Market Matters Report / Market Matters Weekend Report Sunday 5th February 2017

By Market Matters 05 February 17

Market Matters Weekend Report Sunday 5th February 2017

Market Matters Weekend Report Sunday 5th February 2017


The local market had another disappointing week with the ASX200 falling 1.6% while the Dow was essentially unchanged. The Australian market's underperformance was unfortunately assisted by more poor company reporting's / downgrades, clearly damaging local investor confidence as these stocks are simply getting whacked on the bad news - this week's culprits included Vitus Health (VRT), Aconex (ACX), OzForex (OFX) and Navitas (NVT). The concern for investors going into Australia's reporting season is analysts are looking for around 18% earnings growth after 2 years of contraction hence leaving room for disappointment.  Conversely the US reporting season is going off with a positive note, of the 274 companies in the S&P500 that have reported earnings for Q4 2016 almost 67% have reported above analyst expectations, above the long-term average of 64%, clearly supporting stocks. Even the deeply researched heavyweight APPLE pleased investors sending the stock up an impressive 5.8% for the week.

We expect February to be relatively quiet on the index level however we anticipate some significant variance in sector performance. We remain neutral the ASX200 short-term expecting further consolidation between 5600 and 5725 but importantly will again turn bullish over 5725 and bearish under 5540.

ASX200 Daily Chart

We believe the coming  week (s) will very much be a game of 2 halves, the banks / financials strong and resources weak. Firstly lets start on a positive note with the banks / financials after Donald Trump has ordered a review of the Dodd-Frank bank rules that is expected to reduce onerous regulatory costs to many financial institutions - especially after he called the Dodd-Frank a disaster earlier in the week and added we are going to do a number on it! While this review will likely take many weeks, even at Mr Trumps pace, it's a major tail wind for the sector in the near future.

The US banking sector surged 2.6% on Friday night following the news and we believe this will be the catalyst for our local sector to regain the losses of the last 4 weeks e.g. ANZ -8.8%, BEN -8.1% and CBA -5.3%. We are specifically looking at CBA and BEN who go ex-dividend this month, we believe they can be bought on Monday and the anticipated follow through strength should give the brave a "free" dividend - the clear risk is if their report is disappointing over coming weeks.

We are buyers of BEN and / or CBA on Monday if they are up under 2%.

Bendigo Bank (BEN) Weekly Chart

Secondly moving onto our negative view around the resources sector where we are buyers but remaining patient on entry as we anticipate a follow through of the weakness that suddenly arrived last week.

BHP is set to open down 55c / 2% on Monday and it's likely that RIO, OZL, FMG will follow. Currently our targeted buy area for the sector heavyweights are:

BHP $26.20 - In the $24 region, around 8% under Fridays Australian close.

FMG $6.45 - Around $5.80, around 10% below Fridays Australian close.

OZL$9.15 - Around $8.20, around 10% Fridays Australian close.

RIO $64.53 - Ideally under $58, around 10% below Fridays Australian close.

NB If the targeted weakness does unfold we are likely to slowly accumulate into our targeted areas.

BHP Billiton (BHP) Weekly Chart

RIO Tinto (RIO)  Weekly Chart

Additionally, not surprisingly we expect some ongoing stock specific volatility while the local reporting / confession season unfolds. Brambles (BXB) has been a performance culprit in recent weeks and its following the general path of the downgraded stocks by not bouncing quickly - patience is a virtue at present.. We continue to have interest in BXB but not until well under $10.

Brambles (BXB) Monthly Chart

Standout technical chart (s) of the week

Beware the "crowded trade" is something we often talk about, the "Little Aussie battler" is a great example at present. If you turn on Sky Business and listen to the pundits the likelihood is within the hour you will hear someone say they are targeting the $A into the low 60c region, when too many people agree it can be dangerous e.g. in this case who is left to sell the $A to drive it down there if all are bearish and positioned accordingly.

While we do ultimately see ~65c a squeeze up to ~81c looks a strong possibility i.e. the path of most pain. If this unfolds it may create some excellent opportunities in the offshore earners who will likely underperform with the $A ~80c.

Australian Dollar $A Monthly Chart


Our view remains that US and local stocks will rally over the coming few months but the following weeks are likely to be choppy locally with the financials strong and resources weak. 

Medium term after a rally of ~8% by US stocks we are targeting a 25% correction over a few years.

What Matters this week

The ASX200's is set to open up 30-points on Monday, short-term we need a break of 5725 by the ASX200 to again become bullish the overall index but we do see renewed strength in the financial sector.

Potential Investing opportunities for the coming week(s)

We are now holding 27% in cash and are still wearing our sellers hat into strength BUT our buyers hat into weakness = the theme of Q1/2 of 2017. We are looking to increase our bank exposure on Monday morning and buy resources into a 8-10% correction.

Also, we maintain an interest in Star Entertainment (SGR) under $4.70.

Potential Trading opportunities for the coming week

On the index front we still like the German DAX and Japan's Nikkei over coming months.

Locally it feels likely to be a quiet week but you never know with reporting season.

Portfolio / Trade Holdings 

The Market Matters Portfolio as of the 3rd February is below:

We are currently holding 27% in cash and remain sellers of strength and buyers of weakness until further notice. We are looking to increase our bank exposure on Monday morning and buy resources into a 8-10% correction.

Australian ASX200

The ASX200 could potentially break over 6000 in 2017 before the significant correction we are targeting unfolds over the coming few years - the key remains to be open-minded.

Chart 1 – ASX200 Monthly Chart

Chart 2 – ASX200 Weekly Chart

Chart 3 – ASX200 Daily Chart

Chart 4 – March Share Price Index (SPI) 60-mins Chart

American & Canadian stock market indices

US stocks have surged over 12% since Donald Trump's victory with the Dow, Russell 2000, Russell 3000 and finally the NYSE Composite making fresh all-time highs. We remain more cautious on stocks, our best "guess" at present is ~6-8% higher.

Importantly US indices are in a very clear final "Phase 5" of a major bull market since early 2009. We see further upside in what should be a choppy / volatile year prior to a major downturn that is likely to last a few years and correct ~25%.

Chart 5 – Dow Jones Index Monthly Chart

Chart 6 – Dow Jones Index Daily Chart

Chart 7 – S&P500 Index Monthly Chart

Chart 8 – S&P500 Index Daily Chart

Chart 9 – Russell 3000 Quarterly Chart

Chart 10 – NYSE Composite Index Monthly Chart

Chart 11 – Russell 2000 Index Monthly Chart

Chart 12 – US NASDAQ Index Monthly Chart

Chart 13 – The Canadian Composite Index Monthly Chart

European stock market Indices

European indices have broken out to the upside and technically look more bullish than US stocks from current levels with targets for the German DAX of +10% and Swiss SMI +15% - potentially fund managers that have been caught overweight cash are searching for value in previously weak markets.

Chart 14 – Euro STOXX 50 Index Monthly Chart

Chart 15 – UK FTSE Index Weekly Chart

Chart 16 – German DAX Index Monthly Chart

Chart 17 – Swiss SMI Index Quarterly Chart

Chart 18 – Spanish IBEX Index Monthly Chart

Asian & Emerging stock market indices

Asian indices remain bullish with the Hang Seng index looking poised to rally ~10% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher. Similarly the Emerging Markets remain positive but fresh recent highs look likely to generate a selling opportunity.

Chart 19 – Hang Seng Weekly Chart

Chart 20 – China Shanghai Composite Index Weekly Chart

Chart 21 – Japanese Nikkei 225 Index Monthly Chart

Chart 22 – Emerging Markets MSCI ETF Weekly Chart

Interest Rates & volatility

Short-term interest rates in the US have moved sharply higher since the Trump election win, the move has been assisted by the Fed forecasting 3 interest rate rises in 2017 plus strong wages growth fuelling inflation fears.

Beware, we believe this move higher for interest rates has only just commenced, however short-term we can see further consolidation at current levels e.g. Australian 3-year bonds have reached the psychological and technical 2% support area i.e. a 98.00 bond price.

Chart 23 – Australian 3-year bonds Weekly Chart

Chart 24– The US 10-year Interest Rate Monthly Chart

Chart 25 – The US 2-year Interest Rate Monthly Chart

Chart 26   Volatility (VIX) Index Weekly Chart

Australian stocks & sectors

The Australian stock market fell 1.6% last week which yet again was a disappointing performance compared to its global piers. Short-term we see conyinued choppy price action with significant sector rotation unfolding.

Banking sector

The local banking sector is looking strong which makes sense as it becomes more profitable as interest rates rise and Donald Trump considers removing onerous / costly regulations - the Dodd-Frank reform.

On Friday night alone the US banking sector powered up 2.6% as Donald Trump ordered a review of the Dodd-Frank reform in an effort to roll back financial regulation.

Chart 27 ASX200 Banking Index Monthly Chart

Chart 28 US S&P500 Banking Index Monthly Chart

Chart 29 – Commonwealth Bank (CBA) Quarterly Chart

Chart 30 – Commonwealth Bank (CBA) Daily Chart

Chart 31 – ANZ Bank (ANZ) Weekly Chart

Chart 32 – Westpac Bank (WBC) Weekly Chart

Chart 33 – National Australia Bank (NAB) Weekly Chart

Chart 34 – Bank of Queensland (BOQ) Monthly Chart

Chart 35 – Bendigo & Adelaide Bank (BEN) Monthly Chart

The Insurance sector

We remain bullish and comfortably long SUN within the insurance sector. QBE has enjoyed a strong move with the $US and rising interest rates, a pullback / consolidation feels likely short-term.

Chart 36 – Suncorp Group (SUN) Monthly Chart

Chart 37 – Insurance Australia (IAG) Monthly Chart

Chart 38– QBE Insurance (QBE) Monthly Chart

Diversified Financials sector

The Financials Index looks bullish, our target is over 10% higher, with CGF leading the way from current levels.

Chart 39 – ASX200 Financials Index Quarterly Chart

Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart

Chart 41 – Platinum Asset Management (PTM) Daily Chart 

Chart 42 – Henderson Group (HGG) Weekly Chart 

Chart 43 – Challenger Ltd (CGF) Monthly Chart 

Chart 44 – IOOF Holdings (IFL) Monthly Chart 

Resources / Materials  sector

Copper remains in a negative downtrend long-term, even after the recent months fireworks, we are eventually targeting the 150 area.

Iron Ore has significantly exceeded our initial $US70/tonne target, technically we now remain neutral / negative after the "abc" target of ~$US80/tonne has been achieved. Importantly the forward prices for iron ore are in a pronounced backwardation e.g. The February 2020 price is ~$US46/tonne, a whopping 44% lower than today's price.

NB Backwardation - A situation in which the spot or cash price of a commodity is higher than the forward price, generally associated with short-term supply shortage. Contango is the opposite scenario.

Heavyweights BHP and RIO look positioned for short-term weakness, on Friday night even with the Dow up 186-points BHP closed in the US ~55c / 2% under Fridays local close.

Chart 45 – Copper Monthly Chart

Chart 46 – Iron Ore Monthly Chart

Chart 47 – BHP Billiton ADR ($US) Monthly Chart

Chart 48 – BHP Billiton (BHP) Weekly Chart

Chart 49 – RIO Tinto Ltd (RIO) Weekly Chart

Chart 50 – Fortescue Metals (FMG) Monthly Chart

Chart 51 – Independence Group (IGO) Weekly Chart

Energy sector

Our target for Crude Oil of +$US60/barrel remains a real possibility after the OPEC decision and a close over the $US52/barrel area. Our main concern for the energy stocks is the overall optimism in the market. Recently we took an excellent profit on our Origin position and feel comfortable square the sector for now.

Chart 52 – Crude Oil Monthly Chart

Chart 53 – Woodside Petroleum (WPL) Monthly Chart

Chart 54 – Origin Energy (ORG) Weekly Chart

Chart 55 – Oil Search (OSH) Weekly Chart

The Gold sector

Cracks appeared in gold in mid-2016 as it fell hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which is where gold is now hovering.

We believe there will be some excellent trading opportunities in 2017 within the gold sector.

Chart 56 – Gold Monthly Chart

Chart 57 – Newcrest Mining (NCM) Monthly Chart

Chart 58 – Regis Resources (RRL) Weekly Chart

Chart 59 – Evolution Mining (EVN) Daily Chart

Chart 60 – Market Vectors Gold ETF Monthly Chart

The "yield play" stocks

We have been bearish bonds / bullish interest rates since mid-2016 and this view has not wavered. Hence we will only consider buying the "yield play" stocks as a trade when they are under severe pressure, as we did in late 2016 with both Transurban (TCL) and Westfield (WFD).

Chart 61 – Sydney Airports (SYD) Monthly Chart

Chart 62 – Transurban Group (TCL) Monthly Chart

The Property sector

A confusing picture short-term with the overall sector remaining mildly positive at current levels which theoretically contradicts our higher interest rates forecast. Hence we will avoid the sector in 2016 except WFD as an aggressive play if an opportunity arises well under $9.

Chart 63 – Westfield Corp. (WFD) Monthly Chart

Chart 64 – Mirvac Group (MGR) Monthly Chart

Food & retailing  sector

While there are major signals within the sector at present we believe there are generally better places to be invested during 2017 but JBH does look interesting at present.

Chart 65 – Wesfarmers Ltd (WES) Weekly Chart

Chart 66 – Woolworths Ltd (WOW) Weekly Chart

Chart 67– JB Hi-Fi (JBH) Monthly Chart

Chart 68– Harvey Norman (HVN) Monthly Chart

The internet / Technology sector

The Australian Tech. sector had a relatively tough 2016, we may have interest this year but currently only into further weakness.

Chart 69 – Seek Ltd (SEK) Monthly Chart

Chart 70 – REA Group (REA) Monthly Chart

Chart 71 – (CAR) Monthly Chart

The Telco sector

The Telco sector endured a horrible 2016 falling ~20% after spending many years in the limelight. Changes within Broadband have made it extremely tough to value stocks within the sector which helped create the panic selling in both Vocus and TPG Telecom. We are not buyers of this sector but anticipate TPG will help drag the sector lower after its recent failed bounce.

Chart 72 – Telstra Corp. (TLS) Monthly Chart

Chart 73 – Vocus Communications (VOC) Weekly Chart

Chart 74 – TPG Telecom (TPM) Weekly Chart

The Healthcare sector

After being the perfect place to be invested since the GFC last year saw some wobbles within the sector as bond yields rose and excessive valuations were no longer tolerated by investors. While we see higher levels from the sector in years ahead we are 50-50 whether they can be achieved this year, or further weakness is likely first.

Chart 75– US S&P500 Healthcare sector Quarterly Chart

Chart 76– CSL Ltd (CSL) Monthly Chart

Chart 77 Ramsay Healthcare (RHC) Monthly Chart

Chart 78– Healthscope (HSO) Weekly Chart

Chart 79 - Ansell (ANN) Monthly Chart 

Chart 80 - Sirtex Medical (SRX) Weekly Chart 

Chart 81 - Cochlear Ltd (COH) Monthly Chart 

The Gaming / Tourism sector

This sector had a volatile an overall pretty average 2016. We particularly like Star City (SGR) under $4.70.

Chart 82 – Crown Resorts (CWN) Monthly Chart

Chart 83 – Star Entertainment (SGR) Weekly Chart

Chart 84 – Mantra Group (MTR) Daily Chart

The China speculative sector

Significant wealth has been destroyed in this area over recent times as crazy valuations came down to earth with a huge thud. Bellamy's return after suspense confirms our current view that it's all too hard!

Chart 85– Bellamy's (BAL) Daily Chart

Chart 86– Blackmore's (BKL) Monthly Chart

Australian Dollar (AUD) / FX Markets

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region but a test of 80c first feels likely.

The $US remains firm after Donald Trump's victory as the market adjusts for higher US rates. We have been targeting ~105 but short-term feel the bullish $US view is becoming crowded and a correction would not surprise.

Chart 87– Australian Dollar (AUD) / FX Monthly Chart

Chart 88– The $US Index Quarterly Chart



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 05/02/2017.  9.00AM. 

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