Market Matters Report / Market Matters Weekend Report - Sunday 18th February 2018

By Market Matters 18 February 18

Market Matters Weekend Report - Sunday 18th February 2018

Market Matters Weekend Report Sunday 18th February 2018

Last week was a better one for the ASX200 as it managed to rally +1.1%, but not a great result compared to the US which bounced +4.3% - basically the US simply both fell and bounced harder. The resource stocks MM bought during the recent sharp market correction on the whole had a stellar week e.g. BHP +8.2%, RIO +7.3% and Oz Minerals +5.7% but unless our influential Banking Sector can find some love its hard to envisage the ASX200 rallying much back over the psychological 6000-area  - last week ignoring CBA which went ex-dividend we saw Westpac and ANZ both drift lower while global banks soared +4%, they are now less than -3% below their post GFC highs compared to our own banks which are a painful -23% below the equivalent level, something we will look into later in the report.

MM is now only holding 6% and 5% cash in our Platinum and Income Portfolio’s respectively,  hence we are very close to fully invested. Let’s put this in perspective by looking at where we see the market short and medium-term:

  1. Short term – We are net bullish global equities targeting fresh all-time highs by many indices over the coming weeks / months.
  2. Medium term – We still believe a greater than -20% correction will commence this year for stocks.

Hence overall we must be very careful that we are not caught fully invested in stocks when they finally turn lower - we have held our medium-term large correction view for a few years! Hence today we are going evaluate the “Yin & yang” of the market i.e. have we already topped out or will we see fresh all-time highs for many global indices over the coming months.

In our opinion at MM “One of the keys to successful investing during 2018/9 will be being prepared to sell” – most investors weakest quality.

As you know from the latest MM reports we have not been surprised by the sharp correction led in equities by US stocks, or their strong bounce for that matter, just consider the last few years from a simple common sense perspective:

  1. The US economy is growing at a very healthy ~3% per annum.
  2. However in 2017 the S&500 rallied +30.8% followed by another +7.4% in January alone – this degree / rate of asset appreciation cannot be maintained / justified by only +3% economic growth.
  3. Global interest rates / bond yields have been increasing since mid-2016.
  4. History tells us that rising interest rates eventually hurts asset prices, including of course shares.

We have to maintain our finger on the pulse of stocks to constantly evaluate if the interest rate 'tipping point' has arrived or we have simply witnessed a washout of weak longs and over committed short-volatility players.

Last week’s list of major winners / losers (+/- 7%) in the ASX200 illustrates the typical impact of reporting season on individual stocks, plus the strength in most resource companies:

Winners : IAG Insurance Group (IAG) +7.1%, RIO Tinto (RIO) +7.3%, BHP Billiton (BHP) +8.2%, CSL Ltd (CSL) +9.2% and Computershare (CPU) +9.3%.

Losers : Start Entertainment (SGR) -7.5%, South32 Ltd (S32) -9.3%, Fairfax Media (FXJ) -8.3% and Vocus Group (VOC) -7%.

ASX200 Weekly Chart


1 “Yang” – short-term bullish case

As we wrote last week “It’s very easy to get caught up in the emotion of large market swings, especially with the media trying to whip up the frenzy but that’s where good old fashion hard work / planning comes into play”. When we stand back and consider markets on a weekly and seasonal basis there is plenty of reasons to be optimistic into the “Sell in May and go away” period. As we have pointed out a few times early February is often a great time to buy stocks:

  • When the ASX200 falls / drifts in January, like this year, the quarterly low occurs 80% of the time in the first 5-10 calendar days of February.

This obviously feels pretty good today with the 5786 low arriving on the 9th of February. Assuming this low holds which is far from set in stone what have we witnessed “next” since the GFC?:

  1. The average rally from the Q1 low into April / May danger time is a huge 512-points / 10.7%.
  2. Assuming that we have seen the low for Q1 that extrapolates to a target of ~6300, taking the more conservative of the above 2 statistics.
  3. Historically the top usually kicks in between mid-April and early May.

With the ASX200 struggling around 5900 its pretty hard to comprehend the market soaring up towards 6300 but as we regularly say “investors must remain open-minded”.

ASX200 Seasonality Chart


The Australian Banking Sector is currently down -4.5% in 2018 compared to the Global Banking Index which is up +3.7%, its simple, for the ASX200 to rally significantly over the coming months we need to see our “Big 4” banking stocks regain their mojo and get on the coattails of their international friends – seasonally this is a very bullish time for our banks but no signs have emerged to-date. However many investors locally and offshore are concerned by the Australian property market which may impact the banks bad debts / growth moving forward, perhaps a few good weekends auction results will give our banks  a leg up.

When we stand back and look at some major international indexes on a weekly basis they very look very constructive for a rally into a potentially very important April / May top:

1. The US NASDAQ corrected over 12% very quickly but its now bounced over 10% and if it can just consolidate around current levels it will look primed for an move to fresh all-time highs.
2. The German DAX has been one of our favourite charts over recent weeks and although its recovery has been fairly muted compared to the US it’s still targeting a ~10% rally from Fridays close.

US S&P500 Weekly Chart 


 German DAX Weekly Chart


We watch the Emerging Markets (EEM) closely for 2 reasons at present, firstly they are highly correlated to our resources sector, and secondly because they have followed our technical path perfectly over the last 18-moinths.

  • The EEM is targeting further gains of close to 10% which is very encouraging for our decent resources exposure – RIO has already rallied over 10% since its panic sell-off illustrating how the sector remains a current favourite with fund managers.

Emerging Markets (EEM) Weekly Chart

 2 “Yin” – short/medium-term bearish case

 The ASX200 experiences a correction over around 12% in an average year which would target the 5400 area, if 6150 is the high for 2018 – considering last years pullback was only 5% statistically the odds of a 12% pullback this year are actually higher on a rolling 10-year basis.

If we look at the daily ASX200 set-up it appears to be headed down towards 5700 to complete an initial descent from 6150, to change this picture we need to see a close back above the psychological 6000.

 The ASX200 Daily Chart

 At MM we have picked the last 2 major turns very well i.e. the top in 2015 and low in 2016 – not many subscribers agreed with us at the time in either case. We are strongly committed to our view that stocks will correct over 20% during 2018/9 – not that an aggressive a call when many markets tumbled ~12% recently in just 2 weeks! 

 Hence we must remain very aware of the downside failure in stocks because it will be unforgivable to correctly forecast a major correction by stocks and then be caught on the wrong side of it!

 MSCI Global World Index Quarterly Chart


US S&P500 Monthly Chart


 When we look at the unfolding daily picture for US stocks some major concerns jump out at us:

1. On Friday the S&P500 gave up its daily gains in the last hours trade, no great surprise ahead of a weekend but a negative none-the-less.

2. However, if the weakness continues next week and we see a fall under 2670 (-2.2% lower) a technical sell signal will be generated.
3. This “sell signal” would target ~2415 / -13.4% lower, or acceleration to significantly lower prices.

4.The Bulls will ideally see some consolidation between 2750 and 2710.

 Usually I would be leaning towards the negative picture unfolding but a lot of people are “calling it” which always concerns us at MM.

 US S&P500 Daily Chart

 We believe the $US and interest rates are the keys to stocks in 2018/9 and on Friday night AEST something very concerning to us happened:

The $US Index made the fresh multi-year lows we have been targeted and then bounced around 1%.

  • We have to ask is that it and the $US is going higher?

The negative downtrend is certainly entrenched but all good things come to an end. Ideally we will see some more weakness to coincide with a fresh high in some stocks led by the emerging Markets but the influence of the $US cannot be ignored:

  • The $US bounced ~1% on Friday night and BHP traded down -2.3% in the US.

The $US Index Daily Chart

 The $US Index v S&P500 Weekly Chart 

Lastly moving onto bond yields which started the whole avalanche of selling back on the 2nd of Feb following the US Wage Data coming in stronger than expected, leading to raised concerns around inflation. 

  • Over 2018/9 we believe US 2-year Bond Yields are headed towards 3% strongly implying we have not seen the last of stock market volatility because of interest rates.

US 2-year Bond Yields Weekly Chart 



 On balance we believe that stocks have found a short-term low that should be followed by a rally to fresh all-time highs by many indices.

 However, we still believe that a +20% correction will unfold over 2018/9 and due to the outlined warning signals in today’s report we must give a 30% weighting to the possibility that the correction has already commenced i.e. take nothing for granted over coming weeks.

Areas of focus this week 


 While we remain bullish the resources into 2018/9 considering the sectors bull market is now 2-years old and we are looking for a $US low / interest rates higher MM can easily envisage significantly more volatility short-term.

We are now wearing our sellers hat for our holdings in the sector and will have no hesitation selling into strength. i.e.AWC, BHP, ILU, KDR, OZL and RIO.

  • The EEM Charts imply much of the sector can rally another ~8-10%.
  • Conversely the $US may be close to bottoming out which is potentially extremely negative resources.

RIO Tinto (RIO) Weekly Chart


As discussed the $US has been very weak which has helped gold rally. However, if we are correct and the $US is close to a decent low then gold may be ready to underperform, especially as traders have been going long the most liquid ETF’s implying a short-term bullish view which could subsequently see some fairly aggressive selling hit the sector moving forward. The lack of buying in gold when equities tumbled is not a good sign for the often perceived “safe haven”.We currently own no gold stocks.

Newcrest Mining (NCM) Weekly Chart 


 Diversified Financials

We remain bullish the Diversified Financials with an eventual target well over 10% higher but this feels miles away at present!

  • Market favourite Challenger (CGF) has now tumbled over -16% since it’s December high, it may look interesting ~$11.50 / 6% lower.

Challenger (CGF) Monthly Chart

“Shopping List”
Below is our now limited shopping list of stocks plus ideal levels which has been updated from last week, we currently have only 6% of the MM Platinum & 5% of the Income Portfolio in cash so we are fussy buyers :

  1. Banks – We are comfortable with current exposure.
  2. Consumer Services – We are comfortable with our exposure at present.
  3. Diversified Financials – We are comfortable with our position at present.
  4. Energy – We are long WPL which feels ok at present but lets see after it recommences trading.
  5. Food and Beverage – Happily square at present.
  6. Healthcare – Square feels ok but our favourite stock is ResMed around $11.50.
  7. Resources – We have completed a lot of buying and are considering our sell levels moving forward..
  8. Real Estate – Another sector we are not keen on.
  9. Telco’s – We believe the Telcos will outperform in 2018/9 but our Telstra is enough at current levels.
  10. Retail – No investment buying at this stage.
  11. Gold – We have no interest considering our $US view.

“Selling List”

  1. Resources – At this stage we are looking for another 5-10% from our holdings

Standout technical chart (s) of the week

 We remain bullish interest rates which is bearish most assets including property.

  • The Australian Real Estate Index is already almost 18% below its 2016 high and our target remains another 10% lower!

This is importantly likely to maintain pressure on our local banking index.

ASX200 Real Estate Index Monthly Chart


Investing opportunities for the coming week(s)

Refer to both the “shopping list” earlier in the report. A summary of the most likely activity next week is:

  • We are unlikely to be buying in the coming weeks.
  • We have nothing very close to our sell areas at present but another week like the last and our resources will be in the frame.

Trading Opportunities on our radar

MM has been looking for a major low in the $US around now!

  • For the traders look to buy around 89 and leave ammunition to average at 88.50 and 87.50.

 This exposure to a potentially rallying $US may be implemented using an ETF, an investment tool we expect to utilise moving forward.

The $US Index Daily Chart


The $US Index Weekly 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.


 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 when amendemands are made. .


 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 17/2/2018. 3.00PM.

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