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

By Market Matters 08 April 18

Market Matters Weekend Report Sunday 8th April 2018

Market Matters Weekend Report Sunday 8th March 2018

Writing a report when the ASX200 has moved less than 0.1% for the week can initially be challenging because it feels like nothing has really happened however when we look under the hood at different stocks / sectors, let alone consider a potential US – China trade war, there’s plenty going on. A choppy but flat week on an index level provides me with an ideal opportunity to evaluate markets from a different perspective in an attempt to answer the million dollar question – is the 9-year post GFC bull market over?

It’s currently very easy to get caught up in the negativity surrounding stocks as a potential Trump-China trade war dominates the press, interestingly something that was not getting any air-time whatsoever 3-months ago nor being touted as a potential ‘threat’ to the market. However let’s stand back and consider what we said at the start of the year when markets were quiet and not influencing our thoughts in any way day to day. From our 2018 Outlook Piece:

  • “A warning pullback for stocks appears imminent but a decent downturn for stocks may easily be 6 -months away” - This was our first point, word for word, in the January MM Outlook Report.

Of course now its unfolding before our eyes human emotion, the curse of investors and traders alike, makes it easy to panic and think it’s all over for stocks but so far the markets are still following our script – our best guess was the warning drop would be ~6% which is acceptable. Admittedly our shorter timeframe calls have been chopped around as we expected a rally to fresh highs to commence in March but subscribers should always remember that the day to day gyrations of markets are just noise, it’s only when you stand back and look month to month, and beyond, that more meaningful trends emerge.

Last week global equities closed -8.8% below their 2018 January high, but down only -2.4% for the calendar year. If our January view is to prove correct markets should hold together over the coming weeks shrugging off Trump-China trade concerns before rallying towards a more important top for stocks.

  • MM is still forecasting a major correction of around 25% in the medium term hence the risk / reward is still dangerous for the bulls even if we are correct i.e. say +10% upside compared to another ~17% downside – this clearly is the big issue.

We’ve discussed the catalyst for this major correction will probably be something from left field, as opposed to rising interest rates which many were flagging during 2017. An imploding President Trump has worried many since his election victory in late 2016 and although he’s certainly thrown the cat amongst the pigeons with tariffs against China US stocks remain 25% higher than the day he shocked the world and became President.

Will stocks be undone by a trade war, or something new? We seriously doubt the US and China would allow a trade war to erupt, there will simply be no economic winners and the two creating it would be the biggest short term losers -  a similar outcome to a North Korea / US nuclear event which would have had no humanitarian winners. Time will undoubtedly tell but I would not be surprised if we have no yet discussed the cause for the next major stock market correction.

MSCI Global World Index Chart

Following Fridays 572-point fall by the Dow the ASX200 is poised to open on Monday around 5755 / -0.5% lower, although this assumes we get no fresh “news bombs” from Donald Trump and / or China over the weekend.

  • The market internals have turned and we feel the ASX200 is trying to rally – the below chart illustrates that on the last 4-days of Aprils first week the ASX200 closed near its intra-day high, a bullish sign for the short-term.

We still need the market to close back above 5900 to get excited to the upside in any meaningful manner but from a trading / buying perspective we are not afraid of buying / switching stocks into weakness over the coming weeks. Importantly while we feel weakness can be bought for now it’s certainly does not mean we are buyers of strength!

ASX200 Chart

As subscribers know we have started watching the ASX200 Accumulation Index recently simply because its clearer from a technical perspective.

  • Similar to global stocks we are eventually targeting a 20% pullback for our Accumulation Index to test the 2016 lows.

We only have to look at some of Australia’s “favourite pet” stocks to see how easily a ~20% correction can unfold, before dividends the below pullbacks are still quite sobering:

  1. Commonwealth Bank (CBA) is -23.7% below its 2015 high.
  2. Domino’s Pizza (DMP) is -49.7% below its 2016 high.
  3. Challenger (CGF) is -20% below its 2017 high.
  4. Ramsay Healthcare (RHC) is -26.4% below its 2016 high.
  5. Telstra (TLS) is -54% below its 2015 high.

I can assure you that putting together this small list was not like looking for a needle in a haystack; I am trying to make 2 points here:

  1. These is an active investors market, the best returns will not be achieved by holding the same portfolio year in, year out.
  2. Be open-minded to a 20% downturn by both individual stocks, sectors and of course the overall market – probably easier for most investors to comprehend since recent volatility, but a situation which will create many opportunities for the informed.

ASX200 Accumulation Index Chart

Moving onto US stocks the picture is similar although it feels like they are experiencing more volatility, not particularly true in reality with the Volatility Index (VIX) only at 21.5 on Friday night, compared to an historical average of 19.

Our view moving into Q2 is unchanged, we are looking for US stocks to find a low fairly soon before attempting a rally to fresh all-time highs – we are now 50-50 whether they can break above Januarys top, now 10% away.

US S&P500 Chart

In the Platinum Portfolio MM is now only holding 3.7% in AUD, 3% in USD following Fridays flagged initial purchased of the $US ETF (USD) and 4.70% in the MM Income Portfolio’s - Importantly we remain heavily invested considering our medium-term outlook for global stocks.

MM’s current plan remains to significantly increase our cash levels through 2018, whichever way the market moves, however, from a risk / reward perspective in the short-term we may consider 1/2 buying opportunities with close stops i.e. we will take losses if global markets fail to hold together next week.

1 Telstra (TLS) is trading at levels not seen since 2011

We‘ve had TLS on our radar beneath $3.20 since we took profit on part of our holding around $3.65 in December, in hindsight I wish we had not been as pedantic and had sold it all! Everyone certainly hates TLS today but its cheap (10.3x) while paying a 7.1% fully franked yield, the issue is simply around what they will do to plug the earnings gap left by the one off NBN payments.

The stock has more than halved since mid-2015 but it’s had some significant bounces along the way – remember my ping pong ball / staircase analogy last week.

  1. The 2 largest rallies by TLS of +17.6% and 13% started in April 2016 and April 2017 respectively.
  2. Over the last 10-years TLS has rallied on average +6.7% between April and July, historically equity markets weakest time.
  3. With TLS going ex-dividend around March perhaps a large % of the March dividend goes back into the stock.

Also of relevance to our thought process is the telco sector generally outperforms in bear / weak markets.

Out on a limb time – we are bullish TLS from ~$3.10.

Telstra (TLS) Chart

2 MM and the $US

Coming back to 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 14% from its late 2016 high, just when most analysts were continually bullish because of rising US interest rates. Now these same analysts have become bearish the $US, just in time for our minimum 8-10% decent bounce.

  • We believe the $US is either close to / or has made a significant low, hence we are bullish the $US.

On Friday MM allocated 3% of our Platinum Portfolio into the $US using the BetaShares ETF (USD) we intend to add an additional 2% if the $US Index spikes down below the 88 support area.

NB This is what we anticipate will be one of many views that will be “played” via the diverse array of available ETF’s.

$US Index Chart

BetaShares $US ETF Chart

3 Previous Trade Wars

The world is concerned that President Trump is bracing for a trade war with China, both parties are starting to bang their respective powerful drums increasingly harder. History tells us there are very few winners if a trade war actually breaks out, lets quickly look at the below 3 famous examples:

  1. In the 1870’s Italy raised tariffs as high as 60% against France, ultimately both economies suffered badly and it pushed Italy closer to Germany in the build up to World War 1.
  2. US – Canadian trade tensions reached breaking point in 1890 leading to the US Republicans passing the highly protectionist McKinley Tariff, agricultural exports to Canada subsequently halved! It took nearly 100-years for real free trade to regain dominance.
  3. The big one was in the 1930’s after the Great Depression, the US raised tariffs on Canadian imports, who then countered etc, it back fired badly simply exacerbating the Great Depression.

The big problem is Donald J. Trump thinks a trade war with China is easy, or so he says, and I like almost the rest of the world think he’s wrong. However, I still think / hope it’s an ego styled negotiating play.

US Dows Jones Index Chart

4 Updating our copper thoughts

Copper has had a tough 2018 on Friday closing down -7.5% for the year but we actually like copper.

  • We are bullish copper targeting 350 with stops beneath 290.

NB Copper is usually regarded as a bell-weather to the global economy so if markets decide we are likely to experience a trade war triggered recession copper will struggle e.g. on Friday night copper was down -0.5%, overall a pretty good result considering the reaction to trade war concerns by equities.

Copper Chart

Conclusion

  • 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.
  • Short term while we believe equities are looking for a low, our preference is for one final shake out to test / break 2018 lows – this would be a buying opportunity for us, not reason to panic. 

Catching our eye in Australian stocks / sectors

1 Aussie Banks feel cheap for now

Last week the Australian Banking Sector rallied +0.6% while the US equivalent was down -0.8%, not a dramatic difference until we consider the relative performances since late 2017 – we’ve been smacked on the news flowing from the Royal Banking Commission, rising short term rates plus concerns to the health of our property market moving forward.

We’ve been banging this drum for a bit so please excuse the repetition but there’s currently an awful lot of bad news built into our banks e.g. CBA is yielding 5.85% fully franked while trading on a valuation of 13. Elsewhere NAB is yielding 6.86% fully franked and for those who buy next week its almost 9% p.a. fully franked over the next 14-months.

While we are not saying sell the family heirlooms and buy banks we can see plenty of support into weakness moving forward unless we see a noticeable downturn in property prices, or upturn in unemployment.

Aussie v US Banking Index Chart

2 Diversified Financials, the rot to stop?

No major change, the Financials have experienced an awful time recently but Platinum (PTM) has now reached our trading buy zone having tumbled -24%.

  • Platinum Asset Mgt. (PTM) $5.60 – Looks an excellent risk / reward trading buy into weakness around $5.50 targeting a 15-20% bounce.

While this is an easy trade not to take due to the departure of Kerr Neilson from PTM it does give us comfort that the sector as whole is at least due for a decent bounce.

Platinum Asset Mgt. (PTM) Chart

3 Webjet’s (WEB) letting the team down

We are long WEB in the MM Platinum Portfolio and it’s been a frustrating couple of weeks as its fallen over 10%, while its rival Flight Centre (FLT) has almost made fresh 2018 highs.

The rally by FLT has been aided by the short sellers who have reduced their position to 9.05% still much higher than WEB which was increased slightly to 5.85%.

We remain bullish WEB and expect the gap between the 2 rivals to at least narrow over the coming weeks.

Webjet (WEB) v Flight Centre (FLT) Chart

4 Cochlear (COH) remains bearish technically

We discussed COH in a Monday questions / answers report a few weeks ago and our negative short-term stance remains. 

  • We are negative COH targeting ~$160 where we would be a keen buyer.

Fundamentally while we think COH is an excellent company with attractive offshore earnings its 41x valuation makes it easy for us to envisage a pullback to 2018 lows, like the rest of the market.

Cochlear (COH) Chart

“Shopping List”

Below is our revised list of stocks plus ideal levels which are close after last week’s aggressive falls, we currently have only 3.7% of the MM Platinum & 5% of the Income Portfolio in cash, hence we are extremely fussy buyers:

1.      Telstra (TLS) under $3.10 is looking attractive to us, this certainly puts us in the minority.

2.      Platinum (PTM) around $5.50 – this would be an active trading play looking for a 15-20% bounce.

3.      Vocus (VOC) below $2.20 – this would be an aggressive trade in our old nemesis.

4.      A2 Milk (A2M) around $11.50 – a fairly aggressive play considering the stocks high valuation.

“Selling List”

1.      Alumina (AWC) around $2.70.

2.      Woodside (WPL) between $30.50 and $31.

3.      Clydesdale Bank (CYB) around $6.

Standout technical chart (s) of the week

We’ve highlighted Harvey Norman’s chart pattern before but its look so clear to me today I thought I would show it again:

  • We remain bearish targeting sub $3.50 but interestingly this is now approaching rapidly.

Harvey Norman (HVN) Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. Our most likely play early next week:

  • Average our Telstra (TLS) holding under $3.10. 

Trading Opportunities on our radar

The ASX200 is gaining strength and we are buyers of weakness.

  • Buy Vocus (VOC) beneath $2.20 – this is aggressive but we like it.
  • Buy fresh 2018 lows in the ASX200 with stops below 5625 for now.

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.

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 7/4/2018. 10.00AM.

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