Market Matters Report / Market Matters Weekend Report Sunday 6th May 2018

By Market Matters 06 May 18

Market Matters Weekend Report Sunday 6th May 2018

Market Matters Weekend Report Sunday 6th May 2018

Psychology in my opinion is the most underrated of the 3 critical components for successful investing i.e. Money Management, Methodology and Psychology. Most people put well over 80% of their efforts into the methodology of their decision making process while leaving very little time for the other 2 equally important ingredients – a bit like the perfect roast beef dinner with no roast potatoes or gravy, image that! Last week tested my psychology at times and this is when a well thought out long term plan must be in place to enable an investor to simply fall back upon the foundations of their views. This importantly allows us to avoid being pulled in different directions by the markets short-term noise. The ASX200 has roared back to life over the last 5-weeks rallying an impressive +6.7% from its lows leading to the below self-doubt as we watched the impressive rally unfold:

  1. We called this advance, albeit not as aggressive, so at MM we held our nerve when things were looking dicey and actually increased our market exposure during February’s initial US led plunge.
  2. However, following our recent period of profit taking in the resources space it has been too easy to become frustrated that we were now not “long enough”.
  3. The $US has rallied as we expected but the resources didn’t follow their usual path and correct – frustrating.
  4. We took profit on Macquarie (MQG) and they came out with a corking result, even though on Friday it closed less than 1% above our exit it was again easy to become frustrated.
  5. Then to end the week the market fell fairly hard and it was easy to quickly doubt our market view and question whether this was the start of a classic “sell in May and go away” period correction.

Basically human psychology is perfectly designed to be an awful investor starting with the obvious instinct to “take your profits too early but run your losses”. I had lunch with a client on Friday and we discussed various things, A2 Milk being one of them. He’d owned them, doubled his money and sold. We have subsequently bought A2 Milk at higher price to where he sold, and he was initially reticent to buy them again – simply from a physiological perspective. If an investor sells a stock and will only ever consider buying it again at a lower price, the universe of investible stocks will get smaller and smaller over time. It’s psychological, nothing else, and it’s often an impendent to making money.

When we feel that the market is pulling our minds in different directions we immediately go back to our long-term plan – best summarised by our 2018 Outlook Piece. After reviewing our thoughts of January it was easy to sit back and say to ourselves – this ships definitely on course.

  1. In 2018 we were targeting a “warning style” correction to provide a short-term buying opportunity – tick! this happened and we bought the market.
  2. In 2018 we have been targeting fresh all-time highs for most global indices to provide an excellent selling opportunity – tick so far! - this still feels on track and we are slowly increasing our cash levels accordingly.
  3. In 2018 / 2019 are we calling a ~20% correction to provide one of the best buying opportunities in decades – obviously time will tell.

Last week we saw a very strong broad market rally with some clear signals of some fund managers being caught underweight i.e. chasing of 3 market groups - SPI futures to get overall market exposure, market darlings (e.g. A2M +7.5% and Xero (XRO) +5.1% ) plus recent market dogs (e.g. Challenger (CGF) +12.2% and Vocus (VOC) +8.3%). However we must continue to remember at all-times we believe this market is in the final throws of its 9-year bull market.

  • MM remain bullish the ASX200 initially targeting fresh decade highs around 6250, now only 3.1% higher.

Today we will look into triggers that will see us dramatically increase our cash position / take some negative market positions via ETF’s both from global markets and local stocks.

ASX200 Chart

Our bigger picture view for stocks is very well illustrated by the US Russell 3000 Index. We are currently in the second longest bull market in history, one that has basically climbed a wall of worry since the GFC, squashing any bears in its path. Our current target for the Russell 3000 is ~8% higher.

Also the picture that’s unfolding in Europe continues to add significant weight to our short-term bullish view, ideally we would love to see one final high to sell aggressively. If our vision is correct stocks have had their warnaing which history shows us they usually forget very quickly only to eventually become far poorer due to the oversight.

  • MM is still forecasting a major correction of around -20% in the medium / longer-term hence the risk / reward is still dangerous for the bulls, even if we are correct with our target of fresh decade highs by the ASX200.

We’ve already see how quickly global stocks can turn this year with the ASX200 falling almost ~7% and the Dow 12.3%, if we are correct selling a few % early will not be an issue for the patient investor.

Russell 3000 Index Chart

Last week we touched on the ASX200 being far more correlated to the UK FTSE (Europe) than the US (US) although few discuss the 2 in the same breath. We topped out in January along with Europe, with both ignoring a huge surge by US stocks. Again over the last 5-weeks since the buyers have totally taken control of our market the correlation has remained solid:

  • The ASX200 has bounced +6.7%, the UK FTSE +10.3% but the US Dow is up only 1% and all of this was on Friday night!

UK FTSE v ASX200 Chart

Both the UK FTSE and German DAX are following our 2018 path far too well to be ignored and we will definitely consider them as important triggers for the local stock market.

  • Our target for the UK FTSE is ~7900, or 4.5% higher.
  • Our target for the German DAX is ~14,000, or 9% higher.

We actually have a “Gut feeling” that the local and European markets will top out before the US, similar to mid-January this year. If this does unfold we will definitely be selling into the strength.

A secondary trigger will be a failed rally by the FTSE above 7800 before weakness back towards 7650 – this would generate an excellent technical signal. I believe all triggers / catalysts available should be used in 2018 as a smorgasbord of opportunities look ready to present themselves.

UK FTSE Chart

German DAX Chart

Moving specifically onto the US market the picture which looks unchanged on the surface while our view definitely remains - we are looking for US stocks to attempt a rally to fresh all-time highs – we are now 70-30 whether they can break above Januarys top, currently 7.8% away. However beyond the supporting short-term fundamental picture for US equities 1 important characteristic has caught my eye over the last 2-weeks:

  • The market has tried to fall for the last 2-weeks but on both occasions recovered impressively to close on its highs.

The S&P500 is poised just below its overhead trendline resistance which has capped the market since late January and we believe US stocks are about to join in the recent global stock market party.

US S&P500 Chart

1 ASX200 Accumulation Index hits all-time highs!

Unbeknown to many the ASX200 Accumulation Index made fresh all-time highs last week, as you’re probably aware at MM we are looking for a major top in the coming months / quarters. Our ideal target for this often ignored index is now around 6% higher, before we intend to baton down the hatches as the risk / reward in our opinion will definitely favour a +20% correction.

Conversely the ASX200 is miles away from its all-time high but a 6% rally would have it ~6425, well above our initial target of 6250.

Statistically if the ASX200 continues to rally this month and simply has a range equal to the average of the last 3-months the target is 6270, roughly the decade high we’re expecting. We will have no concerns if we miss the last piece of the rally and certainly intend to be building a large cash position above 6200. Remember sitting on cash longer-term may be an awful investment but being “cashed up” when bull markets end presents simply amazing opportunities.

The one thing this market is lacking for me to be a classic top is euphoria, similar to that exhibited by the Australian property market last year and banks back in 2015. Perhaps the last few weeks rally is the start of a euphoric blow-off as investors look for alternatives to property, the staple investment diet of most Australians.

“Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” - John Templeton

ASX200 Accumulation Index Chart

2 Three stocks aiding the MM roadmap

Apart from watching the underlying indices keeping our fingers on the pulse via the stocks themselves is also, if not more important, especially as we have profit targets in all of our holdings. We like to reference individual stock charts which offer the most clarity as they continually provide clues as to the health of the whole market.

3 stocks which been adhering to our plan extremely well since we purchased them are:

  1. A2 Milk (A2M) $12.02 – We are targeting ~$14, or 16% higher.
  2. CYBG Plc (CYB) $5.65 – We are targeting ~$6, or 6% higher.
  3. Suncorp (SUN) $14.10 – We are targeting ~$15.50 minimum, or 10% higher.

If these 3 stocks reach our targets and the hugely influential banking sector holds together the 6250 area may just be too conservative!

A2 Milk (A2M) Chart

CYBG Plc (CYB) Chart

Suncorp (SUN) Chart

3 Base metals lower on cue but alas not the stocks.

We’ve lightened our exposure to the Australian Resources Sector into recent strength but it now feels a touch premature as the anticipated weakness in base metals has unfolded but the $A has tumbled even further cushioning the effect for local miners.

We are still currently long BHP plus independence Group (IGO) which we purchased last week into panic selling but the sector feels ok and probably has more legs in it.

Fridays video with highly respected resources analyst Peter O’Connor (Rocky) threw up a couple of interesting points:

1 Rocky’s very bullish the cashed up sector but acknowledges we are late cycle i.e. he’s on alert.

2 The mid cap space has arguably the healthiest balance sheets in history – attractive to large offshore buyers i.e. potential M&A.

3 Three potential large takeovers are Independence Group (IGO) which we own and both OZ minerals and Alumina (AWC) which MM sold for nice profits – hopefully not too soon.

Importantly China remains firm so overall we may have reduced our position a touch early but his comments on Fortescue (FMG) also caught our attention – a great but aggressive buy; see today’s Trading Opportunities.

Bloomberg Base Metals Spot Index Chart

The Aussie Dollar Chart

BHP is set to open above $32 on Monday, challenging its 2014 highs.

  • We remain long BHP and have backed off our target from $33 to $34, an upward “tweak”.

BHP Billiton (BHP) Chart

4 MM and the $US – again!

In our 2017/8 Outlook Reports, one of our standout contrarian views was the $US would continue its decline before finding a major low around the 88 level. So far this has unfolded perfectly with the $US declining 15% from its late 2016 high, just when most analysts were bullish due to a strengthening US economy. Now most of these same analysts have turned bearish on mass hopefully just in time for our anticipated 8-10% decent bounce – already ~5% so far!

We often quote that the market likes to move in the path of most pain, the recent USD outperformance has definitely helped that adage ring true – the recent Bank of America Merrill Lynch survey identified the short $US trade as the second most crowded position and the most crowded FX trade. Unfortunately our position using the Beta Shares ETF is only up a few %, in hindsight we should have considered a more leveraged, or larger, position.

  • We believe the $US  has made a significant low - we are bullish the $US and long via the Beta Shares ETF (USD.AXW).

NB We anticipate this will be one of many views that MM “play” via the diverse array of available ETF’s available to investors in today’s market.

$US Index Chart

5 Crude Oil is hitting our target

We’ve been bullish crude oil for a long while targeting the $US70/barrel area, beware we’re finally arriving!

Hence while we have upgraded our BHP target to $34 we may bring it back down quickly if crude shows any signs of a dramatic back flip.

Crude Oil Chart

In last weeks “Standout Chart of the week” we covered Origin Energy (ORG) where we remained bullish targeting a test of $10 moving forward.

Following Fridays strong performance by US stocks and 1.9% rally in crude oil we may easily see $10 on Monday. Remember:

“Due to their high correlation we may well sell our remaining BHP position when / if this rally unfolds for ORG.”

I.e. We remain bullish BHP but will not necessarily give it too much room into current strength.

Origin Energy (ORG) Chart

6 Time for bond yields to rest?

On Friday night the Fed left interest rates unchanged, while acknowledging inflation is close to its target without indicating any intention to deviate from their gradual tightening of monetary policy. Nothing too scary and bang stocks rallied sharply.

US 2-year bond yields rose again on the week but as we slowly approach the psychological 3% area a few months consolidation now feels close at hand. However, Australian bond yields slipped on the week as the RBA left interest rates unchanged and local Australian housing prices fell again – with the current local economic climate it feels to us that the RBA have their hands tied and interest rates are going nowhere fast in Australia.

US 2-year Bond Yields Chart

Australian 3-year Bond Yields Chart

Conclusion

No major changes following last week’s strong market:

  • We remain net positive equities for the coming weeks / months with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position.
  • We may look to buy 1-2 takeover targets if they pass our other filters.
  • We may look to buy / average some of the “dogs” of the last 12-months.

“Shopping List”

Below is our revised list of stocks plus ideal levels which are close after last week’s moves, we currently have 17% of the MM Platinum & 2.5% of the Income Portfolio in cash, hence we are careful buyers considering our negative medium-term outlook:

1.      Watch for alerts on takeover targets.

2.      Watch for alerts around the “dogs” of the last 12-months.

“Selling List”

1.      BHP Billiton (BHP) around the $34 area.

2.      CYBG Plc (CYB) above $6.

Standout technical chart (s) of the week

We’ve had our eyes on HVN over the last 6-months targeting a fall to ~$3.25 and with a little help from JB HI-FI last week it again tested its 3-year lows.

  • Watch for a failed spike beneath $3.30 to provide a low risk buying opportunity.

HVN is currently trading on a conservative 10.45x valuation while forecast to pay a 7% fully franked yield. Nothing scary in these numbers unless they follow JBH and miss market expectations.

Harvey Norman (HVN) Chart

Trading Opportunities on our radar

Fortescue on closer inspection is throwing up a healthy risk / reward aggressive play / trade:

  • Buy FMG around $4.80 targeting $5.40 with stops below $4.56, solid 3:1 risk / reward.

Fortescue Metals (FMG) 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.

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 5/5/2018. 9.00PM.

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