Australian Investment Blog

Three veins we are using to keep our fingers on the pulse

As we have discussed previously, markets repeat themselves just like the economic cycles we learnt about at school. Combining this with the human emotions of "Fear & Greed" it's hardly surprising that we can predict long-term trends for stocks when looking back at history. At Market Matters, we predicted this current surge higher from stocks, fuelled by the record cash levels on the sidelines, BUT the harder task is deciding when to aggressively sell stocks.

We have regularly been asked, "how can this market be rallying?" - Perhaps the simple answer is investors are becoming more comfortable with climbing this wall of worry, as equities continually shrug off supposedly disastrous events e.g. China, US rates rising and BREXIT. This complacency makes our forecasted medium term +20% correction, more plausible...markets will potentially be hit with the "straw that breaks the camel's back situation," not an earth shattering event.

Picking tops in markets is generally tougher than picking bottoms and hence on a daily basis, we keep our fingers on the pulse of a number of different markets, looking for signals to sell - do not forget we are targeting a +20% correction from US stocks on the horizon. Today, we going to outline 3 markets we are looking at carefully to aid us deciding when to sell stocks.

US Healthcare Sector
The Healthcare Sector is the second worst sector year-to-date, after the financial sector, primarily due to uncertainties generated by the pending election - will Donald Trump surprise like BREXIT? On current valuations comparisons, it shows good value within the market which fits our short term bullish picture.

We are currently bullish the US Healthcare sector targeting the 925-950area (~8% higher). Leading to two conclusions:

1. We would remain patient taking profit on the correlated Australian Healthcare stocks e.g. CSL, RHC, and COH.
2. We do not expect the S&P500 to top out until the Healthcare Sector has rallied ~8%, but the chart pattern is very exciting in identifying what comes next...a pullback towards the 700 area, over 20% lower, which has huge implications for the Australian market.

US S&P500 Healthcare Sector Quarterly Chart



Interest rates v equities
The quandary facing many old hands in the markets is how to understand the ramifications of interest rates falling to their lowest levels in history, while stocks are making all-time highs. The economics of both are diametrically opposed:

1. Interest rates fall because economies are weak.
2. Stocks rally because the companies and the economies are strong.

Currently, global Central Banks are taking arguably the largest ever financial gamble, to avoid a deep recession after the GFC. So far, it's not working, slashing interest rates (over 20% of bonds are now showing negative yield) and massive quantitative easing is not creating inflation and economic growth.
We believe that the massive buying of bonds by Central Banks is creating a bubble and "when" it bursts / rates rise, stocks are likely to correct - hence we are watching global bonds / interest rates very carefully.

US 10-year interest rates Quarterly Chart



The ASX200
Over recent years, the more diversified US and European stock markets have been easier to forecast than our local ASX200. Simply if the resources or banks have a bad, time we struggle at best due to their large index weighting. Hence, it's obviously important for us to keep a close eye on the domestic market, as well as the highly correlated US market.
The ASX200 has enjoyed a very strong 383 point (7.4%) rally since the start of this month. A consolidation / pullback of around 130-points is due, but the 5400 area should now offer strong support. We remain bullish the ASX200 while it holds the 5400 area.

ASX200 Daily Chart




Summary

We will continue to share with you the indicators we will use to commence selling stocks, including:

• The US Healthcare Index looks perfectly positioned to rally another 8%; that should aid the ASX200.
• A rally in bond yields will ring alarm bells.
• The ASX200 should now hold the 5400 region.

It should be remembered that picking exact tops is luck and not a science. However, we are confident that selling over the next 3-6 months into strength will prove fruitful, but be prepared for the market / stocks to rally further after exiting before a meaningful pullback.

Please remember to keep the questions coming for Monday’s reports!

Watch for alerts over the days / weeks ahead.

Overnight Market Matters Wrap

• The Dow broke a nine-day winning streak and finished down 78 points (-0.4%) to 18,517, and the S&P500 closed down 8 points (-0.4%) to 2,165.
• Oil or more precisely refined products (petrol/gasoline) supplies turned the market weaker. Even though the reports on Thursday reported on the continued drawdown of crude supplies, the supply of petrol is at record highs (as is crude oil) for this time of year. Crude finished down US$1.21 (-2.6%) to US$44.54/bbl.
• Gold had a solid night after the European Central Bank (ECB) left rates on hold. Spot Gold finished up US$11.90 (+0.9%) to US$1,331.20/oz
• Following on with the better news for our market, Iron Ore managed to climb US$1.42 (+2.6%) to US$57.17/t.
• The September SPI Futures is indicating the ASX 200 will open slightly lower this morning, around 7 points, to around the 5,505 level.

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 22/07/2016. 9:00AM.

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