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

By Market Matters 05 March 17

Market Matters Weekend Report Sunday 5th March 2017

Market Matters Weekend Report Sunday 5th March 2017

Australian reporting season is now behind us and with around 70% of stocks having already traded ex-dividend the ASX200 is back to business as usual. The market amazingly has now been in a trading range of 5600 to 5800 for the last 10-weeks, it certainly doesn't feel like it. While US stock have enjoyed a great start to 2017 gaining 5.9% year-to-date the story locally has been far more muted with gains of only 1.1% during the same period.  Last week the ASX200 fell marginally with the Banks / Financials and Healthcare Sectors remaining firm but Retail / Energy and Gold stocks had a tough time. With US stocks due for a rest, not a fall, it's hard to envisage this trading range being broken in early / mid-March.

Our focus in today's report will be on the big picture i.e. how far can stocks rally before a decent correction, how long this is likely to take and which sector (s) could for example take the ASX200 well over the psychological 6000 level.

For a local short-term view we continue to focus on the ASX200 March futures contract (SPI) and while it remains over 5650 we are bullish, a break of this level is likely to see a quick 100-point fall.

Share Price Index (SPI) 60-minute Chart

For the ASX200 to break well over 6000 there is no doubt in our minds that the banks will need to do much of the heavy lifting, which is not surprising as they are around % of our index. Global banks have performed very differently since the end of the GFC:

1. Australian Banks - Our banks are sitting 155% above their panic GFC lows but still 14% below their all-time highs of two years ago.

2. American Banks - US banks are 551% above their GFC lows when Lehman Brothers collapsed but are still around 25% below the overall indexes all-time high. However, some big names like Goldman Sachs and Wells Fargo have very recently achieved this milestone since Donald Trump's victory in November. Conversely Bank of America continues to languish over 50% below its high of 2006.

3. European Banks - Banks in the EU have been under significant pressure, well after the GFC, with UBS still 30% below its 2015 high and Deutsche Bank a very painful 90% below its pre-GFC highs.

Interestingly around 20-mins before the US closed on Saturday morning Deutsche Bank announced its considering a capital raising of EU8bn, this is clearly a large raise and may cause some initial selling in banks globally as fund managers put aside some money to buy the DBA stock which is likely to be issued at a reasonable discount to Fridays close. However for those who follow European banks DBA is cheap, it trades on 50% of its book value compared to UBS on 1.3x, BNP Paribas on 0.9x and our own CBA on over 2.4x. Our initial thought is this is likely to be a catalyst for European banks to rally in 2017.

Returning to the local banks which certainly have fared excellently compared to many of their global equivalents, people who continually "bash" our banks should remember that they are arguably the main reason we avoided a recession post  the GFC. While world economies continue to improve and Australian property defies its numerous sceptics our banks should remain strong - CBA is trading on an est. P/E of 14.8x and yields 7.2% grossed up, not at particularly cheap, or scary levels. It's amazing how many people are now experts on why property will fall in Australia, often the same people who thought share-markets would collapse if Trump won the US election!

We remain comfortably overweight Australian banks and financials especially as they are usually seasonally very strong into late April. Our ideal scenario would be to trim holdings into strength in say 6/7 weeks time e.g. Macquarie Bank over $90.

Finally, for the ASX200 to reach say 6200 it's a gain of ~8%, while its hard to currently see our banks rally over 15% to fresh all-time highs anything is possible and another 5% feels easily achievable. If our financials can gain ~5% the ASX200 is likely to be challenging 6000 minimum. Remember our target for Suncorp (SUN), the largest MM holding, is at least 15% higher so as we like to say "keep open-minded".

ASX200 Financial Index Quarterly Chart

Another very influential sector locally is the Healthcare Sector and again the lead we are receiving from the US is very encouraging, with our long term target slowing coming into play, around 7% above current levels. This should again assist the ASX200 eventually break over 6000.

We currently hold ANN, CSL and RHC within the sector and are more likely to add to these positions than sell at current levels.

Also while we have been short-term negative resources looking / hoping for lower levels to buy the likes of BHP and RIO we are bullish medium term targeting fresh highs for 2017. That would be a ~20% advance for RIO for example, if that was consistent across the sector it would give the ASX200 a huge lift.

US Healthcare Sector Quarterly Chart

Lastly, moving onto the US which is clearly the most influential global stock market over the long-term. Last week we raised our ultimate target for this bull market by ~2%, today we want to reiterate a few points and make some new ones:

1. This current rally in US stocks has been underway for year, the first phase from the panic GFC lows took ~ 2-years prior to a 20% correction. Hence we would not be surprised if the current rally by US stocks did not squeeze into 2018.

2. US stocks have just enjoyed a multi-day advance which has many pundits calling for a sell-off. Statistically they are wrong, these strong advances are usually excellent buy signals if we look say 6-months ahead. As we pointed out in last weeks report a RSI breaking over 75 is a bullish signal - see the following chart.

3. We still believe US stocks will advance another 8-10% before a major correction. Hence we will look to buy the next 5% pullback in coming months which is likely to be from higher levels.

So let's "Keep it Simple Stupid" (KISS) US stocks are likely to head higher over 2017 and even if we continue to underperform Australian equities will need some pretty poor domestic news not to embrace some of this positive sentiment.

It was not long ago that a major broker came out and said " Sell Australian equities", investors who followed that advice have now missed out on ~10% of gains, plus dividends, while struggling to get over 3% in the bank. There will be a great time to sell equities and move to cash but we believe it's still on the horizon - be patient! The more negative commentary we hear on property, shares, Trump etc the higher we feel stocks can squeeze - the path of most pain.

US S&P500 Weekly Chart

Standout technical chart (s) of the week

Many investors keep asking us when is it time to buy / average their Telstra (TLS) position. Our current reply is simple - not until we feel the market is due for at least a 5% downturn then TLS will probably get a safety bid.

Simply put, we have no interest in TLS even though it has corrected over 50% of its last rally.

Technically TLS can easily dip under $4.20.

Telstra (TLS) Monthly Chart

Summary

We continue to believe that US and local stocks extend recent gains well into 2017, and potentially 2018. Ideally in the local market we will see our targeted correction in the resources sector to play out before the overall index is likely to again push higher.

On balance we believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open up 10-points on Monday, short-term we need a break of 5650 by the March SPI to lose our net bullish view for the overall index.

Potential Investing opportunities for the coming week(s)

We are likely to be quiet this week unless BHP, RIO or FMG fall into our buy zones i.e. another 4% lower

Potential Trading opportunities for the coming week

We unfortunately again see no obvious trades locally this week but we do still like our short FMG position and VOC / TPM feel like they have bottomed for now. However for the active player when MM buy the resources sector as an investment traders can also be buyers.

Patience is a virtue with trading and the next 1-2 weeks feel more like a time for the investors - but you never know!

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 3rd March 2017 is below:

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-3rd-march-2017/

We still hold 18.5% in cash, plus we own a short FMG trading position via options and long TPM trading position. We remain buyers of weakness in resources moving forward.

Australian ASX200

The ASX200 could easily break well over 6000 in 2017, if the banks come to the party, before the significant correction we are targeting unfolds over the coming few years - the key remains to be open-minded.

March has kicked started with some fairly wild swings and short-term things are a little unclear.

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 continue to rally and have now surged over 17% since Donald Trump's victory with the all major indices making fresh all-time highs. We remain long term cautious on stocks, our best "guess" at present is now ~8-10% higher i.e. last weeks slight revision upwards feels on the money at present - remember be flexible.

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 relatively choppy / volatile year prior to a painful 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 Weekly 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

No change, European indices have broken out to the upside and technically are bullish with targets for the German DAX of ~+10% and Swiss SMI ~+15% - potentially fund managers that have been caught overweight cash look to be searching for value in previously weak markets. However, on a fundamental basis we may need to wait for some election result clarity later in the year that do not favour extremists for most of this strength to unfold.

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 ~6% while the Nikkei closing over 17,500 is extremely bullish targeting ~22,000, again over 10% higher. Similarly the Emerging Markets remain in a positive uptrend, generating no sell signals, even after another poor week.

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 - markets are now expecting the first of this interest rate rises this month.

Beware, we believe this move higher for interest rates has only just commenced, however short-term we can see a little 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 0.1% last week, again ignoring a positive US and European markets and moving more in step with both Asia. The local weakness had no major standouts plus a number of our large cap stocks went ex-dividend putting natural short-term pressure on the index.

Banking sector

The local banking sector remains strong which makes sense as it becomes more profitable as interest rates rise plus and Donald Trump considers removing onerous / costly regulations - the Dodd-Frank reform. Recent strong reports from both ANZ and CBA have help support the local sector.

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) Weekly Chart

The Insurance  sector

We remain bullish and comfortably long SUN and QBE within the insurance sector. QBE has enjoyed a strong move with the $US and rising interest rates, further 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 remains bullish, our target is over ~10% higher, CGF has been leading the way over recent weeks/ months.

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 its technical "abc" target of ~$US80/tonne leaving us neutral at present. Importantly the forward prices for iron ore are in a pronounced backwardation e.g. The February 2020 price is trading at a whopping 40% beneath 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 still positioned for a little further short-term consolidation / weakness. We are holding a trading short position, via options, in FMG.

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) Weekly Chart

Chart 51 – Independence Group (IGO) Weekly Chart

Energy  sector

Our target for Crude Oil of +$US60/barrel remains a real possibility after the last OPEC decision and the 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 which has now fallen over 14% from this year's high. We remain 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

Gold had a bad mid-2016 as it fell hard on the anticipation of rising interest rates in the US, but gold has recovered well rallying ~$US135/oz from its December low.

We believe there will be some excellent trading opportunities in 2017 within the gold sector primarily on the long side as we continue to look for a major top in the $US.

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 under $9.

Chart 63 – Westfield Corp. (WFD) Monthly Chart

Chart 64 – Mirvac Group (MGR) Monthly Chart

Food & retailing  sector

Some conflicting signals are now unfolding within the sector, we believe it's best to avoid these stocks for now.

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 still only into further weakness.

Chart 69 – Seek Ltd (SEK) Monthly Chart

Chart 70 – REA Group (REA) Monthly Chart

Chart 71 – Carsales.com (CAR) Monthly Chart

The Telco sector

The Telco sector endured an awful 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.

Telstra then had a shocking result recently sending the sector down 5.3% that week. However, VOC then had a solid result last week which helped support both it and TPM, but TLS remains under pressure and has corrected well over 30% since its 2015 "yield chasing" high.

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 we saw some clear "wobbles" within the sector as bond yields rose and excessive valuations, without clear growth / performance, were no longer tolerated by investors. We now see higher levels from the sector in the months ahead led by the S&P Healthcare index which enjoyed a great February.

CSL has shown us how a stock performing well in this sector can rally strongly, in its case to fresh all-time highs.

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. However, we currently like Star City (SGR) targeting ~$5.50 minimum - note MM holds SGR.

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 horrendous thud. Bellamy's return after suspense confirms our current view that it's simply all too hard! These stocks are very hard to value and importantly will take a long time to regain investor confidence.

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 an initial test of 82c first feels highly likely.

The $US remains firm after Donald Trump's election victory as the market adjusts for higher US rates. We have been targeting ~105 but short-term feel the bullish $US view is becoming extremely crowded hence any rally is likely to lack strong momentum and encounter selling from these positioned longs.

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

Chart 88– The $US Index Monthly Chart

Disclosure

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. See full charts pack here

Disclaimer

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 4/03/2017.  2.00PM.
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