Australian Investment Blog

We continue to believe there is a far greater than 50% chance that we have commenced an inflection week with our ideal target for the ASX200 around the 6000 level - this of course will significantly be influenced by the markets interpretation of today's report by ANZ. Statistically if we are going to experience a classic "sell in May and go away" seasonal correction there is a strong possibility that the May top will be this week, especially when we consider the market sensitive events unfolding over the coming days which include ANZ and NAB results, a large Macquarie conference today which has a lot of the market speaking and importantly this event has a history of moving stocks, the FOMC announce their decision on US interest rates on Wednesday, Friday sees the US employment Non-Farm Payrolls data and on the 7th we have the French elections.

Remember the "DOT Theory" - 80% of the time the high, or low, of any time frame will be formed in the first 20% of the respective timeframe.

The ASX200 has now advanced 904-points / 17.9% since Donald Trump's dramatic election victory almost exactly 100-days ago. The average correction over the May / June period since the current bull market commenced in March 2009 has been 6.9% which would bring the local market back towards the 5600 area. This degree of pullback to where the market was in early February would represent around a 40% correction of the advance since November, this all sounds reasonable and actually healthy for a bull market, albeit in our opinion a very mature one.

ASX200 Daily Chart

This morning US stocks have again closed basically unchanged with the exception of the NASDAQ which yet again powered to fresh all-time highs, gaining another +0.8%. Importantly US equities remain extremely close to our initial upside target and risk / reward no longer favours general buying:

1. The US S&P500 remains poised to only rally another ~1.5% over next few days / weeks.

2. A 5% correction is still looming rapidly on the horizon, it still feels like we are heading towards a classic "sell in May and go away" scenario.

3. Assuming we get a 5% correction over May / June, similar to last year, we will be keen buyers into this weakness targeting further gains later in 2017. The NASDAQ is likely to be our yardstick for a buy area with US stocks and we will be simply looking for a correction of ~265-points, similar to that in October / November 2016.

US S&P500 Weekly Chart

US NASDAQ Weekly Chart

Last week investors put almost $1bn to work in Emerging Markets ETF's (stocks and bonds) making it 8-straight weeks of gains, yet over the same period local resource stocks have tumbled. After yesterday’s mild weakness the simple numbers for 2017 are not exciting reading for Australian investors, the Emerging Markets MSCI ETF (EEM) has now rallied +15% yet BHP is down -4.7%, while RIO is only marginally lower for 2017 it has fallen over 14% from its high earlier in the year. As we illustrated in the Weekend Report there is usually a high degree of correlation between our resources sector and the EEM but currently clear divergence has been unfolding since late January with our resource stocks falling while the EEM continues to advance. The question is - do we remain comfortable with our recent foray into the resources sector which are currently showing small paper losses?

Emerging Markets ETF Weekly Chart

Emerging Markets (EEM) v BHP Weekly Chart

We are also currently witnessing significant divergence between the ASX200 and again say BHP, in other words our broad market is following the EEM higher while the resources remain weak. However a similar degree of divergence unfolded in 2016 when the ASX200 experienced a decent correction but BHP rallied. This is reassuring to find considering we believe there is strong possibility of a May / June correction in the broad local market.

ASX200 v BHP Billiton (BHP) Weekly Chart

Both copper and iron ore have enjoyed decent bounces over recent trading sessions, with advances from their respective lows of 6% and 9%. While this has not been enough to-date to convince investors that the correction in resources is complete a little more strength we believe will tip the balance and send resources stocks sharply higher. Lastly, we thought this would be an opportune time to take a look at the recent relationship between US bond yields and say RIO.

It's has been our view at MM that US 10-year bond yields will rise over coming months, leading to 2 likely outcomes:

1. The US banking sector will recover from their recent losses which our local banks ignored.

2. Gold stocks should continue their correction, hence we remain "fussy" with our re-entry target back into Regis Resources (RRL).

The correlation between the US 10-year bond yield and RIO over the last year has year has been excellent. Hence if we are correct with our macro call of US bond yields to make fresh highs for 2017 in coming months there exists a strong possibility that RIO will regain its "mojo" very soon.

US 10-year bond yields v RIO Tinto (RIO) Weekly Chart

Conclusion(s)

The main conclusions for today:

1. We remain bullish the resources sector from current levels, particularly while US 10-year bond yields remain positioned to rally.

2. We remain keen to buy RRL into weakness but our initial buy zone is under $3.05 i.e. over 5% below yesterday's close.

3. Our favourite trade at this point in time is to sell the currently popular banks and buy resources - that's contrarian stuff!

Overnight Market Matters Wrap

· The US major share indices closed with little change, except for the NASDAQ 100, rallying up 0.83%.

· Oil underperformed and slid over 1% overnight, while Iron Ore continues its recent outperformance, up 3.58%.

· The June SPI Futures is indicating the ASX 200 to open 14 points higher, towards the 5970 level this morning.

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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