Market Matters Report / Market Matters Weekend Report Sunday 8th January 2017

By Market Matters 08 January 17

Market Matters Weekend Report Sunday 8th January 2017

Market Matters Weekend Report Sunday 8th January 2017

Overview

We believe strongly that 2017 will be an exciting but potentially very dangerous year for investors. The major theme that we have been both forecasting and investing towards has played out over the last 18-months. MM's view is that US stocks are now in the final phase of a mature bull market which commenced in 2009 - the Australian market is obviously very correlated with the US stock market. Five important points to keep in mind during 2017:

  1. Our ultimate target for US stocks is around 8% higher BUT the final phase of a bull market is usually choppy and volatile - hence buy weakness and sell strength until further notice.
  2. When we consider the Russell 3000 chart, with an ultimate target around 1500, it shows that the best of this final leg up in stocks is already well behind us.
  3. We are targeting a 25% correction for stocks once this current advance is complete.
  4. The year following a US election are historically the worst for stocks, often heralding the start of a bear market / major correction.
  5. We remain open-minded when this top will occur but currently our best guess is mid-2017 - perhaps sell in May and go away!

Hence until we believe a top is in place, and we start taking steps for that scenario in our portfolio, the game plan for 2017 will be a more active style of investing.

US Russell 3000 Index Quarterly Chart

The local ASX200 looks bullish at present unless it breaks back under 5600. Interestingly our forecasts for the ASX200 over the next few years may seem almost crazy to many investors BUT in many ways it’s no different to what happened over the last few years.

  1. Short-term - a 80-90 point pullback is due and currently we will reserve general buying until this unfolds.
  2. Medium Term - we can see a rally over 6000 which is now under 5% away.
  3. Longer term - in a similar vein to the US we anticipate weakness back under the psychological 5000 area.

ASX200 Monthly Chart

ASX200 Daily Chart

The local banking sector which has such a large influence on the ASX200 has enjoyed an excellent rally since the US election gaining close to 18% since the lows of November. We are happy buyers of CBA and BEN into weakness who both go ex-dividend in February, plus ANZ for the next 6-months.

ASX200 Banking Index Monthly Chart

A number of major global indices are currently bullish led by the Japanese Nikkei and German DAX. If the Nikkei and DAX are going to both advance by ~10% it strongly suggests that the ASX200 has more decent upside potential in the short-term, perhaps over 6000.

Our current target for the Nikkei is a potential test of the 22,000 region i.e. over 10% higher.

Japanese Nikkei Monthly Chart

Similarly, the German DAX looks very bullish with a target around 13,000, again ~10% higher.

German DAX Monthly Chart

Arguably the biggest keys to successful investing through 2017 will be having our finger on the pulse of global interest rates and the $US. Our view currently is the bear market in interest rates is over and investors should be preparing for a higher interest rate world. It was only back in the 1980's when Australian interest rates were around 18%, a bounce back to 6% is nothing in the bigger picture BUT it's an increase of 400% from the current level!

We have little interest in investing in the "yield play" style stocks for the foreseeable future after taking profits on our shorter term positions in Westfield and Transurban.

US Fed Funds Rate (Upper bound) Monthly Chart

Short-term the market feels very long the $US as all the fundamentals point towards higher interest rates for the US as Mr Trump moves into the Whitehouse.

A sharp correction in the $US would not surprise and if this provides a trading opportunity we are likely to play it by buying gold stocks.

The $US Index Quarterly Chart

Standout technical chart (s) of the week

Our favourite sector at present is the diversified financials and this is where we are likely to be taking any buying opportunities, in particular Henderson (HGG), IOOF Holdings (IFL) and Challenger (CGF) into weakness.

ASX200 Financial sector Quarterly Chart

Summary

  • Our view remains that US and local stocks will rally over the coming 3-6 months but the next few weeks are likely to be testing for the bulls.
  • 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 10-points on Monday, short-term we can see a little more consolidation around 5750-5775 but a +80-point correction should be close at hand.

Potential Investing opportunities for the coming week(s)

We are now holding 36% in cash and are wearing our sellers hat into strength BUT our buyers hat into weakness = the theme of Q1/2 of 2017.

Potential Trading opportunities for the coming week

  1. On the index front we still like the German DAX and Japan's Nikkei over coming months.
  2. For the index traders we think the local market is close to a reasonable correction which can be bought.
  3. We are watching gold stocks carefully for trading opportunities on the long side.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 8th January is below:

https://www.marketmatters.com.au/blog/post/market-matters-portfolio-7th-january-2017/

We are currently holding 36% in cash after taking some healthy profits over recent weeks, we are looking to buy a 80-90 point pullback.

Australian ASX200

The ASX200 could easily break over 6000 before the correction we are targeting unfolds over the coming few years - the key is to remain 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 11% since Donald Trump's victory with the Dow, Russell 2000, Russell 3000 and finally the NYSE Composite making fresh all-time highs. We are becoming more cautious stocks, our best "guess" at present is ~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 +12% and Swiss SMI +19% - perhaps 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.

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 reasonable strength in 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 rallied 1% last week, we can see a pullback in coming days / weeks but we are buyers of this retracement.

Banking sector

The local banking sector is looking strong which makes sense as it becomes more profitable as interest rates rise. We potentially will add to our CBA / MQG position into a pullback.

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 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 Financial Services sector looks bullish, our target is over 10% higher, with HGG, CGF and IFL leading the way from current levels.

Chart 39 – ASX200 Financial Services Index Quarterly Chart

Chart 40 – Macquarie Group Ltd (MQG) Monthly Chart

Chart 41 – AMP Ltd (AMP) Monthly 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, even after the last few months fireworks, on a longer-term basis we are targeting the 150 area. 

Iron Ore achieved exceeded $US70/tonne target, technically we now remain neutral / negative after the "abc" target of ~$US80/tonne was recently achieved.

On balance we think the sector can go higher but would only be interested in buying a ~3-4% correction.

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 strong possibility after the OPEC decision and solid close over the $US52/barrel area. Our main concern for the energy stocks is the overall optimism now baked into the market.

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 have appeared in gold recently as its fallen hard in anticipation of rising interest rates in the US, our initial target was the $US1200/oz support area which has now been broken.

We believe there will be some excellent trading opportunities in 2017 within the gold sector but clarity has not yet emerged.

Chart 56 – Gold Monthly Chart

Chart 57 – Newcrest Mining (NCM) Monthly Chart

Chart 58 – Regis Resources (RRL) Weekly Chart

Chart 59 – Barrick Gold Corp. (US) Monthly 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 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 here short-term with the overall sector remaining mildly positive 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 sectors

While there are no sell signals within the sector at present we believe there are better places to be invested during 2017.

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 decent 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 a horrible 2016 falling ~20% after spending many years in the limelight. Changes within Broadband have made it extremely hard 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 up another 4-5% after its recent 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 the sector saw some wobbles 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 like Star City (SGR) around $4.60 but are currently not enjoying the price action of Mantra (MTR) at present. The current weakness of the $A should help the sector.

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 is still in suspense and at this stage due to uncertainty / volatility we envisage giving these stocks a wide berth in Q1 of 2017.

Chart 85– Bellamy's (BAL) Weekly Chart

Chart 86– Blackmore's (BKL) Monthly Chart

Australian Dollar (AUD) / FX sector

The $A is trickly at present but we are comfortable with our eventual target of the ~65c region.

The $US remains strong 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.

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

Chart 88– The $US Index Quarterly 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.

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 08/01/2017.  9:00AM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here