Market Matters Report / Market Matters Weekend Report Sunday 5th August 2018

By Market Matters 05 August 18

Market Matters Weekend Report Sunday 5th August 2018

Market Matters Weekend Report Sunday 5th August 2018

The ASX200 started the first week of August falling 1%, as reporting season gets fully underway fund managers appear to have their focus on individual stocks as opposed to overall market exposure. Remember July was the local market’s tightest trading range since pre-GFC times and we’ve now been trading between 6200 and 6306 for over 4-weeks – the ideal technical trading signal would be a “failed breakout” in either direction i.e. a rally up to say 6325 followed by a break back under 6300 generates an excellent risk / reward sell.

Not surprisingly our view has not particularly evolved over the recent quiet weeks and MM is comfortable sellers of strength in stocks / indices, but not weakness. This coincides with our fundamental view that the market is fully valued but not particularly expensive unless of course any of the re-occurring event risks come to fruition e.g. escalation of the Trump driven US-China trade war. As we’ve said a few times the fact that stocks are largely ignoring Trump’s shenanigans demonstrates they remain strong for now.

  • MM remains in cautious “sell mode” but our decent cash levels (16%) plus negative facing positions (8%) does allow us to take long positions if the risk / reward on offer is compelling.

Following strength in the US on Friday the ASX200 looks set to open up over 20-points on Monday, on balance we prefer the scenario of a failed rally above 6300 but its micro /  essentially random-stuff with a surprise result by CBA on Wednesday very capable of changing the whole picture in a few minutes.

ASX200 Index Chart

Over recent months we’ve noticed a few subscribers becoming very focused on our opinion that global stocks are set for a major correction in 2018/9, while we still believe this will occur it has not stopped us buying Newcrest (NCM), Mineral Resources (MIN), IRESS (IRE) and Healthscope (HSO) in July which may have confused some readers hence I will again explain our reasoning so we’re clear around our expectations / views on what may come next:

  1. We still hold 16% of our Platinum Portfolio in cash and 8% exposed to negative facing ETF’s hence we are unlikely look particularly good on a relative basis until stocks correct.
  2. We still have sell levels at $15.30 and above for our 10% holding in Suncorp (SUN) – they report later next week.
  3. We may trim our CBA / banking position depending how they report next Wednesday.
  4. We continually asses the value in taking losses on other holdings – see Janus Henderson (JHG) and Orocobre (ORE) later in the report.
  5. We are still looking for appropriate levels, ideally into strength, to increase our positions in the BBUS / BEAR negative facing ETF’s.

Picking tops in markets including stocks is the hardest game in town but there is no doubt global assets are under pressure as bond yields rise and almost a  decade of Quantitative Easing (QE) comes to an end.

Equities are enjoying improved corporate earnings but investors must remember stock markets look into the future and when fund managers decide that the current “peak earnings environment” is mature the correction is likely to be aggressive, let the equity market tell you when its ready to correct.

 ASX200 Index Chart


US sectors are offering clarity to the S&P500 Index.

At MM we have often described the market as a jigsaw which unfortunately when you have all the pieces the horse has usually bolted i.e. it’s too late.

While we were doing our usual analysis of markets, both far and wide, a few pieces of the US puzzle fell nicely into place.

  1. MM is bullish the US banking Index targeting fresh highs for 2018, unfortunately the correlation with our own banks is low. 

US S&P500 Banking Index Chart


Secondly, the US healthcare sector looks set to make fresh all-time highs, ideally up towards the 1100 area.

  1. MM is bullish the US healthcare sector short-term.

US S&P500 Healthcare Index Chart 

  1. Hence we remain mildly bullish the US S&P500 targeting fresh all-time highs up towards 2900, our preferred scenario of the last 6-months.

The question (s) we now ask ourselves is do we hold our BBUS (short US ETF) position, wait to average into fresh highs, hedge with local stocks, overseas indices etc.

  • Unfortunately there is no local ETF exposed to the US banking index.
  • The DRUG global healthcare ETF is not a good risk / reward buy in our opinion.
  • We continue to like the European facing HEUR ETF’ and emerging markets IEM ETF’s against US equities medium-term.

However we believe investors should not loose site of the bigger picture, the S&P500 may rally another 2-3% but it’s a dangerous game getting caught in a potentially messy short-term “hedge”:

  • MM is focusing on where to reduce equities exposure and / or increase our negative facing ETF’s position, not buying the last gasp i.e. a little short-term pain = long-term gain.

US S&P500 Index Chart


Bond yields (interest rates) & the economic / market cycle

In a number of reports recently we have discussed why many economists / market players are watching US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends.

  • Historically stocks will correct when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

What the charts implying to us is that the US is heading towards a recession in 2020 hence our phrase that the global asset / equity bull market since the GFC is looking on the money and hence investors should be looking for “late cycle positions” in stocks / sectors.

When we consider history, one of the standout messages for this stage of the cycle is be careful paying up for growth, something we’ve touched on recently but not in this economic context – GARP (growth at reasonable price) not GAAP (growth at any price).

To keep things simple; 

Look for – solid / predictable profitability (ROE – return on equity) with relatively low debt levels at of course a reasonable price / valuation.

Avoid – high valuation growth stocks who are often unlikely to live up to expectations / hopes if the economy becomes a major headwind.

 MM believe the time is arriving for the “boring quality blue chips” compared to the growth stories that have excelled in the last few years.

US 2/ 10-year yield curve Chart


Which miners do we like from the “quality” perspective.

 The volatility has increased in the resources sector over the last few weeks with a large correction in some base metals and heavyweight RIO disappointing with its half year report. Following on from point 2 we are predominantly looking for quality in the sector as opposed to growth when we re-establish some exposure – obviously the reliable earnings is a tricky one due to the volatility of the underlying commodity prices but if / when global inflation picks up as we expect the sector as a whole should benefit.

  • The Bloomberg Base Metals Index has now corrected ~16% with strong support now only 3-4% lower.

Bloomberg Base Metals Index Chart


Our favourite 3 resource stocks from a quality perspective are BHP, OZ Minerals (OZL) and Alumina (AWC) however it’s no great surprise that they don’t often throw up good risk / reward buying opportunities. The resilience of some of the sector to weakness in commodity prices is frustrating but its not a reason to chase all stocks without any thought to price, or risk / reward.

  1. BHP Billiton (BHP) $33.38 – hopefully patience will be rewarded, we took profit on our BHP position around $34 where the stock has basically remained. Our ideal buy level for BHP remains under $30.
  2. OZ Minerals (OZL) $9.40 – we missed the dip below $9 in hindsight by overthinking things, we are watching OZL carefully around current levels.
  3. Alumina (AWC) $2.83 – the aluminium price has corrected almost 20% (see 2nd chart below) but AWC remains firm and we now expect to see a “pop” to at least above $3 in the near future.

We are also considering nickel plays Western Areas (WSA) / Independence Group (IGO) if their respective correction has a little more legs.

MM believes the potential opportunities in the above stocks is more than enough to be classified as a short-term hedge to any rally to fresh all-time highs by US stocks, especially as we like the long-term higher inflation outlook for resources.

BHP Billiton (BHP) Chart

LME Aluminium Chart


The first loss is often the best loss!

We’re not particularly happy with the MM Platinum Portfolio over recent weeks because we’ve both underperformed the ASX200 by ~1% and simply not made money! However we must also remember that investing is a long game, not just a few weeks.

 There are 2 predominate reasons for our rough few weeks, Janus Henderson (JHG) and Orocobre (ORE) – 2 stocks we’ve been discussing exiting for a while & they were both on our “sellers list” just last week.

Ok, what to do now with these 2 losers especially as a number of subscribers have been asking if we plan to average either but interestingly nobody has mentioned the harder option of taking the loss.

1 Janus Henderson (JHG) $39.28 

JHG has been sold off following its recent second quarter results showing outflows of $2.7bn, taking FUM (funds under management) to $370.1bn. The surprise $US100m on market buyback was not enough to offset the news of outflows and loss of one CEO (they had 2).  

JHG is now trading on an est. 2018 P/E of 10.1x while paying a yield of 4.4% unfranked. Its cheap but sentiment is against the global asset manager.

  • We see no reason to panic out of JHG here but averaging is not yet on the agenda, we want to see the outflows stemmed.

Janus Henderson (JHG) Chart 


2. Orocobre (ORE) $4.37

At the start of 2018 we expected a lithium play to be a core holding in the MM Platinum Portfolio but after some great earlier forays into both ORE and Kidman Resources (KDR) the landscape has changed dramatically. 

ORE has fallen 42% and KDR 45%, the bubble has certainly burst for now and we find ourselves holding a high valuation / growth stock, exactly what we discussed earlier as an “avoid”.

If I was trading say KDR I could be a speculative buyer under last weeks lows hence we’re reticent to panic sell just here but it’s certainly not been an enjoyable journey since May. ORE is now the 5th most shorted stock that we monitor with over 14% of the company short-sold and its basically been rising all year – not a good sign. Toyota’s large purchase at $7.50 is certainly well and truly under water, it makes our purchase at $5.79 look almost good!

The global lithium ETF (LIT) traded in the US has also had a tough time falling ~25% since January but it looks poised to bounce at least 10% following Fridays +1.3% gain which offers some hope in the short-term for our position.

  • MM has no intention of averaging ORE and we continue to look for a better exit price for damage control.

Orocobre (ORE) Chart


Kidman Resources (KDR) Chart



Again no major changes.

  • We remain net positive equities for the coming weeks (just) while the ASX200 can remain above 6140 and we expect US stocks will make fresh al-time highs shortly.
  • We are comfortable sellers of strength but not weakness.
  • We will continue to slowly increase our cash position and are still firmly wearing our “sellers hat”.

“Shopping List”

Again no major changes.

  • We still need decent weakness in $US earners MQG, COH and CSL for example before we start buying.
  • Similarly we are interested in a number of resources stocks into continued weakness.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.30-$15.80 but we may reduce this large position into initial strength above $15.
  • Buying the BBUS and BEAR into weakness i.e. strength in ASX200 and S&P500.


Standout technical chart (s) of the week

 We didn’t particularly like the sector implications from the below considering we have Perpetual (PPT) in the Income Portfolio however the negative trends facing IOOF suggest further weakness in the stock.

  • Technically we are bearish IOOF Holdings (IFL) targeting the $8 region, over 10% lower.

IOOF Holdings (IFL) Chart


Trading Opportunities on our radar

With likely competition on the increase via Domain and turnover in the property market slowing down we find it hard to justify REA trading on an est. P?E for 2018 of 38.8x its in the “avoid” basket!

  • We are bearish REA initially targeting sub $75.

REA Group (REA) Chart


 Investing on our radar

We bought mining services company MIN last week for both technical and fundamental reasons.

  • MM will consider averaging our MIN holding under $16.25 i.e. just over 1% lower.

Mineral Resources (MIN) 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 Sunday!

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 04/08/2018

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