK) Chart


As subscribers know we are looking for a more defensive portfolio at this point in time i.e. stocks that provides a constant dividend and stable earnings regardless of the state of the overall stock market.

We remain mildly positive short-term but we do intend to increase our cash holdings into strength e.g. selling some healthcare stocks as discussed in point 3.

In the bigger picture we believe we are entering an active investors dream i.e. buy weakness and sell strength as illustrated in the global indices section with special reference to the tech based NASDAQ.

Chart of the week.

We've had Apple on watch for the last month looking for an opportunity to go long below $US205.

The stock failed to embrace Octobers weakness and significantly outperformed the other FANG’s.

However following Fridays report and importantly outlook it was slammed almost 7%. We believe the management are leaning on the conservative side with their forecasts and AAPL is good buying below $205 – this could have doubled as investment of the week.

Apple Inc $US Chart

Investment of the week.

Alibaba (BABA) has tumbled almost 40% from its June high, in our opinion returning some excellent value to the share price.

MM likes BABA below $US150.

Alibaba (BABA) US Chart

Trade of the week.

Newcrest Mining (NCM) has been choopping around in a relatively tight range since mid-2016.

Technically NCM now looks set to rally towards $22 – we own NCM in the Platinum Portfolio.

There are 2 ways we may play this:

1 – Simply cut the position if NCM spikes towards $22.

2 – If we do see a spike towards $22 hold the position with a stop below $21.50.

Lets hope we get the opportunity to decide!

Newcrest Mining (NCM) 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


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.


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 3/11/2018

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