Market Matters Report / Market Matters Weekend Report Sunday 9th April 2017

By Market Matters 09 April 17

Market Matters Weekend Report Sunday 9th April 2017

The ASX200 and importantly the sectors within it are currently dancing the "bond yield jig" and in our opinion that's likely to be the game for the foreseeable future. Overall it feels like the local share market has had the kitchen sink thrown at it, yet it continues to remain extremely resilient - As we often say "a market that does not fall on bad news is a strong market". There have been 4 obvious recent negative influences that Australian stocks have basically shrugged off:

1. US banks have fallen 10.6% dragging our highly market influential banking sector down 2.5%, plus local regulators are having yet another shot at forcing our banks to increase the capital they hold.

2. Iron Ore has plummeted 20.5% in the last 2-months dragging heavyweights BHP and RIO down 16.3% and 16.6% respectively.

3. The Telco Sector continues to be slammed, falling another 3.6% last week alone.

4. US stocks have corrected over the last 6-weeks with the Dow falling 757-points / 3.6%.

Yet even after poor employment data out in the US on Friday night, following closely on the heels of Donald Trump's missile attack on Syria, the ASX200 is set to open ~5880 on Monday, only 21-points below the 2017 high.

Statistically if the local market can close over 5890 at anytime next week it should comfortably reach the 5950-6000 level in April - remember a break of 5810 will negate this short-term bullish outlook.

ASX200 Daily Chart

The Australian stock market has recently been the beneficiary of foreign investment which undoubtedly has assisted our performance and we see no obvious short-term end to these positive money flows. It's an easy investment rationale to understand - we have an improving earnings profile, low policy uncertainty, strong population growth, a relatively weak currency and the highest global market dividend yield ~4.5%, with the exception of NZ on 5.1%.

1. From the latest Bank of America fund manger survey we know money managers are sitting on record levels of cash ~4.9%, almost 10% above the 10-year average of 4.5%.

2. Foreign buying of our market has really accelerated in 2017 and the trend remains very much intact.

If there is one thing that can kick the market higher / faster than locals expect its foreign money.....the ASX200 got 1.8% cheaper in $US terms last week......that's equivalent to the market trading ~5970! We continue to favour both Australian and European markets over the US in 2017.

Moving onto US stocks, as most of you know we often say the NASDAQ is the leader amongst indices and last week yet again the NASDAQ made fresh all-time highs. Our short-term target for the NASDAQ is around 5575 / 3% higher - i.e. not a great deal higher. The technical path we believe the NASDAQ is following implies it could easily eventually reach the 6000 area i.e. over 10% higher. Hence over coming months we remain buyers of ~5% pullbacks although undoubtedly the press will again be calling it the end of the world for stocks.

US NASDAQ Index Weekly Chart

Moving onto bond yields which we maintain are the key to determining which sectors to hold from month to month. On Friday night, following the US employment data, we got the spike down in US bond yields that we discussed earlier in the week, however they closed up on the day, near their weekly highs. This is very important to our view for the coming weeks:

1. We believe US bond yields will now head higher over coming weeks / months which should subsequently take US banks along for the ride.

2. US bond yields rising is also good news for Australian banks and our vehicle of choice at current levels is CYB, but while it's the cheapest local bank by far, plus its Europe facing, it does not yet pay a dividend - investors need to decide their short-term motivation at this stage around dividends and franking.

3. If US bond yields rise gold stocks are likely to fall and we are very happy to have sold RRL on Friday locking in a ~20% profit. We intend to hold our position in EVN at this stage incase we are wrong, but our current plan is to increase our exposure back into the Gold Sector via either RRL, or Newcrest, into weakness. A 10% drop in this volatile sector would not surprise.

In summary we are bullish banks short-term and this is very positive news for the ASX200.

US 10-year bond yield v US Banking Index Weekly Chart

On Friday night iron ore was thumped 6.8%, down to fresh lows for 2017. However the 20.5% correction that the bulk commodity has experienced since February's high is coming very close to the degree of retracement which it experienced in mid-2016. We have noticed with many sectors and stocks over 2016 and 2017 a 20% pullback has brought the buyers out in force. It was very interesting to see that BHP, a large iron ore producer, closed mildly positive on Friday night in the US. The likelihood is that RIO and FMG, who are far more exposed to iron ore, will open lower on Monday but we believe on balance this will be a buying opportunity - the Australian Financial Review (AFR) declaring that iron ore is now in a bear market reinforces our confidence in this view.

Also remember what we experienced in March with the oil price and related stocks. Crude oil tumbled close to 13% at one stage in March and closed down 6.2%. However the Energy Sector rallied 3.7% after a small dip at the start of the month, and this strength has continued into early April. However the Energy Sector had fallen 8.7% into March, after forming a top in January i.e. stocks very often lead commodities.

Iron Ore Monthly Chart

Let's consider the 4 resource stocks that we are invested in / have traded recently:

1. RIO Tinto (RIO) - we have a 5% holding in the miner under $60 but while we remain bullish from this area our holding is large enough.

2. BHP Billiton (BHP) - we have a 5% holding in the diversified miner ~$24 but while we remain bullish from this area our holding is large enough.

3. OZ Minerals (OZL) - we have a trading position from $7.78, while a pullback towards $8 would not surprise our target is now ~$8.80.

4. Fortescue Metals (FMG) - FMG has corrected 20.9% from its February high, we will be trading buyers of FMG on a spike under $5.75, ideally around $5.60 and potentially via options.

Fortescue Metals (FMG) Weekly Chart

Standout technical chart (s) of the week

The AFR has printed yet another negative property story today, saying "the housing correction won't be orderly" - well bad news does sell newspapers. Two comments to make on that front:

1. Markets rarely crash when everybody is forecasting it...I went to an auction on Saturday, on Sydney's north shore, and the house (which I knew well) went for ~15-20% more than I expected!

2. When we look at the chart of property facing Mirvac its bullish and looks set to make fresh multi-year highs in coming weeks.

Property feels solid at the moment.

Mirvac Group (MGR) Monthly Chart

Summary

We continue to believe that US and local stocks can add to recent gains into 2017, and potentially 2018. Ideally over coming weeks the banking sector will recommence its 2017 rally after its small correction, as the seasonally strong April kicks in. We are looking closely at two investments and one trading situations next week:

1. Sell VOC and buy CYB, we have given our position in Vocus way too much room in hindsight.

2. Buy FMG as a trade under $5.75 and ideally close to $5.60.

Bigger picture we continue to believe the ASX200 will break over 6000 in 2017.

What Matters this week

The ASX200's is set to open up 15-points on Monday, the market is very likely to become "thin / illiquid" into Easter so volatility can potentially increase easily in both directions.

Potential Investing opportunities for the coming week(s)

We are considering buying CYB next week and liquidating our one big disappointment, Vocus.

Potential Trading opportunities for the coming week

We are watching FMG very closely under $5.75.

As detailed in the report we are bullish the ASX200 while it can hold the 5810 area, hence weakness early next week will offer some good risk / reward.

Portfolio / Trade Holdings

The Market Matters Portfolio as of the 7th ofApril is below, we are now holding 14.5% in cash following the profitable sale of Regis Resources (RRL) on Friday:

https://www.marketmatters.com.au/blog/category/market-matters-positions/  

Weekend report Charts / Chart Pack

The Market Matters Weekend report charts can be found below:

https://www.marketmatters.com.au/chart-pack/

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 08/04/2017. 5.00PM.
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