Market Matters Report / Market Matters Weekend Report – Sunday 9th July 2017

By Market Matters 09 July 17

Market Matters Weekend Report – Sunday 9th July 2017

Market Matters Weekend Report – Sunday 9th July 2017

The ASX 200 ended a choppy weak down -18pts or -0.31% however there was big divergence between the sectors that form part of the ‘reflationary trade’ and those that don’t, for example the Material sector added +2.10% for the week versus the Utilities which were down by -2.28%. So for now, it’s a flat start for July in terms of the index, however if we look at averaged since the GFC, we typically get a gain for the ASX 200 in July of +4.04% to be the most bullish month of the year followed by August which has been flat / slightly down from 2009 onwards. Overnight we saw US employment data come in slightly ahead of forecast in terms of the headline number (+222k versus 200k expected) , however actual growth in wages was a tad weak. Still, the number was good and continued growth in the work force will at some point put upward pressure on wages and that will filter through to higher inflation.

The bond markets saw most of the action this week with a big sell off in bonds globally pushing up interest rates, a theme we’ve been discussing at length in recent weeks. Interest rates are just so important for the fate of the market and if we are to see higher borrowing costs globally, then economic data has to be supportive of that – and right now it is. The key test will come in a couple of weeks with the US reporting season kicking into gear – and analysts are fairly optimistic about US earnings, anticipating double digit earnings growth QoQ for US stocks, which if achieved would be the first time it’s happened since 2011.

Australia

We held the view last week that the strong rally for Australian stocks on Tuesday was the start of the strong move up that typically plays out in July, so weakness towards the end week has us frustrated from an index perspective. That said, a test of the weekly low and rejection on Friday bodes well for next week, and we have SPI Futures up by +10pts on Monday. We retain our positive stance on the Australian market however continue to believe that being in the right sectors and indeed the right stocks will be key to making good returns going forward.

ASX 200 Daily Chart

The U.S

The US stock market was also choppy last week led by weakness in the Tech sector that has now corrected by ~4% from the recent highs. It now looks like the bulk of weakness here has played out and the Nasdaq can now continue to grind higher. The other indices in the U.S didn’t pull back as much however the Nasdaq has been a leading index for some time now and we prefer to take our queue from it.

US NASDAQ 100 Weekly Chart

Sectors

There has been a massive amount of divergence between sectors of late and this is largely a result of what’s happening in Bond markets. Interest rates are going up and this helps some areas of the market, and hinders others.

Banks and Financials

The US banking sector rallied strongly last week setting the index back on course for fresh 2017 highs, now only around ~3% higher. The local banking stocks are benefitting to some degree here however there remains plenty of room for improvement locally, which we expect to happen this month.

US S&P500 Banking Index Weekly Chart

Resources

We remain bullish the resources space looking for the big cap miners to add to their strong gains. We tempered this view slightly during the week by taking a nice ~14% profit on Fortescue, however we did switch the funds into Alumina (AWC). Our original target on Fortescue was ~$5.50 however the move to $5.39 and subsequent weakness prompted us to take profit around ~$5.34. Although marginally overbought in the short term, both BHP and RIO remain bullish at current levels.

BHP Billiton (BHP) Weekly Chart

The Yield Trade

With rising global interest rates, it’s no surprise to see the ‘yield trade’ come under pressure. We’ve seen this before and stocks dropped by ~20% in a short period of time. These ‘low risk’ defensive yield stocks as some like to call them, are not low risk, they’re not that defensive and they can drop quickly and aggressively. The best defence in being in the right sectors at the right times, which is clearly easier said than done however at the moment, their remains some obvious sectors to ‘avoid’.

Sydney Airport is your typical yield play stock and that has now fallen ~14% from recent highs.

Sydney Airport (SYD) Monthly Chart

Healthcare

Healthcare looks like it will enter in a short term “technically bearish’ zone in the US and our own Healthcare stocks such as CSL track the US healthcare sector pretty closely. For now, we are neutral/negative the sector and have no appetite to buy into the Healthcare at this stage.

US Healthcare Sector – Quarterly Chart

Standout technical chart (s) of the week

We’ve flagged Alumina (AWC) in the past looking to BUY around $1.80 however we didn’t get the chance, now the stock has broken above $2.00 closing at $2.03 on Friday. Normally we’re not keen buyers of breakouts, given a large proportion of them fail for whatever reason, however the fundamental picture for Alumina looks very encouraging, the recent pullback was constructive and this now looks likely to break current resistance and should trade to $2.50. We have pre-empted this move adding the stock to the portfolios last week.

Investing opportunities for the coming week(s)

  1. We already own QBE however we continue to think the stock is compelling here given the backdrop of sharply higher interest rates
  2. We are sellers of BT Investment if it fails to break back over $11.00 on Monday
  3. We are looking to add to our position in Newcrest Mining (NCM) however would prefer to see Gold spike under $US1200 before buying

Trading Opportunities on our radar

  1. We will again be keen to BUY Fortescue on a drop back into the high $4’s
  2. For the brave, short positions can be initiated in the Healthcare stocks  

Fortescue Metals (FMG) Daily Chart

Summary

Some conflicting signs playing out from an index perspective, however on balance we think July seasonality will start to play the tune for stocks following the ~4% correction in the Nasdaq. We remain bullish the ‘reflation trade’ through big overweight holdings in Materials, Financials and Insurance.

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 08/07/2017. 3.00PM.
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