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

By Market Matters 08 October 17

Market Matters Weekend Report Sunday 8th October 2017

Market Matters Weekend Report Sunday 8th October 2017

Last week the local market was yet again pretty choppy finally rallying +0.5% courtesy of a strong 1% advance on Friday but for most of the week we were knocking on the door of the multi-month lows. Amazingly the local ASX200 has been stuck in a tight range for about 5-months capped around 5800 and supported at 5650. The recent sector rotation from resources to banks reversed slightly last week but outright buying or selling of stocks is almost a distant memory.

The list of major winners / losers was at the lowest I can remember with only 3 stocks in the ASX200 moving by over 5% for the week:

Winners : Healthscope (HSO) +8.4%, OZ Minerals (OZL) +6.2%.

Losers : Origin Energy (ORG) -5.3%.

We’ve said it before but it’s pretty remarkable that the ASX200 is entering its 21sth week trading in the tight range between 5629 and 5836 – some index volatility is statistically extremely overdue! There are 2 clear trends out there at present i.e. US stocks continue to grind higher while volatility grinds lower but only the latter is currently being embraced locally.

Let’s yet again look at the ASX200’s “trading patterns” which continue to contain the local market as we move well into October, surely at least one of these ranges will be broken soon:

  1. Short-term Neutral Pattern between 5629 and 5836 – 20 weeks to-date.
  2. Medium-term Neutral Pattern between 5582 and 5956 – 35 weeks to-date.
  3. October’s range to-date is 5650-5751 i.e. 101-points.

Technically MM is ideally still targeting a correction towards the 5525 area i.e. only another ~3% lower in the weeks ahead but we remain very conscious that the local market continues to experience good buying into any decent declines.

ASX200 Monthly Chart

We often get asked why we look at different timeframes e.g. quarterly, monthly, weekly etc with the occasional sceptic wondering if we simply choose the chart that fits our current view! There are a couple of important and very relevant points to make on this subject:

1. The Weekend Report is the cornerstone of our week to week analysis which is deliberately researched and written when the markets are closed to reduce external influences.

2. We commence each such report with an open-mind being very prepared to switch between a neutral / bearish or bullish stance on any particular market.

3. We generally use the quarterly charts to determine both the position of a market i.e. bullish or bearish and our ideal targets and buy / sell areas.

4. We then use the lower-timeframes daily / weekly / monthlies for fine tuning and clarity.

5. With stocks for example we then further combine our specific stock / sector fundamentals with technical signals we are seeing to generate our strategic decisions.

Obviously there is no such thing as a perfect science with investing but viewing markets from a longer-term perspective eradicates plenty of news driven noise. At MM we have made major portfolio weighting moves on only two occasions – (1) we went to 50% cash in mid-2015 before equities corrected 20% and (2) we went limit long equities in early 2016 before the current major advance. While we invest differently to the legend Warren Buffett we love a lot of what he says:

“Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” - Warren Buffett.

Importantly when we turned very bullish at the start of 2016 our then lofty target (s) for global stock indices were very distant but now they are only a few percent away. The simple reason we are more active in the market at present is twofold:

  1. We see another major inflection point on the horizon for stocks and fully expect to be in over 50% cash before the end of Q1 2018 – we may even take positions in bearish ETF’s.
  2. However, we still see another 5% upside for the ASX200 into 2018 and obviously more for some stocks / sectors hence with the RBA cash rate stuck at 1.5% we see logic in shorter term plays targeting 10-15%, or some “free” fully franked dividends.

This should also shine some light on why our most recent 4 forays into the market have only received 3% allocation of the MM Platinum Portfolio as opposed to our more customary 5%, or greater – remember at MM the Platinum Portfolio is our real money not a theoretical canvas.

MSCI Global World Index Quarterly Chart

I watched a very interesting interview with famous bond investor Bill Gross of Janus Henderson Group (JHG) this morning where he pointed out 3 simple things which we found have been observing closely at MM:

  1. The US economy is looking good for US workers but an increase in US interest rates looks a “slam dunk” for December.
  2. US 10-year bonds are in a long-term downtrend since the early 1980’s, where US interest rates have fallen on average 0.2% per year for over 3 decades.
  3. This huge downtrend in US interest rates is being challenged BUT has not been broken.

Interestingly here we are with a multi-billion dollar fund manager applying very similar analysis to MM i.e. using a quarterly chart to see if we about to witness the end of a multi-decade bear market.

US 10-year bond yield Quarterly Chart

The ramifications will be very interesting if the answer becomes “yes” in the months / years ahead as the correlation has very clearly been lower rates has equalled increased asset prices e.g. stocks and property. Hence if interest rates rise in a meaningful manner asset prices may come under some real pressure.

Dow Jones v US 10-year bond yield Quarterly Chart

Global Indices

No change, in the bigger picture we believe the bull market for equities which began back in March 2009 is approaching completion but still don’t believe it’s time to jump ship, just yet. Ideally stocks will experience increased volatility as they climb the ever steepening wall of worry towards our long-term target (s). At MM we have been bullish US stocks since early 2016 but our target area is now approaching fast and is only ~3% away for the broad Russell 3000, considering we are ultimately looking for an over 20% correction we are not surprisingly avoiding chasing strength in stocks / the market.

Since Donald Trump’s US election victory the Russell 3000 has rallied an impressive 23% with only one small 5.2% pullback on the way, while we are not looking for the end of the 8-year bull market just yet another ~5% pullback simply feels overdue.

US Russell 3000 Quarterly Chart

US stocks are fully embracing Donald Trumps flagged tax plan which is illustrated by the outperformance by the largest theoretical beneficiaries i.e. the small-medium sized companies. The Russell 2000 (smallest 2000 companies in the Russell 3000) has already reached our long-term target area.

Technically a quick 6% correction prior to a rally into 2018 would paint the perfect picture but unfortunately markets don’t often give us such clear patterns. However we remain  on definite watch, a pullback towards 1400 followed by a fresh push into new all-time highs and MM will probably be holding 50% cash!

Please note we understand this is not the local ASX200 but if our strong view becomes US stocks have a high probability of falling over 20% high cash levels will feel correct for our money!

US Russell 2000 Monthly Chart

No real major change for European stocks which were firm last week. The ideal scenario for a low risk entry into the German DAX will be a second correction back under 12,000 following failure over 13,000. Obviously time will tell if this pullback unfolds but successful investing, like many things, is all about preparation.

In the bigger picture we still see German stocks trading well over 13,000 before major alarm bells will ring.

German DAX Weekly Chart

At MM we’ve been very bullish the Japanese Nikkei for all of 2017 but here we are only 6% from our target area after rallying almost 30% since late 2016. While we remain positive the attractive risk / reward for the bulls has diminished significantly.

Japans Nikkei Monthly Chart

Resources

Australian large cap resource stocks have had an overall strong few weeks although iron ore dependant Fortescue (FMG) has continued to struggle with the bulk commodity trading down close to its lows for 2017. Conversely RIO which receives the majority of its income from iron ore has traded strongly regaining most of its losses since mid-September, a big thumbs up for the company’s capital management plans. We have 2 clear views on the sector:

1. We are positive the reflation trade hence are keen on the likes of BHP and RIO into weakness but do not plan to chase into strength.

2. Iron Ore is our least favourite part of the sector with FMG looking set to break under $5 and potentially lower.

Iron Ore Monthly Chart

RIO Tinto (RIO) Weekly Chart

Fortescue Metals (FMG) Daily Chart

Gold

Gold stocks have endured an awful 4-5 weeks with Regis Resources (RRL) correcting over 18%. We took a small position in RRL last week at $3.66, please note we are only looking for a bounce back towards $4.

We are keen buyers of gold moving forward but can see further weakness into Christmas following its usual seasonality path.

Vaneck Gold Vectors ETF Seasonality Chart

Regis Resources (RRL) Weekly Chart

Banks and bond yields / interest rates

We remain both positive and overweight the banking sector as we move into reporting season next week and Novembers dividend season – Bank of Queensland (BOQ) is first of the blocks next Thursday. The recent undervaluation relative to the index has gone following a few weeks of strength and we are currently sitting around the normal historical comparative levels.

However we are keeping 2 factors clearly at the front of our minds: 

  1. US banks have already reached our initial target area although our preferred scenario is ~6% higher.
  2. November is usually a poor time for our banks although dividends clearly have a significant impact, we may take some money off the table in 1 or 2 of our holdings in a few weeks if we see some decent gains.

CBA, the only member of the “big 4” looks excellent at current levels with a move towards $79 on the cards.

Our view remains that US interest rates will continue to move higher in weeks / months to come and if this proves correct banks should benefit, of course assuming the rally in rates is orderly and of course the Australian property market holds together.

US S&P500 Banking Index Weekly Chart

Australian Banking sector seasonality Chart

Commonwealth Bank (CBA) Daily Chart

Diversified Financials

The diversified financials rallied steadily over the last month gaining 3.1%. We currently like the below 2 stocks in the sector but both at lower levels:

1 Challenger (CGF) – we are long at $11.95 and would average into weakness back towards recent $11.50 low.

2 Macquarie Group (MQG) – This feels like an opportunity missed at present, we are buyers under $92. We like the $US earnings with the local currency feeling very vulnerable at present.

Challenger Ltd (CGF) Monthly Chart

Macquarie Group (MQG) Monthly Chart

Retail plus Coles & Woolworths

No change, we are cautious the sector but will be prepared to buy panic weakness in some select stocks.

Harvey Norman continues to catch our eye after their aggressive decline over the last few weeks, primarily because of their recent profit report. While the momentum and sentiment is clearly against both the sector and the stock MM will become potential buyers of HVN under $3.50.

Harvey Norman (HVN) Coal Index Weekly Chart

Healthcare sector

Taking into account both our negative outlook for the sector MM is likely to be very fussy with any buying but we never say never! We are also licking our wounds for exiting Healthscope (HSO) a few days too early.

We are buyers of RHC ~$55, around 12% lower but approaching fairly fast, remember the stock has now corrected 27% so another 10% is not out of the question for this highly owned and loved stock…..it’s definitely the path of most pain with no major brokers having a sell on the stock.

Ramsay Healthcare (RHC) Monthly Chart

“Shopping List”

Below is our current shopping list of stocks plus ideal levels which has been updated from last week, we now have 16.5% of the MM Platinum Portfolio in cash: 

  1. Banks – We like our overweight banking position at present into BOQ’s report on Thursday.
  2. Consumer Services – Aristocrat (ALL) ~$19 a fussy level to average our holding if the market experiences some weakness.
  3. Diversified Financials – Challenger (CGF) to average around $11.50 and Macquarie (MQG) under $92.
  4. Energy – Origin Energy (ORG) as a trade under $6.70 or potentially average our small position in Santos around $3.80.
  5. Food and Beverage – No interest currently.
  6. Healthcare – Not a sector we currently love and have no buying targets unless Ramsay Health (RHC) falls over 10%.
  7. Resources – We are likely observers for a few weeks.
  8. Real Estate – Another sector we are not keen on except Westfield (WFD) as a trade around $7.
  9. Telco’s – No further buying at this stage.
  10. Retail – We like Harvey Norman (HVN) under $3.50.
  11. Gold – We have enough exposure at this time.

Potential “Sells”

Two of our MM Platinum Portfolio stocks are close to our current sell targets:

  1. Regis Resources (RRL) around $4.
  2. Santos (STO) around $4.40.

Standout technical chart (s) of the week

Woolworths (WOW) is a stock we’ve successfully avoided during its huge multi-year bear market and with the news that Europe’s largest retailer Kaufland is preparing to open a network of stores across Adelaide margin contraction feels likely to be back under the spotlight. The competition is intensifying in bricks and mortar as well as the much publicized Amazon and we believe this is one industry that has much further to go along the readjustment path.

We have no interest in WOW until further notice with a technical target close to $18!

Woolworths (WOW) Weekly Chart

Investing opportunities for the coming week(s)

Refer to both the “shopping list” and “Potential sell” earlier in the report.

In general we still remain keen to buy the index / market ~5525 i.e. allocate our 16.5% cash into stock weakness.

ASX200 Monthly Chart

Trading Opportunities on our radar

We have 2 trading situations on our radar today, they have both been on our reports previously but have been slowly getting closer:

  1. Westfield (WFD) – Buy under $7.10 looking for a ~15% recovery.
  2. Origin Energy (ORG) – We are buyers of ORG ~$6.60 although we may decide to average our Santos (STO) position at the time.

Westfield Corp. (WFD) Monthly Chart

Origin Energy (ORG) Monthly Chart

Summary

We remain short-term bearish the ASX200 ideally targeting a correction back towards the 5525 support area, we are still “hoping” to further accumulate equities into such weakness.

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 6/10/2017. 4.00PM.
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