Market Matters Report / The Hickman Report - Saturday 7th December 2013

By Market Matters 07 December 13

The Hickman Report - Saturday 7th December 2013

The ASX200 may again be driven specific stock news

The Overall Market

  • I was having an enjoyable coffee at 9am on Friday morning discussing how the markets were unfolding as expected and fortunately how we had avoided the numerous recent corporate land mines e.g. QAN, GNC, FGE, UGL, MND, NCM, PNA, WOR & OZL.
  • Approximately 30 minutes later, I was feeling sick in the stomach as QBE went into a trading halt with an announcement (downgrade) concerning its US operations. Ironically not a downgrade around the Australian economy.
  • With no announcement, it is currently impossible to quantify the damage and subsequent course of action.
  • However, I can review the trade and potentially learn for the future (as we all should):

  1. The chart pattern was generating an excellent buy signal with a good risk reward profile.
  2. The sector was looking solid e.g. IAG and Suncorp.
  3. I am bullish the $US and US interest rates which assists US earnings for QBE.
  4. The management has an awful history over recent years.

  • In hindsight 3 out of 4 is not good enough, companies’ management that disappoint seem to repeat their errors.
  • Unfortunately I am confident the poorly performing directors will have a far more prosperous year than the investors.
  • The Dow's forecasted 8% correction appeared underway on Thursday but after Friday night's strong rally, the jury clearly remains out. Yet again, the NASDAQ's outperformance held the S&P solid.
  • I stress if we get this retracement, it’s an excellent buying opportunity and not time to panic sell.
  • The US economic figures remain very strong, unlike Australia, which implies that taper concerns will be the likely cause of any correction.
  • US margin loans remain at record all-time highs which makes a retracement easy to comprehend, interestingly in Australia it is +70% under its 2007 peaks.
  • The roadmap for Australian equities remains more clouded at present, littered with dangerous corporate land mines and relatively very poor economic data - The ASX200 has corrected 5% from 2013 highs but the S&P only 0.5%.
  • Hence my work on correlations with clearer indices e.g. NZ50 on chart 8.
  • Global valuations consider Australia to be fairly valued in a global context, with the US market still looking attractive on an earnings growth basis and Europe on valuations.
  • Hence no overseas buying is apparent except in companies exposed to world economic growth.
  • The weakening $A will keep overseas investors away short term, they focus on net purchase cost not better profitability.
  • The government handling of Qantas, after the recent GNC decision, will now be fascinating as it struggles to compete.

What Mattered Last Week

Last week was very weak for the ASX200, falling 178 points at one stage by Friday morning. The focus was again negative on a stock specific basis, with unfortunately another couple of shockers gaining the spotlight. Three major IPO's also hit the market last week in mixed fashion.

  • Qantas (QAN) fell over 15% on a massive predicted 1/2 year loss and credit rating downgrade to "junk debt status".
  • I repeat never invest in airlines, it’s simply too hard on a long term basis - trading is different depending on timeframes.
  • QBE went into a trading halt as discussed earlier, pending announcements on US operations.
  • The overall insurance sector was extremely weak into this announcement which is common but "smelly".
  • The banking sector was a standout, falling over 3% for the week as I suspect overseas investors steer away from investments denominated in the falling $A.
  • The retail and real estate areas also fared poorly as the Australian economy is clearly out of flavour.
  • Conversely, the big miners fared far better as investors focused on growth not yield.
  • I repeat I prefer growth over yield for 2014.
  • Two out of three IPO's listed were unimpressive, confirming stock selection is vital - Nine Ent. -3.5%, VED +54% & Dick Smith +1.8%.


What Matters This Week

  • The ASX200 may again be driven specific stock news plus strong seasonals as bank dividends hit the market this week.
  • Traders / investors should remain aware that December is historically the number one month for the S&P 500.
  • However, the ASX200 is trading in far more correlated way to the New Zealand Index than the US Indices.
  • The European Indices remain net positive on a weekly basis but with diminishing conviction.
  • In December shareholders will receive $8.6 billion in dividends, explaining why the ASX200 has rallied 85% of time from this period into January (a significant portion of this will be absorbed by the IPO’s).
  • I am net bearish, but wondering if we will snap back next week after recent strong underperformance.
  • I will remain net negative the ASX200 while we are sub 5285. If it was not for the seasonal factors I would be very bearish, as it is I am cautiously negative.
  • The overlay of the ASX200 and NZ50 points clearly to an unfolding 8-10% correction (chart 8) – interestingly for November, the ASX200 was -1.9%, NZ -2.3% but the S&P +2.8%. This trend has clearly continued in early December.

Trading for the coming Week

  • I will remain bearish sub 5285 but a break of here will turn me neutral not positive.
  • Monday is going to be very interesting, after a 200 pts. bounce in the Dow, can the ASX200 finally hold some strong gains?
  • QBE will be the main focus early next week, trading will be determined by the pending announcement and interpretation.
  • I am a buyer of FMG around $5.20 but this is unlikely to occur this week.
  • I am looking to increase holdings of OGC into gold sector weakness – copper is a slight concern here.
  • The gold sector has had an awful year; gold stocks look as unloved as the retail sector was in June 2012 prior to a 65% rally. I am buying slowly now while everybody is selling looking for a corrective rally minimum, perhaps as equities correct.
  • I am recommending buying long dated NCM calls for trading / option investors.
  • Investors should have plans for this potential correction if it occurs. I have increased cash holdings and will simply buy my preferred equities into weakness, I have refined these below:

      BOQ (11.00), CWN ($15), FOX ($31), FMG ($5.20), and REA ($35).


Market Matters’ View

The below views are illustrated in detail by the charts beneath.

Bullish: BOQ (m), CBA (m), CSL (m), CWN (m), Dow (m), FOX (m), FMG (w), FTSE (w), Hang Seng (w), IBEX (m), NASDAQ (m), Nikkei (m), OGC (m), REA (m), SEK (m), S&P (m), SUN (m), & WOW (m).

Neutral: AMP (w), Australian Banks (w), BEN (m), BHP (w), Gold (m), NCM (m), QBE (m), RIO (w), STOXX (w).

Bearish: ASX200 (d), China (m), Copper (m), NZ (w), NAB (w), Retail Index (w), WBC (w), WES (w) & WPL (m).

• Time Frames - (d) = daily, (w) = weekly and (m) = monthly.

E.g. A (d) implies I am bullish on a daily basis but a (m) would mean I am bearish on a monthly / longer term basis.


Australian ASX200

I remain bullish on a monthly basis, plus we are in a seasonal very bullish phase. Most people were too afraid to buy closer to 5000 because of media coverage surrounding the US debt default situation – then fear of missing out emerged and 5450 was quickly reached. Prior to November every retracement reached hungry buyers but this has definitely relaxed of late. The yearly range targets 5450+ (reached) and a simple monthly abc targets 5670. However, I am very wary of the potential 8% correction for overseas markets and the weekly “rising wedge triple top” formation on the weekly chart.











American Equities

The American indices look set to rally into next week with the Dow targeting well over 16,000. However, the next 8% move I believe is down with the likely exception of the NASDAQ.








 

European Indices

The European indices now look net bullish for 2013 with the Eurostoxx and IBEX both target fresh 2013 highs in December. However, the FTSE has now become 50-50 on a weekly basis.






 

Asian Indices

 

Asian indices remain positive and finally started performing last week. The Nikkei has been trading out of control, under the weight of stimulus and intervention.






Australian Stocks

Buying sustainable yield and selling XJO calls has been a logical strategy over recent years, however, the risk of rising bond yields has resulted in me now recommending a more balanced portfolio – my view is that the next move in rates is up. Overall the major stocks in the ASX200 remain clearly positive; however, I have reduced exposure into recent strength positioning myself for a potential pullback.

Stock picking remains at a premium as is demonstrated in 2013 by BOQ outperforming in the Banks and FMG in the resources space.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Australian Dollar

The $A is looking very heavy, the recent bounce was a little greater than anticipated breaking 97c, renewed weakness now looks likely with an ultimate target of 81-82c.




Commodities

The Gold chart looks bullish longer term targeting fresh recent highs, likely over $2,000 suggesting inflation - confirmation requires a close over 1480. On a monthly basis, gold remains bearish targeting new lows for 2013/14 under 1180. Conversely, seasonally this is a good period for gold.

Also, the amount of money tied up in Gold ETF’s that did not exist pre 2004 remains. Having recently visited China, the only two investments that interest locals are property and gold……not reflected by the price yet.

Copper remains negative on a longer term basis, a very similar chart pattern to Newcrest Mining and we all saw what happened there.





Please note this is my personal TECHNICAL opinion of markets and "General Advice" taking no account of individual’s circumstances.

Have a great week,

Shawn Hickman



 

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