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

By Market Matters 09 September 18

Market Matters Weekend Report Sunday 9th September 2018

Market Matters Weekend Report Sunday 9th September 2018

The ASX200 had a very poor week falling almost 3% as $50bn was wiped off the local market, we witnessed an aggressive unwind of the previously top performing high growth / valuation stocks – some of the stocks included in the relatively long list of causalities were : Seek (SEK) -5%, Aristocrat (ALL) -6.3%, Macquarie Bank (MQG) -5.2%, Treasury Wines (TWE) -5.2%, A2 Milk (A2M) -8%, CSL Ltd (CSL) -7.3%, and After Pay (APT) -17.2%. At MM we’ve been forecasting this market repositioning for a few weeks and hence our portfolios were largely left unscathed as investors scrambled to take some money off the table from stocks that have soared over the last 1-2 years.

As we saw last week the more traditional “blue chip” stocks can largely hold together while this correction unfolds because they have not enjoyed the strong gains of the last year but the index itself can still come under major pressure. Our current view is the current unwind will continue in its aggressive manner until we see calm return to emerging markets (EM) and worries around a US - China trade war diminish. On Friday night Donald Trump signalled, as Bloomberg so perfectly expressed it, is prepared to go “all in against China” after threatening an additional $US267bn in tariffs, only on Thursday people were hoping he may back off from his previous $200bn in tariffs – it took the Presidents latest rhetoric  to take US stocks to their first weekly decline in a month.

The escalation of the US – China trade tensions continues to hurt the emerging markets as the $US and to a certain extent US stocks remain the standout perceived safe havens. Both the Australian dollar and equities are coming under pressure as they are suffering for a collection of reasons including trade dependency with China, internal issues with household debt / property prices plus we are generally considered a higher risk country, hence association by default with the emerging markets when things are tough.

Donald Trumps latest actions have the ring of potential capitulation about them, assuming over the weekend he doesn’t Twitter any retraction / softening of his stance a crescendo of selling pressure on stocks should definitely be considered as a realistic scenario for the next few weeks – I cannot see how this latest outburst, this time from Airforce One, can have anything but a damaging impact on stocks.

  • We believe there is a greater than 60% chance that the recent pullback will test the 5800 area, around 5-6% lower.

The most important question as this unwind evolves is “what do we believe will happen next and how can we make money from any potential moves utilising the most prudent risk / reward?”. Since the major swing low at 4706 in 2016 the ASX200 has corrected 10% in 2016 plus 6.9% already earlier this year, our preferred scenario is the market is in the midst of a ~8% correction which should test the 5750-5850 major support.

US stocks closed down -0.2% on Friday following President Trumps comments while ignoring strong local employment data in the process. The SPI futures are calling the ASX200 to open down around 25-points but it will be interesting to see how Trumps latest trade threats impacts investors after a weekend to ponder their potential implications a very real and damaging trade war may actually unfolding before our eyes.

ASX200 Index Chart

The trend is certainly your friend with the Australian Dollar as it fell to 30-month lows on Friday night with a number of economic factors leaning on the local currency even though contagion with EM is not in the frame we are following their currencies lower:

  1. Australia’s largest trade partner is China and hence any escalation of trade war concerns is clearly bad news for the $A – China buys around 30% of our products.
  2. The $A is often regarded as a gauge of risk appetite, hence the $A is coming under selling pressure as EM concerns escalate.
  3. US 10-year bond yields are now trading 0.3908% above their Australian counterparts, the first time US bond yields are higher than our own in ~30-years, thus making the $US more attractive from a yield perspective.
  4. Australian growth is expected to be muted moving forward because of our household debt / property prices while the US is firing on all cylinders again supportive of $US compared to the $A.

We feel that the long $US v $A has become a “crowded trade” and when you consider all of the above its easy to question why anybody would currently consider buying the $A but that’s the extreme style of sentiment that exists at market tops / bottoms. Hence if we see an aggressive spike lower in the $A over the next few weeks we may take profit on our long $US ETF position to focus on stocks but not while it continues to decline in an orderly fashion.

  • MM remains long the $US against the $A via the $US BetaShares ETF - our target remains around the 65c area.

The Australian Dollar Chart

The US & Australian 10-year bond yields Chart

1 International equities

While global stock markets have been moving in a number of different directions the underlying theme has been the US outperforms everybody else. Donald Trump is clearly picking a fight(s) via trade wars while the US economy is booming, a bit like the school bully who just grew 6-inches faster than his classmates.

The below indices show the relative performance so far for September & 2018, we’ve not even considered EM which has been smacked:

  • The ASX200 is down -2.8% and up +1.3% respectively.
  • The UK FTSE is down -2.1% and down -5.3% respectively.
  • The US S&P500 is down -1.0% and up +7.4% respectively.

We feel there exists a strong possibility that US stocks are set to play catch up with global equities over the coming weeks, we particularly like the set-up of the Russell 2000 which looks poised to correct almost 6% from last weeks close.

Similarly the FTSE, which we have been negative for a few months, still has another 4-5% downside before reaching our ideal retracement area.

The pieces of at least one potential puzzle are coming together, remember earlier our ideal target for the ASX200 being ~5800, another 5-6% lower.

  • MM would are keen buyers of global equities into a further ~6% correction.

US Russell 2000 Chart


I know a few subscribers will question what’s happened to the +20% correction that we’ve been “calling” for most of 2018, often referring to it as looming on the “horizon for this bull market”. The answer is simple if a touch boring:

  • As investors we must remain flexible and open minded as markets continually evolve.
  • We look to make money from market fluctuations by applying simple risk / reward – at MM we are not trying to make “out there market calls” to use for advertising in the years ahead.

In the current market our preferred scenario is another ~6% lower before markets regain their “mojo”, we have a number of reasons for this tweak to our medium-term view with one of them being we know too many people sitting on cash hoping to buy stocks cheaper!

As we mentioned earlier we like the chart of the Russell 2000 (RTY) primarily because we believe it offers excellent risk / reward.

  • We are hoping to buy stocks if / when the RTY retraces back ~6%, however if the market fails to hold 1600 support we will rapidly switch back to being bearish targeting another 10% downside i.e. excellent risk / reward for buyers if we see a 6% dip in coming weeks.

MSCI Emerging Markets Index Chart

Recently we have been looking for the strong relative outperformance of US stocks v emerging markets to end, this view has clearly been premature so far. Following President Trumps salvo on Friday around trade with China it appears more water needs to go under this bridge before the significant divergence starts to regress. 

  • The long US stocks short emerging markets elastic band continues to tighten.

US S&P500 v emerging markets Index Chart

2 Some resource stocks are looking very weak

Two stocks caught our eye for all the wrong reason when we scoured the market looking for risk / reward and of course ideas.

  1. Copper/ gold producer OZ Minerals (OZL) $8.51 – OZL has generated sell signals targeting well under $7, or over 15% lower.
  2. Nickel producer (WSA) $2.38 – WSA has generated sell signals targeting around $2, also around 15% lower.

These targets may feel pretty dire but both stocks are already down 20% and 40% respectively from their highs of 2018 illustrating the volatility they can exhibit at times – at MM we always regard the resources sector as aggressive investments / trades simply because the companies cannot control the underlying commodity prices that determine their profitability.

Like with the high valuation / growth stocks we believe investors have been caught complacently long resource stocks in 2018 to painful effect - it also shows that in all likelihood many of the growth stocks can fall further.

If a US – China trade war gathers momentum next week the resources are certainly one of the sectors that are likely to suffer but if they do fall too far some excellent aggressive opportunities are likely to materilise.

OZ Minerals (OZL) Chart

Western Areas (WSA) Chart

One concern we raised last week with the resources space was with the Australian Dollar ($A), the issues remain very relevant as the $A continued its decline last week.

The correlation between the Metals & Mining stocks and the $A has decoupled in a pronounced manner over the last few months, implying either the $A bounces, or resource stocks have further to fall – remember we are net bearish the $A.

  • MM likes resource stocks into weakness but will not be chasing into any strength at this stage of the cycle.

Metals & Mining Producers ETF v Australian Dollar ($A) Chart

One parts of the resources space which has unceremoniously fallen from grace is the lithium stocks as concerns escalate around oversupply. The declines from their respective 2018 highs have been huge:

  • Orocobre (ORE) -55%, Minerals Resources (MIN) -34%, Galaxy Resources (GXY) -48% and Kidman Resources (KDR) -63%.

However on Friday the sector enjoyed an aggressive bounce, albeit from a very low base, with no apparent news – the kind of move we like at MM.

Both GXY 18.3% and ORE 15.8% remain in the 4 heaviest most shortest stocks on the market but considering how far they have fallen perhaps we saw some short covering on Friday.

  • Technically we like ORE for a bounce towards $4.20, or 15% higher.

Orocobre (ORE) Chart

3 Checking in on the US “yield curve”.

Market players continue to watch US bond yields very closely, especially to see if they invert e.g. 2-year bond yields rally above their 10-year friends – the differential is now only 0.2363%.

  • Historically stocks will fall when / if the US yield curve inverts i.e. the move will probably become self-fulfilling because so many market players are conscious of it.

NB Only once in history has this relationship failed to accurately predict a recession.

The contraction of the bond yield differential implies to us that the US is heading towards a recession around 2020, hence our phrase that the global asset / equity bull market since the GFC is very mature still feels correct.

This correlation has been pushed from the front pages of the financial press but we have no doubt it will return when the US & China finally resolve their trade issues.

US 2/ 10-year yield curve Chart


  • Remain patient and look to accumulate stocks into current weakness watching very carefully that we are not witnessing the end of the longest bull market in history.

Standout technical chart (s) of the week

The Chinese market is having an awful year falling -18% to-date with much of the losses blamed on the risks of a US China trade war.

The Chinese Index should be watched carefully for “buy signals” because it may be the precursor for a US-China resolution.

  • Chinese stocks are clearly heavy and may struggle on Monday but we actually believe the next 8-10% could be up.

Chinas Shanghai Composite Index Chart

Trading Opportunities on our radar

Similar to ORE mentioned above we like Kidman Resources (KDR) for a solid short-term 15-20% bounce.

  • MM is bullish KDR targeting over $1.20.

Kidman Resources (KDR) Chart

Investing on our radar

We’ve been monitoring ALL for a few weeks and were very close to pulling the trigger on Friday morning when the stock briefly tumbled under $29. The decent 2% bounce over the course of Friday we feel adds credibility to our target buy area.

ALL is trading on an Est P/E for 2018 of 24.6x while yielding 1.3% fully franked.

  • We like Aristocrat Leisure (ALL) under $29.25.

Aristocrat Leisure (ALL) 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


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.


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 07/09/2018

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