Market Matters Report / Market Matters Weekend Report Sunday 7th July 2019

By Market Matters 07 July 19

Market Matters Weekend Report Sunday 7th July 2019

Market Matters Weekend Report Sunday 7th July 2019

The new financial year has kicked off in the same positive vein as the last with the ASX200 surging towards its all-time high, now only 1.5% away following last week’s 133-point gain. On Tuesday the RBA boosted the markets already aggressive hunt for yield by cutting interest rates to 1%, sending the beneficiaries of today’s ultra-low interest rate environment ever higher e.g. 80% of the Real Estate sector closed the week up by more  than 5%! Only the banks noticeably struggled at the start of the 2019/20 FY as their margins get squeezed as interest rates fall but the broad market remained strong with over 80% of the ASX200 closing up over the 5-days.

The trend has certainly been your friend since Decembers panic low and at this stage we must remain technically short-term bullish until we see a weekly close below 6690 and medium-term below 6315. Interestingly the first 6-months in 2019 has produced bullish both higher highs & lows, strongly assisted by the aggressive 180 degree change of policy by global central banks to a dovish stance from its prior hawkish outlook.  We love our statistics at MM and the current surge higher by the ASX200 in search of a new level / area of equilibrium, looks pretty similar to the rally after the GFC low:

1 – From March 2009 the ASX200 rallied for 8-months making higher highs before consolidating for a few years. Dramatic impulsive rallies from lows are a common characteristic with all stock markets as the ever negative heard scrambles to cover shorts and go  long. In 2009 the advance, before the market took a pause, was 1774-points / 57%.

2 – So far in 2019 the uninterrupted rally has also been 8-months, assuming July holds above 6315, with a current gain of 1359-points / 25.1%. Impressive considering stocks have already been rallying for around 10-years.

Importantly no sell signals have been generated but our “Gut Feel” is the next 200-points is more likely down than up. However the name tag often given to this 10-year bull market since the GFC of “the most unloved ever” still feels apt as few people I bump into on my travels feeling rich because of the share market,  if anything it’s the opposite due to the pullback in housing. Hence fund managers  / investors who have missed this advance by equities are potentially going to be queuing up to buy any decent weakness.

At MM we remain in “sell mode” as we look to adopt a more defensive stance than over the last 6-months, the relative thoughts and skews across our 4 Portfolio’s will be discussed later.

Short-term MM still remains technically bullish the ASX200 while it can remain above 6690, our the next technical target is ~6850.

The ASX200 is set to open on Monday down around 15-points with resources likely to struggle after relatively strong employment data in the US on Friday night diminished the markets confidence in a Fed rate cut at the end of this month. The US Non-Farm Payrolls slight increase created concerns that the Fed may “wait and see” with regard  to rate  cuts  which resulted in the $US rallying over 0.5% dragging the likes of gold and copper down in sympathy.

ASX200 Chart

Over recent months MM has been confident the RBA would cut interest rates to at least 1% with our main indicator being the 3-year bond yield was trading noticeably under the Official RBA rate. However over the last week the 1% mark has felt like a magnet to both rates, while a few days clearly doesn’t make a summer, we feel the “easy money”  for the rate cut lovers is behind us. Markets are still expecting one more 0.25% cut in 2019, with potentially another in 2020, but this may become 1 or 2 cuts too far with potential disappointment for investors already ravenous for “cheap money”. Logic says to me the RBA will want to see the impact of these 2 quick rate cuts before considering going again.

However the rate sensitive stocks still feel like they are playing catch up to bond yields, not the leading indicator as we sometimes expect.

MM is not convinced of on another rate cut in 2019 but stocks with sustainable yield are still arguably cheap if rates remain at current levels for the foreseeable future – term deposits are paying under half of the average yield of the ASX200.

Australian 3-year bond yields v RBA Cash Rate Chart

The chart below illustrates that the last 18-months rally by US stocks has been strongly correlated  to “cheap money” as the S&P500 and iShares IBOXX ETF (HYG US) – an ETF that holds high yield bonds -  have moved in almost perfect tandem. However the HYG has started turning lower even while the S&P500 made fresh all-time highs on Friday night, plus we saw a few cracks appear when stock futures initially fall -1.2% on a sniff that the Fed might not cut rates later this month.

MM is becoming increasing wary of US stocks after they have reached our targeted 3000 area plus the “heavy” HYG is adding to this feeling.

US S&P500 & Junk Bond ETF Chart

Last week we saw iron ore correct -10.4% dragging Fortescue down -8% from its weekly high while heavyweight RIO and BHP both struggled in a strong week for stocks.

Last week the largest steel industry group in China urged the government to maintain order in the iron ore market after prices surged to a five-year high following a supply squeeze exacerbated by the Vale disaster in Brazil. With the bulk commodity more than doubling over the last 7-months one of the major concerns is speculators are long iron ore futures and they could get hit if regulators try to cool the market hence magnifying / accelerating a potential pullback.

MM is extremely wary of iron ore and related stocks at current levels – our BHP position is on alert.

Iron Ore (CNY/tonne) Chart

MM has 2 strategies that are at the front of our minds at present with regard to sector allocation and the macro back drop for stocks:

1 – Investors have been chasing the obvious and usual suspects in their hunt for yield, we believe as these stocks become too expensive the secondary (not in quality) less familiar “yield play” stocks will come to the fore and outperform.

2 – A recession is being almost regarded as a fait accompli in rhetoric from economists plus dare I say it the RBA but the market is not currently pricing the risk into share prices. The Q4 15% correction by stocks was because investors were concerned the Fed would raise rates too fast causing a recession in the US, today a recession is still expected just not caused by the Fed, fascinating differing reactions by stocks to-date.

Understandably we are keeping a close eye on stocks / sectors that usually outperform during tough economic times.

1 –  Platinum Portfolio

The MM Platinum Portfolio had a relatively quiet week with no big winners, or losers, in our portfolio – the best performers were NIB (NHF) and Healius  (HLS) while lithium stock Orocobre (ORE) was our worst on ground. Last week’s trimming of our major bank position has taken our cash position up to a healthy 23%:

With Augusts reporting season looming only a few  weeks away a cash level ~20% feels optimum to take advantage of any overreactions on the downside – there’s likely to be huge volatility under the hood with only last week we saw the potential as Speedcast International (SDA) crashed almost 50% courtesy of a painful downgrade.

While we have no sell signals for stocks at this stage we are becoming increasingly cautious on both our own and especially the US indices, hence we feel the prudent risk / reward strategy is still too slowly start move to a more defensive skew over our portfolio.

Following the recent moves we have a number of stocks that we are considering switching out off and obviously into:

Holdings MM is considering selling -  BHP Group (BHP), Iluka (ILU), Macquarie Group (MQG) and Ausdrill (ASL).

Stocks MM is considering purchasing – Smart Group (SIQ), BlueScope Steel (BSL), Perpetual (PPT), Adelaide Brighton (ABC) and Tabcorp (TAH).

Expect MM to continue “tweaking” our Platinum Portfolio as the bull market matures and many stocks reach our target areas.

*watch for alerts over next few weeks.

Macquarie Group (MQG) Chart

One of the “3 ugly ducklings” in the MM Platinum Portfolio is Orocobre (ORE), the shares are now trading a huge ~60% below where Toyota bought into the lithium producer in an effort to secure guaranteed future supply of lithium, a major requirement for electric car batteries. However the share price has had endured an awful 18-months since its major tie up with the Japanese car maker due to the plunge in the underlying lithium price  as production has been ramped up across the globe.

Things look so bleak for lithium and its respective stocks that we have been considering whether we take our medicine, or indeed average. The office of Australia’s chief economist predicts a 26+% increase in stockpiles worldwide, representing 2 ½ years of consumption. According to this study, the ramp-up in electric vehicle and battery facilities is projected to lift lithium demand by ~50% by 2021 while currently under ½ of the lithium produced around the world ends up in rechargeable batteries.

MM is considering averaging its ORE position around current levels – an aggressive play.

Orocobre (ORE) Chart

2 Income Portfolio

The Income Portfolio had yet another quiet week with MM not transacting hence it still holds 4.83% in cash.

Again no change, until we see any indications that bond yields have bottomed MM sees no major reason to significantly reduce our large market exposure, or re-position / skew holdings towards higher rates i.e. why hold cash in today’s market when yield / income is your objective.

The RBA Cash Rate Chart

3 –  International Equites Portfolio

We recently launched our MM International Equities Portfolio and has started slowly as intended buying Apple (AAPL), Barrack Gold (ABX), Ping An (2318 HK) and Samsung (005930 KS) : .

No changes, are still sticking with this for now - “We remain bullish global equities but the “easy money” on the long side feels well and truly behind us hence our construction of an international portfolio is going to be a steady careful process.

Our favourite 2 overseas stock today are Netflix (NFLX US) and Bank of America (BAC US) both discussed in Wednesdays Overseas Report.

MM likes BAC targeting ~$US35 area with stops below $US26 i.e. solid  2:1 risk / reward.

Bank of America (BAC US) Chart

MM is bullish NFLX with a target ~20% higher.

Netflix (NFLX US) Chart

The major US indices have reached our targets as mentioned previously leaving us very cautious the S&P500, NASDAQ etc, especially as the junk bonds markets are starting to struggle. However the Russell 2000 (small cap) index has actually reversed its fortunes and started  to outperform short-term, technically this can be taken both ways and is yet another example of why its best to remain flexible.

On balance the RTY sitting ~10% below its all-time high while Friday night saw the likes of the Dow making fresh all-time highs we feel paints a negative picture.

US Russell 2000 Index (RTY) Chart

4 - MM Global ETF Portfolio

MM launched its Global ETF Portfolio last week, an extremely exciting time for the MM team & our subscribers:

So far we have tickled on 2 positions, long both the $A and gold, leaving us 85% in cash. Construction of this portfolio like our International Portfolio will be a slow and patient process. We are currently keeping an eye on 3 other scenarios:

1 – We are considering ways to buy the Emerging markets v Europe.

2  – Moving forward we are watching for potential turns in stocks and bonds BUT are no hurry to fight the current bullish trends in both – just yet.

3 – Copper and some other industrial metals look like they can take another leg lower, recession or trade war led perhaps. A short in this space would also offset some of the risk in our other 2 holdings.

Copper ($US/lb) Index Chart


Short-term Australian stocks obviously look good as they trade at multi-year highs but on balance we feel it’s time to adopt a more conservative stance, we are likely to continue tweaking our portfolios accordingly in the weeks ahead.

US stocks will trigger a sell signal with a break below the 2960 by the S&P500, similarly we may consider a “cheeky” short around the 3030 area.

Gold still looks great and we want to increase our exposure to the sector in our portfolio (s) into a pullback – a correction looks likely to start on Monday.

Chart of the week. 

Commonwealth Bank has rallied over 30%, if we include dividends, from its Royal Commission induced panic low in late 2018. The technical picture has been fairly good over recent weeks and if the pattern continues to unfold as we anticipate 2 reasonable moves in the months ahead:

1- First a fresh 2019 high around $85 before another pullback to test the $80 region or an “abc” pullback towards $78.50 before we see ~$85.

2 – After one of these corrections we expect a rally of over 10% towards $90.

Obviously lots of water to go under the bridge with this call but If this unfolds as above we may tweak our banking exposure at respective levels. In simple terms its predicting levels where we feel investors are likely to buy CBA for yield as opposed to selling it over concerns around margin contraction.

In the bigger picture CBA still looks good.

Commonwealth Bank (CBA) Chart

Investment of the week.

We are currently considering the out of favour Adelaide Brighton (ABC) which is one of Australia’s largest manufacturers of construction materials including cement and lime hence it’s not rocket science to comprehend the company’s share price struggle in the wake of the housing market’s contraction.

However following the stocks major correction 3 things are sparking our interest – a 4.84% projected dividend yield, exposure to government infrastructure spend and lastly the technical picture looks great as investors look for “cheap” opportunities.

MM is bullish ABC with an initial target ~15% higher.

Adelaide Brighton (ABC) Chart

Trade of the week.

BlueScope’s (BSL) has endured a horrible 18-months falling over 45% at its worst. However we feel the tide has turned and are happy buyers of BSL with an initial stop below $11.40.

MM likes BSL initially  targeting ~15% upside.

BlueScope Steel (BSL) 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 day!

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 6/07/2019

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