Market Matters Report / Market Matters Weekend Report Sunday 9th December 2018

By Market Matters 09 December 18

Market Matters Weekend Report Sunday 9th December 2018

Market Matters Weekend Report Sunday 9th December 2018

The ASX200 had a fascinating week which felt both exhausting and relatively weak by the time we wrapped things up on Friday but the index actually managed to close up +0.25% for the week, it certainly didn’t feel like it! On both the stock and sector level anything that benefited from the US Fed taking their foot off the raising interest rates gas pedal fared well e.g. Real Estate, Telco’s, Transport and Utilities while the banks took a backward step e.g. Commonwealth Bank (ASX: CBA) -1.2%.

Under the hood things were pretty choppy with 24 stocks closing up by over 5% and 18 down by the same degree – clearly from the stock / sector rotation many fund managers hadn’t been positioned for an end to the rapid appreciation in US interest rates, some economists such as Shane Oliver are now saying the next move in Australia will actually be an interest rate cut. Also to keep investors on their toes we saw GrainCorp (ASX: GNC) soar +25.5% following a takeover bid while IOOF Holdings (ASX: IFL) tumbled -33% becoming a major casualty of an APRA investigation. We remain committed to our view that this is not a buy and hold market but one for active investors but this is starting look pretty obvious as we see the Dow again fall 600-points on Friday night.

The Volatility Index soared 10% on Friday but it remains below Octobers high and well below those “blow off” panic levels witnessed in February. In other words the markets slowly becoming accustomed to large day to day swings by US equities.

While we are no taking this as a bullish indicator it does relay that sophisticated investors do not believe Armageddon is around the corner.

Volatility VIX (Fear Gauge) Index Chart

Last week the Dow had its worst week since March closing down 1150-points / 4.5% while the UK FTSE fell -202-points / 2.9% but we finally saw the local market regain its relative “Mojo” closing positive. However this outperformance will be tested following Saturdays weak Chinese economic data :

1 - Chinese Nov. Imports rose 7.3% in Yuan, compared to estimates of +18.3%.

2 - Chinese Nov. Exports rose 10.2% in Yuan, compared to estimates of +13.8%.

Trumps tariffs are undoubtedly biting which in today’s negative market sentiment is likely to knock stocks further as opposed to being considered a potential catalyst for a resolution to the US – China trade disputes.The ASX200 was set to open down ~40-points following the Fridays  plunge by the Dow but the drop may be worse following the Chinese numbers.

That said,  we still believe local stocks are trying to rally and we are in the perfect week for a “Christmas rally” to commence hence we are still a short-term buyer of weakness but will certainly be pleased to see an end to this current negative news flow and more importantly its harsh interpretation.                                                                                  

MM remains bullish the ASX200 into Christmas / 2019 targeting the 5900 – 6000 area

ASX200 Chart

Sometimes its easier to stand back and look at the big picture to explain our thoughts.

We believe the 779-point / 12.2% decline from August high is either complete, or very close to it, hence we are looking for a bounce towards 5950 before another >10% decline to test the psychological 5000 area. However as can be seen on the 10-year chart of the ASX200 below this would only represent a ~40% pullback of the post GFC bull market, nothing out of the ordinary for a market correction.

Moving onto the Christmas rally phenomenon:

1 - If the Christmas rally starts in November, which occurs over 50% of the time, the Dec high is usually in the last 48-hours of December but it then usually kicks a little higher into mid-January, or even early Feb. To consider this scenario it’s important to see if Novembers 5594 low holds firm.

2 – The average gain for December over the last decade is +1.56% which only targets the 5750 area but considering the current 779-point / 12.2% correction our preferred scenario is for a larger bounce.

3 - Over the past 30 years, on only 3 occasions has December been weak following a ‘red’ November.

4 – Since the GFC we have enjoyed a seasonal rally every year except in 2011, Decembers low on average comes in around the 9th – 14th of the month   - the majority of the seasonal gains are usually at the back end of the month.

ASX200 Chart

Global Indices

What a difference a week makes, following their best week since 2011 US stocks backed it up with the worst week since March, as we’ve said get used to volatility!

Two weeks ago the market embraced the Fed suggesting the speed they were looking to raise interest rates maybe slower than the market was expecting, but this week the reasons behind their thought process became the worrying focal point. Economists all seemed to jump on the same bandwagon forecasting a US recession in 2019 /20, as we’ve said a few times recently the markets currently looking at things with a “glass half empty” bias i.e. the sentiment is poor.

Technically one thing caught our eye at the end of last week and not surprisingly it was concerning for the bulls i.e. we saw the small cap Russell 2000 index, which has often led in 2018, break to fresh multi-month lows, very close to the panic levels reached in February.

We now will be watching 2 short-term scenarios for US stocks, when this degree of volatility is unfolding technical indicators can be especially useful:

1 – If the Russell 2000 can close above a 1480 it will trigger an excellent buy signal i.e. less than 2.5% higher.

2 – A more bearish outlook would be for the S&P500 to make fresh 2018 lows targeting an “ABC” retracement of almost 6% lower.

US Russell 2000 Chart

US S&P500 Chart

Technically global equities had an awful week making fresh 2018 lows and we believe markets now sit at a critical junction.

We can see 2 scenarios unfolding from here and one is particularly ugly:

1 – The 1900-1950 area holds and we get a bullish rally back above 2020.

2 – The market accelerates to the downside and our 1500 downside target arrives sooner rather than later i.e. >20% lower.

This is one of the most important times that I can recall to remain open-minded to what comes next.

MSCI World Index Chart

Updated Macro Outlook

As touched on previously Jerome Powell lifted the anxiety of higher interest rates for many investors following his dovish speech 2-weeks ago but suddenly everyone is now scarred of a pending recession.

On Friday the US employment data showed U.S. payrolls and wages rose by less than forecast in November while the unemployment rate held at the lowest in almost 50-years. The report added weight to financial markets nerves over whether Fed Chair Jerome Powell is close to pausing with rate increases – a cynic would suggest the Fed had an idea what Fridays data would be.

Bond yields again retreated and the $US gave back further ground but not against the $A, these market swings would often be taken positively by stocks but not this week. The elastic band had stretched too far with US bond yields but the correction we have been looking for is almost complete – we are now only slightly bearish / neutral US bond yields.

We now expect a period of stability in US bond yields which implies calm in stocks – that would be nice!

US 10-year bond yield Chart

1 Why is the $A falling v the $US?

The $A fell 1c last week against the $US while at the same time the $US Index itself slipped -0.8%, or in other words the $A fell against most major currencies.

A weaker $A appeared to lift the likes of CSL, ResMed and Cochlear all of whom closed up over 3% for the week. Our long-term target for the $A unfortunately remains in the mid-60c area implying the $US earners will continue their recent revival.

Australian Dollar ($A) Chart

The reduced optimism towards the US economy narrowed the gap between the Australian and US bond yields, theoretically supportive of the $A.

However the $A is a proxy for global growth and especially China both of which are very much in the doghouse at present.

MM remains bearish the $A.

US v Australian 10-year bond yield Chart

2 Yawn, still no hurry buying the Resources Sector.

Ex-energy the Australian Resources Sector again struggled last week, over the last month BHP (ASX: BHP) is down -6.45% and RIO Tinto (ASX: RIO) -11.24%. MM currently has direct exposure to resources via RIO Tinto (ASX: RIO) and Western Areas (ASX: WSA) which although being well below an index weighting continues to feel enough.

BHP is set to open down just under 1% on Monday around $30.90, well below the $34 where we exited the last of our position in May, but it’s still not cheap enough for us just yet.

MM still has no interest in the big Australian until below $30.

BHP Billiton (ASX: BHP) Chart

Slowly but surely the stars are starting to align in the resources sector, we have been bearish S32 for months targeting sub $3 i.e. a 30% correction.

Recently this aggressive call fell only 3c short my “Gut Feel” is that MM will increase its resources exposure in the next 2 weeks.

Our preferred purchases in the sector remain BHP Billiton (ASX: BHP), Iluka (ASX: ILU) and Sandfire Resources (ASX: SFR) plus a potential increase of RIO Tinto (ASX: RIO) holding but price / value will determine any purchases.

South 32 (ASX: S32) Chart

One of our favourite buys around current levels is Iluka (ILU) with an ideal entry between $7 and $7.50.

As discussed previously we may switch our Newcrest Mining (ASX: NCM) position depending on their comparative prices.

Iluka (ASX: ILU) Chart

3 Oil stocks remains a fair “punt”.

Crude oil has now plunged over 35% from its October high but we believe its probably bottomed for 2018 although I’m not convinced a significant bounce is around the corner.

At MM I expect we will leave the sector alone.

However, for the brave we like Beach Petroleum (BPT) around $1.50 for a potential 20% bounce.

Crude Oil Chart

Beach Petroleum (ASX: BPT) Chart

4 We still like the banks into 2019

No change, the Australian banking sector has started to regain its “mojo” over the last 3-months with CBA only down -0.2% while the ASX200 has plunged -7.5%, it’s certainly been a while since we’ve seen  that degree of outperformance! Recently for the first time in a decade Citi Group went overweight with the bank saying the sector was trading at a 30% discount to the market – the large players are slowly migrating to our side of the fence.

MM continues to like the banks into 2019 and believes their largely sustainable dividends will lead to sector / market outperformance over the next few years.

Commonwealth Bank (ASX: CBA) Chart

5 Have the high growth / value stocks already finished their bounce?

MM went aggressively long this battered group of stocks in late November, so far so good but I expect to surrender some paper profits on Monday. We allocated 9% of the Platinum Portfolio equally across Appen Ltd (ASX: APX), Altium Ltd (ASX: ALU) and Xero (ASX: XRO) all of whom are nicely ahead but they did all slip ~3% last week.

Its important to remember these are “active positions” and we would not be surprised if we exit at least one of these volatile stocks in the short-term, our current targets remain:

APX - $15, ALU $24, and XRO - $45, with ALU flirting with our target early last Monday.

Also, we may consider adding to our ALU position below $20.

Our answer to the question is unfortunately we will have a better idea by early next week.

Altium (ASX: ALU) Chart

5 We remain bearish the $US but some correlations are failing.

The $US was one of our good calls in 2018 and we believe it has again shown its hand, especially following the dovish speech from the Fed Chair and Fridays relatively weak US employment data. MM remains bearish the $US targeting a ~3% decline in the short-term, back towards its late September lows. The $US currently feels like its “hanging in there” because of volatility in US stocks and uncertainty around  a trade war, not a reason to chase the greenback in our opinion.

$US Index Chart

However while the $US is strongly correlated to a number of markets they are not all dancing the usual jig, the 2 that still are:

1 – If the $US Index corrects it should be good news for our Newcrest Mining (ASX: NCM) position as gold is inversely correlated to the $US – our current target for NCM is ~$21.80, around 4% higher.

2 - If the $US Index corrects it should be good news for the $US earners like CSL and Cochlear.

The other correlations outlined in previous reports are struggling because of market opinions around a struggling global and specifically Chinese economy.

6 Should we chase the bounce in real estate stocks?

Today we’ve selected one of the best and certainly the worst stocks in the sector:

1 – We still like CQR from a technical standpoint targeting $5 with stops below $4.55, still solid 2:1 risk / reward – last week CQR was featured as our investment of the week.

2 – Conversely we are still scarred of LLC although it will probably bounce from below $12 – a definite very aggressive play.

Hence the answer to the question is yes, but as shorter term market driven trades only, in a selective manner.

Chart Hall (ASX: CQR) Chart

Lend Lease (ASX: LLC) Chart

7 Any value in the hammered IOOF (ASX: IFL) $4.60

A short and simple answer “we see no reason to buy this stock embroiled in a quagmire of regulatory hassles – or worse!”

Technically we can see a decline under $2.50 for IFL.

IOOF (ASX: IFL) Chart

Conclusion

As subscribers know in the bigger picture we are looking for the ASX200 to correct over 20% in total targeting ~5000. Our previous mantra has been consistent:

We remain mildly positive short-term targeting a Christmas rally ideally towards 5950 where MM will increase our cash position.

However now we have moved from 90% confidence in this stance to around 70% - we may increase some cash earlier than previously planned given this reduced conviction

Chart of the week.

Not the first time that Seek has occupied this prestigious position although not for positive reasons. While SEK has now corrected ~25% we believe it has much further to travel.

MM remains bearish SEK targeting under $12.

Seek (ASX: SEK) Chart

Investment of the week.

ResMed (ASX: RMD) $15.46

RMD has embraced the weakness in the $A and looks to have further to rally, as the $A does to fall.

MM likes RMD targeting the $16.50 area.

ResMed (ASX: RMD) Chart

Trade of the week.

SGR is a stock we have been watching closely for months. On Friday SGR was the best performer on the ASX200 rallying over 5% from within a few cents of our long-term target. Conversely sector rival Crown (ASX: CWN) remains bearish targeting $10 – we particularly like the “Buy SGR & sell CWN” spread trade.

MM likes SGR into weakness between $4 and $4.50.

Star Entertainment (ASX: SGR) 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.

Have a great day!

James & the Market Matters Team

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 8/12/2018

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