Market Matters Report / Market Matters Weekend Report Sunday 8th July 2018

By Market Matters 08 July 18

Market Matters Weekend Report Sunday 8th July 2018

Market Matters Weekend Report Sunday 8th July 2018

Last week the ASX200 rallied a solid +1.3% again led by the banking sector which gained almost 4% while the large cap resources such as BHP and RIO declined over 2%. The rally by the banks over the last 4-weeks has been a perfect illustration of the elastic band effect which we regularly discuss i.e. markets, especially in the short-term, are driven by the human emotions including “Fear & Greed” leading to huge oscillations of optimism / pessimism which regularly push stock prices to relative extremes in both directions.

With the “Big 4 Banks” making up over 20% of the ASX200 its no surprise that the broad index is making fresh decade highs as the sector dramatically comes back into favour i.e. only 2% of the ASX200 stocks equals an amazing 21.4% of the market. We often say “the market cannot go down without the banks” and how true that’s looking at present, until the strong rebound in the banks at least consolidates the upside momentum is likely to be maintained, hence we will have a good look at the banks later on in todays report.

We have regularly reminded subscribers to be “open-minded” in 2018 / 9 and this definitely now applies to a potential market top we have been looking for in the 6250-6300 region which so far has shown little sign of materialising. Below is a very quick outline of how are we currently seeing things:

Short-term – the market looks set to push higher until we see failure and a close back below 6250 in the ASX200 i.e. around 1% below where the market is set to open on Monday morning.

Medium-term – MM still sees a major top unfolding in 2018/9 followed by a substantial correction hence we remain in “sell mode” but patience still feels the correct strategdy.

Long-term – We are looking for a significant correction for an excellent buying opportunity probably in around 18-months’ time but that’s too far away to be of major concern at this stage.

ASX200 Index Chart

ASX200 September SPI Futures Chart

Two weeks ago we said “it feels like some underweight fund managers have been forced to commit some of their cash into Australian stocks” – plus we pointed out that in the recent Bank of America (BofA) Fund Manager survey fund managers allocation to stocks was sitting at an 18-month low – certainly not bearish stuff at the time.

However things have changed dramatically in the latest June BofA survey illustrating a sharp reversal in market sentiment i.e. from pessimism to optimism.

  1. Fund managers have increased their exposure to equities by 16% to the highest level since March 2017.
  2. The move back into equities has been triggered improving profit outlooks with allocations to commodities at an 8-year highs and energy a 6-year high.

In our opinion this changes the markets dynamic considerably as now fund managers are long stocks the previous safety net of cashed up fund mangers looking to buy weakness is largely removed hence they can go down far easier, perhaps not now but at some stage.

At this point in time the risk / reward for MM is on the sell side but we reiterate no “scary” sell signals / triggers have been generated to-date.

ASX200 Accumulation Index Chart

As subscriber know we’ve been anticipating a top for equities in 2018 /9 – since the GFC the ASX200 Accumulation Index has experienced 2 meaningful pullbacks of around 20% and 18% respectively. Two things are catching our eye when we consider the position of today’s market:

1. The ASX200 Accumulation Index has clearly reached overhead technical resistance but it can sit here climbing a wall of worry for months, just look at 2010.

2. The market has not experienced a decent pullback since February 2016, over 29-months ago, it’s fairly easy to say a correction is overdue – not a particularly good reason to sell for MM

The question we keep asking ourselves at MM is are equity markets extremely strong or crazily complacent - only time will tell as fund managers pour $$’s back into stocks as company profits rise while ignoring the potential Trump-China trade war. At times like this we have to stand back and look at the bigger picture we’ve been “painting” throughout most of 2018:

  • We expected the most watched US S&P500 index to trade between its January high-February low for a number of months – this has proved correct.
  • Then we expected the S&P500 to attempt a rally potentially to fresh all-time highs– this is currently unfolding and will theoretically follow one of the below 2 green arrows with fresh all-time highs ~4% higher.
  • Lastly we expect the S&P500 to experience a meaningful correction in 2018/9, obviously time will tell if this proves correct.

US S&P500 Index Chart

1 Suddenly everyone wants the banks.

At MM we hold 27% of our flagship Platinum Portfolio in the “Big 4 Banks” hence we’ve thoroughly enjoyed the impressive return to favour of the Banking Sector. Recently our tune has been the banks are cheap and paying excellent yields hence we felt it was just a matter of time before this strong recovery occurred i.e. the elastic band as we like to say was stretched way too far and subsequently snapped back with CBA rallying 12.6% in just 4-weeks.

Importantly now is what we think comes next, today we’ve looked at 3 banks and they all remain constructive to various degrees.

1 Commonwealth Bank (CBA) $75.67 – technically the failed break below $70 is overall bullish with a potential target around the $87 area, short-term the picture will remain rosy while $74 holds.

Commonwealth Bank (CBA) Chart

2 ANZ Bank (ANZ) $28.99 – technically ANZ is looking great with an initial target around $30, or 3.5% higher, a break back below $28.70 would cloud the picture short-term.

If we were to consider increasing our already large banking exposure in 2018 ANZ would be the likely candidate.

ANZ Bank (ANZ) Chart

Second tier banks were also strong last week, BOQ has now bounced over 9% from its low, an expected reaction we had outlined in earlier reports.

  • We think BOQ will at least challenge the $10.80 area before this recovery may encounter selling i.e. ~ 3% higher.

Bank of Queensland (BOQ) Chart

The individual banks look good which suits the MM portfolio mix but raises the question if a top for the ASX200 can be close at hand.

  • Out current plan is to maintain our banking exposure, given the view remains they will outperform over the next year.

2 Is “Doctor Copper” right this time?

Copper is often thought to be an excellent leading indicator to the health of the global economy due to its widespread use in many applications across the globe. The current 16% decline will prove a fascinating challenge to the theory: 

  • Copper appears to have embraced the concerns that a US-China trade war will slow down global growth BUT stocks have clearly ignored the risks so far.

Only the copper stocks have paid much attention with OZ Minerals (OZL) also declining 16% from its June high.

  • At this stage MM believes the risk / reward is on the side of buying copper, and OZL if it again pokes its head below $9.
  • However, we are a little concerned that fund managers have their largest exposure to commodities in 8-years.

Copper Chart

3 The resources may yet provide a buying opportunity

Base metals have had a relatively tough time recently although many Australian stocks have certainly proved very resilient led by diversified goliaths BHP and RIO who are both close to multi month highs.

The BofA fund managers survey has shown us that fund managers are “very long “ the commodities which while it makes fundamental sense it often proves painful when everyone is on the same train i.e. the first port of call for both local and overseas investors was likely to include BHP and RIO which at current prices we do not find especially attractive.

Bloomberg Base Metals Spot Index Chart

BHP and RIO have basically ignored increasing concerns around China and weakness in commodities as everyone sits back licking their lips looking for buybacks, special dividends etc……perhaps its not that easy, we believe they are great companies but the risk reward is not exciting to us at current levels:

  • BHP Billiton (BHP) – We continue to like BHP into weakness but our ideal target remains below $30.
  • RIO Tino (RIO) – Similar to BHP we like RIO but into weakness with our ideal target ~$74.

BHP Billiton (BHP) & RIO Tinto (RIO) Chart

We currently see better risk / reward value in a few of the slightly smaller names into further weakness.

  • OZ Minerals (OZL) below $9, Western Areas (WSA) around $3 and Alumina (AWC) below $2.50.

Western Areas (WSA) Chart

4 The pieces of puzzle continue to come together

When we are continually evaluating the future direction of global stock markets we look at stocks, sectors & indices that are the clearest to us - 3 examples of watch we are watching closely:

Bullish for now

1 Suncorp (SUN) – SUN remains on track for our long-term $15.50-$16 target area, now only 4% higher.

2 Macquarie Bank (MQG) – MQG remains in a strong bullish uptrend, ideally we are buyers of the next $9-10 pullback.

Suncorp (SUN) Chart

Macquarie Bank (MQG) Chart

Sell triggers

The British FTSE is one of the worlds equity markets most correlated to our own ASX200 hence definitely worth watching closely.

  • The FTSE has generated a technical sell by repeatedly closing below 7650 targeting a ~10% decline.

UK FTSE Chart

On balance markets remain bullish for now but this bull market is undoubtedly maturing in our opinion.

5 Casino stocks are becoming volatile

Casino stocks exposed to Macau have been getting smacked as revenue continues to disappoint with a number of reasons cited including a plunging Chinese share market, China’s crackdown on cash outflows, a proposal to allow gambling on a nearby island and now we have a potential trade war looming between China and the US.

  • In the last 2-months Wynn Resorts shares are down -25% and Las Vegas Sands -14%.

Currently around 75% of Crowns new Sydney Barangaroo apartments are sitting unsold, including the $100m penthouse – perhaps the sellers have been way too optimistic in today’s soft real estate market. CWN are looking for the 82 residences to offset a significant portion of the $2.2bn build but with prices starting at $9.5mn the buyers pool is clearly a small group.

Also, with the purchasers currently basically all Australian the question being posed is can CWN attract overseas punters if not real estate buyers, we believe there is room for some bad news in coming months.

  • MM are keen buyers of CWN into weakness which would not surprise us in 2018 i.e. patience certainly feels prudent for now.

Crown Resorts (CWN) Chart

Conclusion

Again no major changes although following the recent solid gains by the ASX200 and especially the banking sector its hard to get too negative just yet.

  • We remain net positive equities for the coming weeks (just) while the ASX200 can remain above 6250.
  • We will continue to slowly increase our cash position and remain firmly wearing our “sellers hat”.

“Shopping List”

  • We still need decent weakness in the resources, COH, MQG and CSL for example before we start buying.

“Selling List”

  • General selling into strength.
  • Suncorp (SUN) between $15.50-$16 but we may reduce this large position into initial strength above $15.
  • Janus Henderson into a further strength.
  • Orocobre (ORE), ideally into any reasonable strength or potentially a switch into Kidman Resources (KDR) – see Trading Opportunity below.

Standout technical chart (s) of the week

The Emerging markets have plunged almost 20% in 2018, a move we flagged as a possibility but its proven fruitless as we were hoping its usual close correlation to BHP would continue allowing us to buy back into the “Big Australian” below $30.

  • As we said earlier we like BHP but this relative divergence is another reason why we believe the current BHP price contains a large degree of optimism.

Emerging Markets (EEM) Chart

Emerging Markets (EEM) v BHP Chart

Trading Opportunities on our radar

MM has enjoyed some excellent success in the lithium space in 2018:

  1. In mid-January we bought ORE for $6.45.
  2. In late January we sold ORE around $7.30 and bought KDR around $1.87.
  3. In mid-March we sold KDR around $2.25.
  4. In late March we repurchased ORE for ~$5.75 – this position is currently down over 5%.

Here we are long ORE which is down ~5% but KDR has tumbled 35% since its May high. We are bullish KDR around current levels while ORE is feeling a touch tired although it may bounce back towards $6.

  • We like the direct switch from ORE to KDR at current levels and / or buying KDR while looking to sell ORE closer to $6.

Kidman Resources (KDR) v Orocobre (ORE) 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 here. Positions are updated each Friday, or after the session when positions are traded.

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 07/7/2018

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