Australian Investment Blog

Reading between the lines in this tricky market

Globally stocks appear to have entered a period of almost unsettling complacency, which is very different to the panic back at the start of the year. "Short bets" on volatility are around record highs telling us the "weight of money" consider stocks to be extremely safe at present - investors believe that central banks will come to the rescue if any panic arises. It used to be called the "Bernanke Put" after the then-Fed Chair Ben Bernanke launched massive and ongoing quantitative easing measures during the GFC.

The following VIX chart shows the index is plumbing multi-year lows, with the volatility index under half of where it was after BREXIT. Overall this low VIX ties in with our 3-6 months bullish outlook for equities but when the market turns readings back over 30 are likely to occur quickly. However, for now, no panic, an important take out from the VIX chart is it generally trades at depressed levels for many months, and its only just reached the ~12 area.
NB The VIX chart is often referred to as the Fear Chart, simply the lower the VIX, the lower the markets Fear.

Volatility Index (VIX) Weekly

Over the last week, the local stock market has traded in a tight range as investors digest company reports and the market simply takes a breather after an impressive 560-point (11.1%) rally from the 5050 region. A market taking a rest after an 11% gain is healthy and usually a precursor for further gains.

We remain short term bullish the ASX200 targeting the 5650 area where we anticipate reducing our market exposure.

ASX200 120-minute Chart

Yesterday CBA reported what we believe is a solid result, but the stock fell 1.3%, while ANZ Bank rallied 1.2%. Short term we expect both ANZ and NAB to outperform CBA as they simply play some catch-up - over the last 12 months ANZ is -11%, NAB -14.4% but CBA only -5.3%.

The big change to the market's recent view is that the likelihood our local banks will need to raise capital by issuing fresh shares has diminished significantly - reducing the supply of shares to the market. The question is how many funds were holding back from buying our banks because they anticipated receiving shares in the future at a discount to their current levels?

When we look at ANZ since its panic highs back in mid-2015 the 41% correction, that most investors at the time imagined impossible, is a great example that we should all remain open-minded to market moves. We believe ANZ is now correcting the $15.39 plunge, and while that is not a bullish scenario in itself, it does have short term positive implications.

Our retracement targets for ANZ are $27.75 and $29.50 as bullish outlier, basically another 4% upside minimum. It should be remembered the banks are trading very cheaply relative to the overall market and have been so unpopular that a short squeeze is easy to comprehend.

ANZ Bank (ANZ) Quarterly Chart

Suncorp (SUN) remains one of our favoured stocks at present, and it goes ex-dividend 38c fully franked tomorrow. Similar to ANZ Bank it has rallied strongly after an average result however they articulated a credible plan to improve margins and thus profitability going forward.

We believe SUN is an excellent buy for Investors hunting for yield before tomorrow's dividend - we have a target of ~$15.50 on the stock.

Suncorp (SUN) Monthly Chart

Summary

1. We are short term bullish the ASX200 targeting the 5650 region.
2. We like the banking sector short term targeting another 4-5% upside minimum.
3. We remain bullish SUN targeting $15.50, even after paying 38c fully franked dividend tomorrow.

**Telstra (TLS) has just reported full-year earnings; Profit $3832m, EPS 31.6 cents, DPS 31 cents. It looks a little light on to us. Revenue missed by -2.6%, EBITDA was a -2.8% miss. Some will be disappointed with a 15.5c dividend and not 16c. EPS was a -2.4% miss. Not a great result, however, they did launch a $1.5 billion share buy-back, which should offer some support to the share price. We reiterate our negative view on the stock in the medium-term***

Telstra (TLS) weekly chart

Overnight Market Matters Wrap

• The Reserve Bank of New Zealand cuts its interest rate by 0.25% to 2%, with at least one more expected this year.
• The US share market closed marginally lower as Treasury (bonds) demand increased and the energy market taking a beating yet again.
• The Dow closed 37 points lower (-0.2%) at 18,495, while the broader S&P 500 closed 6 points lower (-0.3%) at 2,175.
• As mentioned, the energy sector led the decline, with oil down 2.5% to US$41.71/bbl after the EIA inventory report showed a rise of 1.055m Bbl, versus an estimate of a decline -1.5m Bbl.
• Iron Ore didn’t fare too well either, down 1.6% to US$60.58/t. With both Oil and Iron Ore weak overnight, BHP underperformed in the US, down an equivalent of 2% to $20.04 and we expect to see this follow through in the ASX 200 today.
• Corporate Earnings to report today are Telstra (TLS), Magellan Financial (MFG), Virgin Australia (VAH) and Goodman Group (GMG).
• The ASX 200 is expected to open with little change this morning, testing the 5,540 level as indicated by the September SPI Futures. Corporate earnings such as TLS, however, will likely dictate the direction of our close today.

Regards,
The Market Matters Team
Level 12 28-34 O'Connell St
Sydney NSW 2000


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