Market Matters Weekend Report – Sunday 12th June 2020 (NAB, NCM, TLS, SBUX US, IZZ)
Market Matters Weekend Report – Sunday 12th June 2020
Half-way into July and the song remains the same, plenty of bad news flashing across our screens to excite the bears but stocks remain resilient and some indices actually manage to accelerate higher – the US tech based NASDAQ again made fresh all-time highs on Friday night, up 24% for 2020 while China’s Shenzhen Index has catapulted up 22% in just the last 2-weeks. When we weigh up the factors presently impacting stocks MM continues to believe the positive liquidity factors are outweighing the constant flow of very real negative news stories. Global central banks have drawn their lines in the sand and unless COVID-19 spirals out of control they look destined to win the battle and continue inflating asset prices – at least for now.
The bull market post the GFC and most especially since March is probably the most unloved in history, the only stock market talk over dinner parties and in taxis is around when is the market going to crash, whereas in other bull markets everyone was passing on “tips”, although the latter is happening in the tech sector, a sign of where the backbone of this rally resides.
There are a number of different ways to quantify this overall bearish sentiment but 2 we monitor closely are below:
1 – In June’s Bank of America Fund Manger’s Survey showed a record 78% of investors thought the market was overvalued but cash levels have slipped to the 10-year average of 4.7% implying that another strong leg higher by stocks may encounter some selling / profit taking.
2 – The AAII Bullish Consensus has risen to 27% from 22% but it remains well below the 35% area tested in June, let alone the recent peak around 45% in January.
Equities may be passed their “peak of pessimism” during the COVID-19 outbreak in March but they are nowhere near dangerously bullish. However, the slow but sure improvement in sentiment as markets rally keeps us comfortable with our “sell strength & buy weakness” mantra for 2020. Importantly we are bullish into 2021 until further notice, hence any moves by MM down the risk curve are likely to be more conservative in nature than the reverse. Even the rampant NASDAQ is offering buying opportunities for those brave enough to press their proverbial buy buttons when things look wobbly and the media yet again become excited e.g. since March the tech based US index has corrected 7.1%, 5.9%, 6.6% and 5.5% respectively.
It still feels to us that a reasonable weight of money is looking to buy pullbacks hence the NASDAQ has not managed to pull back vaguely close to 10% since March, however the legs higher continue to surprise by their magnitude as frustrated buyers chase market favourites as opposed to the broad market.
MM remains bullish global equities with the path of most pain / least resistance higher.
US NASDAQ 100 Index Chart
Victoria has gone into the feared secondary lockdown as the state registers its worst ever day of fresh COVID-19 infections, unfortunately the cats out of the bag with the rest of Australia holding their breath that border closures can keep the pandemic at bay. While the US continues to prove its far better at almost anything as opposed to dealing with a pandemic, over 60,000 fresh daily cases has now become the norm but stocks are clearly focusing on an economic revival 12-18 months ahead as optimism reigns supreme. I pose the question how bad the news will have to be for equities to lose faith in the Fed & Co., hopefully we will not find out!
Following a strong end to the week on Wall Street the local futures are pointing to the ASX200 opening up around 100-points tomorrow, if the gains are held / added to last week’s losses will basically be wiped out in one fell swoop. I keep looking at the chart below and my “Gut Feel” continues to favour an aggressive FOMO (fear of missing out) style rally above 6200, with the banks & resources both very strong in the US on Friday next week wouldn’t surprise me as the pivot point for such an advance.
MM remain bullish the ASX200 looking for at least a “pop” above 6200.
ASX200 Index Chart
At MM we often advocate taking profit on positions into fresh “blow-off” style highs however not all pictures tell the same story, in the case of Chinese stocks surging 20% in the past fortnight we believe it’s a move to embrace and definitely not fade. Importantly this is theoretically great news for Australian stocks correlated to a strong Chinese economy with the resources obviously coming to mind and in what’s been a down year so far we’ve already seen strong performances by Fortescue (FMG) and OZ Minerals (OZL) while heavyweights BHP and RIO are both outperforming if a little more cautiously. MM intends to maintain our overweight stance towards resources in 2020.
I can imagine many subscribers are sceptical towards the move by Chinese stocks but I caution this thinking because in my opinion the ducks are aligned, remember so far in 2020 copper is up +3.1%, iron ore +34% and the Baltic Dry Index (shipping freight cost) a whopping +66%. These gains strongly imply that China, the world’s second largest economy, is performing strongly and related stocks should follow.
MM is very bullish Chinese exposed stocks.
China Shenzhen CSI 300 Index Chart
The coronavirus has been undoubtedly the main point of reference on the news over recent weeks and indeed in 2020 but the pick-up in the last couple of weeks as Victoria becomes isolated from Australia makes me and probably most people reading this missive very uncomfortable. I hope & prey that everyone down South is coping ok and obviously that the virus fails to again spread throughout our fair land. Its disconcerting when we look at the rate of infections below that we compare to the US albeit it on a significantly smaller scale.
Equities appear far more comfortable than myself with the fresh waves of COVID-19 across the world, it’s not just Victoria, Hong Kong has just re-shut its schools, that would be tough I would imagine! Stocks appear ok while big business keeps firing but any sectors that will struggle to get back off the canvas have again been slammed e.g. over the last month Flight Centre (FLT) -30% and Webjet (WEB) -28%. We’ve seen how hard these laggards can rally when investors search for bargains but we believe there’s no hurry to pick up a few “speccys” just yet.
Conversely when we see improvements in the virus statistics both here and in the US I feel we can expect a huge week – markets that don’t fall on “bad news” are usually strong.
Confirmed cases of COVID-19 in the US & Australia Chart
With the market potentially headed higher in the weeks ahead I have focused my attention on stocks / ETF’s we may consider selling plus any areas where our exposure is “light” especially as Chinese stocks are giving the green light to our reflation view. I was planning on doing a piece on the “buy now pay later” space today but I felt it was time to focus more on the bigger picture now, for the volatility hungry please wait a few days for our thoughts on the likes of Afterpay (APT), Zip (Z1P) & Open pay (OPY), they’re very much on the menu.
If MM has made one frustrating error of judgement since the panic low in March, it’s been investing too conservatively i.e. markets are moving faster and to great degrees than throughout most of history. Hence when we called the growth sector to again outperform the value sector a few months ago in hindsight we should have tweaked the MM portfolios accordingly thus allowing us the opportunity to consider reversing at an appropriate time – we anticipate being more active in the year ahead assuming of course the market determines it’s the way to add vale / alpha.
MM Growth Portfolio.
Importantly we only hold 2.5% in cash hence by definition we are only likely to de-risk into strength or switch between our stocks / sectors – https://www.marketmatters.com.au/new-portfolio-csv/
3 Potential stocks to sell
1 – Bravura (BVS) $4.56 – we will consider taking a quick profit on this position up around $5.20, not out of the question when we consider how the IT stocks are rallying.
2 – A Bank (s) – MM is overweight the banks which we are comfortable with at today’s levels but as we’ve witnessed over the last 6-weeks they can be choppy beasts lending themselves to buying weakness / selling strength. We are currently considering NAB & Westpac above $21 and Macquarie Group (MQG) around $130.
3 – Ramsay Healthcare (RHC) $62.98 – the private hospital operator has been fairly disappointing of late and we might take a small profit in the $66-$70 region.
National Australia Bank (NAB) Chart
3 Potential stocks to buy
1 – Newcrest Mining (NCM) $31.14 – we’re keen on this gold stock ideally closer to $30, a pullback in the “crowded” gold space towards $US1700 may offer such an opportunity.
2 – Aristocrat (ALL) $24.18 – MM likes ALL around current levels after its 16% pullback.
3 – Telstra (TLS) $3.50 – the sleeping giant appears to have woken up rallying over 13% in the last 2-weeks, potentially some investors are contemplating the relatively safe dividend due in August. We believe the outlook for TLS is solid over the next few years and the stocks good value around current levels.
What we decide to buy / sell from the above will obviously depend on the market’s dynamic at the time.
*watch for alerts.
Newcrest Mining (NCM) Chart
MM Income Portfolio.
We hold 5% in cash hence again by definition we are likely to de-risk into strength or switch between our stocks / sectors, as opposed to purely increase market exposure – https://www.marketmatters.com.au/new-income-portfolio-csv/
1 Potential stock to sell
1 – Sydney Airport (SYD) $5.30 – its looking more and more like a long road to recovery for SYD, a bounce up towards $5.90 might provide an ideal exit.
1 Potential stock to buy
1 – Telstra (TLS) $3.50 – as above, around current levels.
Telstra (TLS) Chart
MM International Portfolio.
We hold 10% in cash with this portfolio offering a little more flexibility but overall we are happy with our current holdings – https://www.marketmatters.com.au/new-international-portfolio/
1 Potential stock to sell
1 – Janus Henderson (JHG US) $US20.40 – Another kick up towards $US25 where the stock was in mid-June will be an ideal exit.
1 Potential stock to buy
1 – Starbucks (SBUX US) $US74.29 – we like this coffee / café business for quasi-exposure to the growing Chinese middle class, we are happy at today’s level and would consider averaging below $70.
Starbucks Corp (SBUX US) Chart
MM Global Macro ETF Portfolio.
We hold 24% in cash in our macro portfolio offering a little more flexibility to take positions as markets continue to unfold along the path we have been expecting – https://www.marketmatters.com.au/new-global-portfolio/
1 Potential position to sell
1 – ProShares Short VIX ETF (SVXY US) $US32.21 – no major change, we considering taking profit around the $US37 area.
1 Potential position to buy
1 – iShares Large-Cap China ETF (IZZ) – this locally traded and $A denominated ETF only has a market cap of $103m but it’s by definition as liquid as the underlying Chinese market making it the perfect vehicle to utilise for our bullish China view.
iShares China Large-Cap ETF (IZZ) Chart
Conclusion
MM remains bullish stocks and largely happy with our 4 portfolios.
Our Holdings
Our positions as of Friday. All past activity can also be viewed on the website through this link.
Weekend Chart Pack
The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.
Have a great day!
James & the Market Matters Team
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, or after the session when positions are traded.
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