Australian Investment Blog

Yesterday's speech by Donald Trump appeared to lack detail while being big on rhetoric, in other words exactly what most commentators thought the market would hate, yet the Dow is up over 300-points as we start typing this report. Listening to his inaugural address to congress sounded like a simple extension of his campaign speeches, although he definitely did appear significantly more statesman like than in the past. In the Weekend Report we revised higher our ideal target for US stocks and this is already feeling on the money, investors should not underestimate how far this final phase of the bull market which began back in March 2009 can extend - another 10% higher for US stocks would not surprise. Again putting things into perspective, the broad US market has now advanced 260% since March 2009, we continue to target the rally to continue for another 8-10% before correcting over 25%, definitely not outlandish swings considering the last 8-years.

Today we will again look at the overall market themes which continue to evolve in an extremely exciting manner. Let's look at last night's rally of 1.5% in the US market on a sector level because we believe it will give some excellent insights into where investors should have exposure over the next 6-months:

1. The Financial sector was the best performer gaining 3%. We remain happy with our large exposure to this sector via ANZ, CBA, HGG, PTM, MQG, QBE and SUN.
2. Resources bounced ~2% - BHP is set to open up around 44c, the stock will still be over $2.50 / 9.4% below its January high. We remain buyers in the $24 area and will not be chasing BHP, FMG or RIO into strength at this stage.
3. Healthcare was +1% - Again we remain happy with our exposure to ANN, CSL and RHC but do expect the financials to outperform. Our target for the US healthcare space is only 5-6% higher, or 1/2 of what we believe the broad market can achieve.
4. Real Estate and Utilities (the "yield play") were marginally lower - we continue to have no interest in stocks which will be adversely affected by rising global interest rates.

US Dow Jones Daily Chart

Last night US bonds were sold off aggressively clearly assisted by Trump's $1trilion rebuilding America plan. Anything that stimulates the already firm American economy is likely to send interest rates higher and subsequently bonds lower. The global bond market dwarfs its equivalent stock market and hence any movement of monies from bonds to equities is very bullish for stocks short-term, we believe a degree of this is unravelling at present. We continue to target 3% minimum for the US 10-year bond yield which is importantly over 20% higher than where they are today on a pure yield basis.

When we consider this move in interest rates we revert to a saying by the often touted world's greatest investor: “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” - Warren Buffett.

We are strong believers at MM that classic portfolio theory is for those who have non informed and thought out opinions on the market. In this particular case we continue to have no interest in our "yield play" stocks until further notice. Their performance over the last year, when the ASX200 has rallied 13.6%, strongly supports this view e.g. Westfield (WFD)-13.5%, Transurban (TCL) -1.2% and Sydney Airports (SYD)-4.4%. They bounced last month as growth came under pressure however as we suggested in Tuesday afternoons report, the trends of February were likely to be short term, a counter trend move and nothing more.

US 10-year bond yield Monthly Chart

When we cast our eyes to the local share market, using the SPI futures, for reasons explained recently it remains simply bullish while the market is over 5650. Technical analysts amongst our subscribers will smile when they see that as Donald Trump spoke our market quickly sold off 30-points as traders assessed his lack of detail and tried to second guess the reaction from US stocks but the SPI held its 50% support perfectly touching 5654 before bouncing almost 30-points - we strongly believe Technical Analysis should be part of any investors arsenal - we believe this is a big value add from MM. Let’s consider March moving forward on both a statistical and seasonal basis:

1. Assuming that yesterday’s low in the ASX200 of 5675 is the low for March recent ranges target a break up to 5900 this month.
2. Assuming that yesterday’s low in the ASX200 of 5675 is the low for the week recent ranges targets 5780 this week, about 30-points over where we are set to open this morning at 5750.
3. Seasonally the ASX200 usually rallies from January, consolidates in March before a very strong April. This is still unfolding but March does feel a touch stronger than just consolidating at present.
4. Banks are usually stronger than resources from January until the end of April, this is unfolding as expected.

ASX200 March Share Price Index 60-mins Chart

Conclusion

We remain bullish stocks until at least late April when a 4-5% pullback may unfold as is a seasonal habit. Hence,

1. Stay long stocks until further notice with financials our preferred sector.
2. Look to buy resources at marginally lower levels.

Overnight Market Matters Wrap

• The US markets resumed its rally, with the major indices accelerating over 1.1% overnight post President Trump’s speech.
• The Financials continued to benefit the most with Trump’s tenure overnight, with Real Estate and Utilities being the laggard.
• A strong open towards the 5,750 level is expected this morning in the ASX 200 as indicated by the March SPI Futures.

Disclosure

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.

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