The market sell-off which we have been waiting for continued yesterday, with the ASX200 testing the psychological 5700 support mid-morning, before staging an encouraging 40-point (0.7%) rally into the close. The selling was pretty broad based although the resources and telco’s did perform well with OZ Minerals (OZL), RIO Tinto (RIO) and Telstra (TLS) all managing to close positive – a very solid achievement following a 372-point decline on Wall Street.
On the end the ASX200 finally closed down another 48-points (0.8%), a sizable 218-points (3.7%) beneath the 1st of May high at 5956 – statistically any monthly decline of over 250-points is stretched unless we are experiencing a major change in trend – not the current view at MM. Hence we believe any spikes under 5700 are likely to attract some decent buying from cashed up investors, like ourselves, unless things really fall apart politically in the US - at least for the next week or two.
The market is now clearly suffering its “sell in May and go away” correction. Remember the two simple statistics we looked at yesterday to put this recent weakness into perspective:
1. The average decline for the ASX200 over May / June since the GFC is 6.9%, this targets the 5550 area i.e. 3.3% below yesterdays close.
2. The average pullback for CBA during May / June since the GFC is over 10% which targets the $79 area – so far CBA has hit $79.53.
Following our 5% allocation into CBA yesterday we are now happily sitting on 23.5% in cash for the MM portfolio, the question remains what and importantly at what levels will we continue shopping – importantly we still believe this weakness is an opportunity to buy, not panic sell.
ASX200 Daily Chart
US markets held together last night, but a 56-point bounce by the Dow following a 372-point decline is definitely not exciting stuff. The S&P500 closed 1.7% below this week’s all-time high, our ideal target remains the 2300 area, a further 2.7% lower which makes our 5600 target for the ASX200 “feel” about right.
With so much uncertainty hitting markets at the moment it’s hard to imagine stocks being pushed to fresh all-time highs any time soon – last night the Brazilian stock market fell a scary 10%!
US S&P500 Daily Chart
European indices are following the US and appear set for a period of consolidation after recent strong gains. We can see the DAX correcting another 400-points, or ~3%, very similar in degree to our view for the Dow and Australian markets.
German DAX Monthly Chart
The financials remain our major market exposure via CBA, CYB, NAB, HGG, QBE, SUN and WBC. However we have left ourselves the flexibility to add to this large weighting following our recent sales of CBA at $87 and ANZ over $30. Our main targets at this point in time are:
1. CBA around $79.00 – we allocated 5% into CBA yesterday at $80.00. We will add another 2.5% under $79.
2. QBE Insurance (QBE) we will consider increasing our position to 7.5% under $12.50.
3. Macquarie Bank (MQG) we will consider allocating 5% into MQG under $85.
Technically we remain bullish the financials targeting a final push above 2017 highs, short-term our target is now less than 2% lower.
ASX200 Financials Index Quarterly Chart
We currently hold a +20% portfolio exposure via BHP, NCM, OZL and RIO. During 2017 we have witnessed a significant divergence between the emerging markets and our resources sector, indices that are usually very highly correlated. We continue to believe that our resources sector will play catch up as opposed to the emerging markets giving up their gains although last night’s weakness in Brazil did put significant pressure on the EM index which fell ~1.7%.
On balance our resources exposure is much higher than we would usually hold and there are only 2 other stocks which we continue to consider buying.
1. Alumina (AWC) - we are considering allocating 5% into AWC under $1.80.
2. We remain buyers of Regis Resources (RRL) under $3.10.
RIO Tinto (RIO) Weekly Chart – Has been strong over the past 2 days in a weak market
We are ideally targeting an additional few stocks to purchase during this market downturn. However considering we see a strong possibility of the ASX200 testing the 5600 area we don’t anticipate being too aggressive just yet. A further 3 stocks we are watching at present:
1. Seek (SEK) - we are considering buying SEK under $17.
2. Computershare (CPU) – we are considering buying CPU around $13.50.
3. Healthscope (HSO) - We continue to like HSO closer to $2.
Watch this space as we evolve our shopping list into this market correction.
James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.