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

By Market Matters 04 November 17

Market Matters Weekend Report Sunday 5th November 2017

Market Matters Weekend Report Sunday 5th November 2017

The ASX200 had a firm week although our usually most influential banking and financial sectors noticeably closed in the red, all 3 banks which have reported this season have subsequently found themselves in the “bin” i.e. Bendigo Bank (BEN), CYBG Plc (CYB) and National Australia Bank (NAB). Considering our banking sector fell -2.6% last week it was a stellar performance by the ASX200 to close up +1%, managing to make fresh 2 ½ year highs. That previously distant goal of the 6000 level is suddenly only a mere 40-points away and we believe the big question has now become how far above the 2015 milestone will local stocks rally before a more significant move to cash is warranted – we currently have 90% of the MM Platinum Portfolio invested in stocks i.e. only 10% in cash.

Hence today’s report is going to focus on 3 areas including importantly how we see the ASX200 trading into 2018, and beyond:

  1. Combining November and Decembers seasonality to be ready for typical volatility / moves this time of year.
  2. Maintaining focus on our medium / long term outlook on stocks / assets.
  3. The Australian economy and importantly what to avoid.

The list of major winners / losers last week shows a second week with a relative lack of commitment within the market as the winners notched up yet another victory, this time only 5 to 3 and a few of the movers are definitely in the “speculative” basket:

Winners : CIMIC Group (CIM) +6.3%, Woodside Petroleum (WPL) +6.6%, Northern Star (NST) +5.4%, Vocus (VOC) +6.2% and TPG Telecom (TPM) +6.2%.

Losers : Bendigo Bank (BEN) -7.4%, Bank of Queensland (BOQ) -6.2%, Amcor (AMC) -6.5% - BOQ traded ex-dividend 46c fully franked.

The ASX200 continues to grind higher over 5900 but with distinctly reduced momentum as we enter the seasonally volatile / weak November. Remember the important statistic from last Friday’s report:

1. Since the GFC there has been an average correction in November of -5.3%.

2. Historically the correction usually lasts round 11-days and commences on the 10th i.e. next Friday.

We remain bullish the ASX200 at MM targeting a decent break over 6000 in 2017 / early 2018 assuming the 5800 area holds, however short-term another begrudging pull back towards the 5850 area would not surprise.

ASX200 Daily Chart

1 The ASX200 into Christmas, and beyond.

Firstly let’s have a look at the seasonal statistics for the ASX200 since the GFC for both November and December:

November

  1. At some point in November the ASX200 falls on average a whopping -5.3%.
  2. While the smallest correction was -2.8% and the largest was -9.0%, the most common pullback by far is between -4.1% and -5.5%.
  3. The correction usually lasts ~11days with the most common period for the correction is between the 10th and 20th of the month.

December

  1. The average gain for December since the GFC is an impressive +2.5%, with only one negative year in 2011.
  2. However this only tells half the story, in 3 out of the 8-years we formed a low mid-month before rallying strongly over 6% - in 2011 we rallied 5.8% from the start of December before losing all the gains.
  3. The lows for December were at the start of the month 4-times and mid-month 4-times - in the anomaly of 2011 when the market was in “correction mode”, unlike today, the ASX200 rallied strongly initially which I have counted as “start of the month”.
  4. In 6 out of the 8-years the high for December was in the last few days while in 2010 it was on the 23rd, only in 2011 was the high early on the 5th.
  5. The average gain by Commonwealth Bank (CBA) during December, since the GFC, is +4.1% hence we may potentially add to our +7.5% holding in the MM Platinum Portfolio if November weakness unfolds.

When we stand back and look at the ASX200 since the bull market which commenced back in March 2009 our plan is simple but logical:

Firstly, we are looking for a pullback ideally over the coming 2-3 weeks which should provide an excellent opportunity to buy for a rally into Christmas and 2018.

Secondly, we would be keen buyers into any mid-December weakness looking for an aggressive rally into the month’s end, and remember avoid selling until the end of December.

We reiterate we are bullish the ASX200 with an assault on 6500 easy to visualize Into 2018.

ASX200 Monthly Chart

We have 2 holdings in the MM Platinum Portfolio which are technically looking excellent for fresh post-GFC highs and we feel there is a strong likelihood they will “top out” close to the time we expect to significantly increase our cash levels:

  1. Suncorp (SUN) $13.86 – SUN is both our longest held (over 2-years) and largest position (12%) in the MM portfolio, we continue to target the $15.50-$16 area i.e. 12% higher.
  2. Aristocrat (ALL) $23.73 – ALL is a fairly new addition to the MM portfolio but it’s already showing a +15.5% paper profit, our target remains the $25-$26 area i.e. over 6% higher.

Suncorp (SUN) Monthly Chart

Aristocrat Leisure (ALL)Monthly Chart

2 MM’s medium / long-term view on stocks & assets.

We are undoubtedly in an ideal world for asset prices with low inflation, historically low interest rates, ongoing central banks stimulation in some major regions plus an improving corporate landscape. Fund managers are becoming very complacent when it comes to risk, just consider the below 2 simple examples:

    1. Bitcoin which the average person is yet to fully understand has surged over 700% in 2017 and taxi drivers are discussing its merits like experts, for this particular asset class it certainly feels / sounds like the mid-80’s.
    2. In June Argentina managed to easily issue $2.75bn of 100-year junk bonds at 7.9%, history almost guarantees this will end in a messy default – the issue was around 3x oversubscribed!

Why would someone want to buy an Argentinian 100-year junk bond yielding under 8% when they get an almost guaranteed 3% from the US Fed – our strong opinion at MM is people are significantly miss-pricing risk on many assets today.

Irrational exuberance leading to expensive markets can last for years and while at MM we are not yet saying jump off the train warning signs are clearly building on the horizon.

Bitcoin ($US) Weekly Chart

We went aggressively bullish equities in early 2016 when the Russell 3000 was trading under 1100 with a then extremely bullish target of ~1550 – I don’t believe people actually took us seriously at the time. Technically we can easily tweak that target to the 1550-1600 region but the risk / reward for buying US stocks in our opinion has gone.

Ideally we will see a 5% correction in US stocks followed be one final rally into 2018 before MM moves heavily to cash but for now all we know for sure is we are at a very interesting period for stocks and investors should remain extremely open-minded.

US Russell 3000 Quarterly Chart

US S&P500 Weekly Chart

3 The Australian economy

This is not a new theme / topic for MM but last week’s strong decline in the domestic 3-year bond yield under 2% reiterates our strong opinion – the Australian economy is relatively unhealthy:

1 Australian 3-year bond yields falling back under 2% strongly implies no local interest rate increase  in the near future simply because our economy cannot handle it.

2 The Australian dollar has generated technical sell signals targeting significantly lower levels i.e. ~65c again implying a weak economy.

At MM we maintain our concern with the Australian consumer and continue to avoid discretionary retail stocks in the MM Platinum Portfolio, and only hold a small position of HVN in the Income Portfolio.

Australian 3-year bond yields Weekly Chart

The Australian Dollar “$A” Monthly Chart

Australian stocks / sectors

Resources

We have remained patient in adding to our IGO / NCM position within the Australian resource stocks which proved frustrating last week as the sector rallied strongly e.g. BHP +4.2% and RIO +4.5%.

However there is no change to our overall outlook:

1. We are positive the reflation trade hence are keen on the likes of BHP and RIO into weakness but still do not plan to chase strength.

2. We currently prefer the base metals over the more volatile and currently weak iron ore sector.

Bloomberg Industrial Metals Index Monthly Chart

Energy

We remain bullish crude oil for now but were conscious that for the first time since crude oils large fall in 2014 oil is now trading in backwardation i.e. buying oil today is more expensive than on the futures market in say 6-months’ time. This regularly occurs at a top in oil, it does not mean sell today but watch carefully at the very least.

Crude Oil Monthly Chart

Gold

We still hold 7.5% of the MM Platinum Portfolio in NCM which is currently showing a small paper loss of just under 2%. Fridays strong 0.65% rally was a pleasant surprise with no obvious catalyst – it simply felt like a fund manager pressed the buy button for the Australian resources.

If we are correct and the $US has a good chance of making one final low in the relative near term around the 90 level we should be able to crystalize a profit from this position over $25.

Newcrest Mining (NCM) Monthly Chart

The $US Index Weekly Chart

Banks and bond yields / interest rates

We remain both positive and overweight the banking sector as we fully move into reporting season and of course the November dividends – although so far we have experienced 3 out of 3 negative reactions following their reports, fortunately our only exposure was National Australia Bank (NAB).

We continue to keep 3 factors clearly at the front of our minds:

  1. US banks have already reached our initial target area although our preferred scenario is just another ~4% higher.
  2. Between 10th – 14th is usually a poor time for our banks we may take some money off the table from part of our holdings in the next week if we they can regain some of last week’s losses.
  3. CBA usually rallies over +4% in December hence we may increase our position from 7.5% to 10% if we see decent selling in November.

US S&P500 Banking Index Weekly Chart

Diversified Financials

The Diversified Financials remain bullish with a target ~13% higher. Recently we executed the planned purchase of IFL within the sector hence will not hesitate to take profit on CGF at our target: 

  • Our profit target for CGF is ~$14 where we are likely to take profit.

Challenger Ltd (CGF) Monthly Chart

Retail incl. Coles & Woolworths

No change, we are cautious the sector but will consider buying panic weakness in some select stocks if the opportunity arises i.e. HVN under $3.50.

We remain bearish Woolworths with an eventual ugly, potentially under $20.

Harvey Norman (HVN) Weekly Chart

Healthcare sector

We remain bearish the US Healthcare Sector which interestingly was again under pressure last week falling 0.65% by Fridays close.

On balance we will in general avoid the local healthcare stocks because if the US sector falls as we anticipate the currency will only be able to help so far – the long-term correlation is very close as the  below chart illustrates.

However, we are happy with our purchase of Nanosonics (NAN) in the short / medium-term. Although the stock fell on Friday following its AGM we felt the news was good, perhaps the market was simply “too long” in anticipation of an upgrade?

US S&P500 Healthcare Sector Quarterly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is only a few % away for the S&P500, considering we are ultimately looking for a correction of over 20% we are understandably avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the S&P500 has rallied an impressive ~24% with only one small 5.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet another ~5% pullback simply feels overdue but perhaps too many people are hoping / looking for it.

US S&P500 Monthly Chart

We remain bullish European stocks while last week’s lows hold.

Euro Stoxx 50 Weekly Chart

At MM we’ve been very bullish the Japanese Nikkei for all of 2017 but we’ve now exceeded our 22,000 target area after rallying over 30% since late 2016. We are now neutral but no sell signals are vaguely apparent.

Japans Nikkei Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we currently have 10% of the MM Platinum Portfolio in cash:

  1. Banks – We like our overweight banking position just for now but may “leg” between stocks this month if the opportunity arises.
  2. Consumer Services – Nothing is close at present.
  3. Diversified Financials – Following our purchase of IFL that’s enough for now.
  4. Energy – Were mildly positive but see no value at current levels.
  5. Food and Beverage – We like A2 Milk around $6.50.
  6. Healthcare – We still like Sirtex (SRX) as an aggressive play around $10.
  7. Resources – We like BHP around $25.25 but that’s a distance lower now.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No investment buying at this stage, as a trade VOC / TPM look interesting for the brave!
  10. Retail – We like Harvey Norman (HVN) but only under $3.50.
  11. Gold – We have enough exposure at this time with NCM.

Potential “Sells”

A few of our MM Platinum Portfolio stocks that are in striking distance of to our current sell targets:

  1. Challenger (CGF) around $14.00 – note was lowered slightly.
  2. Telstra (TLS) over $3.65.
  3. Aristocrat (ALL) around $25.

Standout technical chart (s) of the week

A2 Milk had a volatile week following the news that Colonial First State had reduced its successful 6.4% stake in A2M to 5.4% - why wouldn’t they after such a stellar run.

However there now remains a distinct possibility that other “jittery” investors may take some money off the table above ~$7.50. If this does eventuate an eventual pullback towards October’s $6.50 region is very feasible where we will likely become buyers.

A2 Milk (A2M) Monthly Chart

Investing opportunities for the coming week(s)

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

  • Nothing imminently close while I’m typing although if the banks have a good week we may lighten.

Trading Opportunities on our radar

We only have 1 trading idea this week which is actually a combination of trading and investment but included in the “trading opps.” due to the stocks lack of liquidity:

  • Buy REH limit $45 with a target of $50-55 running stops under $43.
  • Good risk / reward but with the stock trading ~$100k a day we strongly advocate small positions.

Reece Ltd (Plumbing) (REH)Quarterly Chart

Summary

We are now confident in our medium-term forecast of the ASX200 breaking well over 6000 in 2017/8  with a “guess” target of over 6200.

We remain comfortably overweight the banking / financial sector but may take some money off the table in the next 1-2 weeks.

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.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking . Positions are updated each Friday.

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 3/11/2017. 4.00PM.
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