Buy Banks & Sell Resources - has this call got legs?

James Gerrish

Market Matters

These markets are becoming extremely interesting as we start to see the “risk on theme” gather momentum at the expense of the more recent “safe haven” favourites e.g. last week we saw A2 Milk (A2M) +5.6% & Telstra (TLS) +5.8% while CSL Ltd (CSL) -2.5% & Cochlear (COH) -4.8%. Fridays strong rally caught many off guard and although we flagged a potential strong session in Friday mornings report we didn’t envisage it becoming the largest gain of the year, up +1.3%.

The ASX200 rallied strongly primarily because the financials finally enjoyed some buying with the banking sector gaining over 2%. It feels to us that fund managers have started their EOFY rebalancing in earnest with a significant portion of the buying focused in the underperformers and vice versa. This clearly helped the index which is heavily weighted in the “old world” stocks like the banks and Telstra.

Monday looks set to be another fascinating day as the resources look set to dive at least in the morning with oil, gold and copper all falling over 2% while BHP tumbled 84c / 2.5% however  the futures are indicating the ASX200 will open unchanged – we continue to believe the resources who’ve surged since 2016 are vulnerable to a decent correction following their impressive gains.

Fridays gains were initially led by the futures market and we could also be seeing some hedge funds unwind their “sell Australia” “buy US/ Europe” positions ahead of EOFY. Importantly for us it creates a clear short-term technical picture for the index i.e. it’s now bullish while it can hold above the 6060 area, this should assist our plans moving forward as we remain in “sell mode” - subscribers should be prepared for alerts as we look to increase our cash levels into strength, and rejig our portfolios over the coming weeks if opportunities arise.

At MM we remain mildly bullish the ASX200 in the short-term, ideally targeting the 6250-area / around 3% higher –  but we remain in net “sell mode”.

Following last weeks portfolio moves selling Webjet (WEB),  Independence Group (IGO) and Fortescue Metals we are now holding 20% cash in our more active flagship Platinum Portfolio.

ASX200 Index Chart

As subscribers know we are looking for a good risk / reward selling opportunity in the ASX200 Accumulation Index (Australian stocks) ideally in coming weeks / months but markets can grind higher, while continually threatening to fall, for long periods of time e.g. back in 2009/10 the index ground higher, repeatedly pulling back from the overhead red trend line resistance line, for almost a year i.e. selling too early can be costly and often unnecessarily as human characteristics regularly provide us with opportunities courtesy of “fear & greed”.

Hence we are slowly increasing our cash levels, generally as individual stocks / sectors pop higher as the market is currently experiencing distinct sector rotation as opposed to moving as one.

“Patience is not simply the ability to wait – it’s how we behave while we’re waiting” – Joyce Meyer.

ASX200 Accumulation Index Chart

1 The resources may yet provide a buying opportunity

Over the years at MM we have regarded the resources sector as a trading / short-term vehicle for 2 main reasons – the lack of yield and the lack of control over commodity prices which by definition dictates their underlying profitability. However, the yield side of the equation has made a total 360 degree turn with BHP yielding 3.7% and Alumina (AWC) 6.25% both fully franked, hence making the sector more attractive if we time our entry levels correctly i.e. we are buyers of weakness, not strength.

As we have been saying for a number of weeks from a simple risk / reward perspective we believe the most likely next 10% move by base metals is down. However we believe this would be no reason for hysteria, more likely an excellent shorter term buying opportunity and in context it would only represent a small retracement of the gains since early 2016.

Importantly it remains essential to have a plan if further sector weakness does unfold.

Bloomberg Base Metals Spot Index Chart

Sector goliath BHP has looked after us nicely in recent times and while we have no real exposure to the sector the obvious question is where do we try and re-enter. Over the years one thing I have noticed is logic and the market rarely travel together over the short-term e.g. BHP has ignored major weakness in both crude oil and the emerging markets (EEM) over the last few weeks but Friday nights sharp 84c drop by BHP in the US gives us a sniff that it might just be time for some catch up.

We took a healthy profit in BHP a month ago around $34, since then the stock has neither made us feel silly or given us the opportunity to re-enter cheaply.

Ideally we will be able to start accumulating a position in the “big Australian” back under $30, exactly where BHP was when oil and the EEM were trading around today’s levels.

BHP v Emerging Markets Chart

OZ Minerals (OZL) is likely to struggle on Monday with both gold and copper down over 2%. Investors in OZL must acknowledge the volatility in the stock which regularly experiences 10-20% corrections.

  • We may have interest around $9.50 but will definitely do so closer to $9.

OZ Minerals (OZL) Chart

We exited our Independence Group (IGO) last week just above $5 for reasons outlined at the time. The stock should come under pressure on Monday with weakness in both nickel and gold, the companies two sources of revenue. The stock has already corrected $1.20 / 17.8% in 2018 and we believe a repeat performance is a strong possibility.

  • We are neutral IGO at present but would certainly be interested buyers around $4.25.

Independence Group (IGO) Chart

Lastly looking at the high yielding aluminium play Alumina Ltd (AWC). From a technical perspective the stocks not as clear as the previous 3 but it’s cheap from a valuation perspective and its dividend is certainly attractive.

  • We like AWC back towards $2.40, and especially $2.10.

Alumina (AWC) Chart

2 Gold stocks are buoyant but stretched

The Australian gold sector has mostly outperformed its global peers to a major degree over the last 18-months however it would appear that hedge funds have mistimed their purchase of the precious metal and respective stocks which may undo some of these gains.

Hedge funds had pushed their “bets” on gold to the highest level in 7-weeks just before the Fed signalled more rate hikes than expected and the $US soared = bad news for gold with Friday nights ~$US30/oz fall likely to cause a sea of red in the sector on Monday. However as the gold ETF chart below illustrates gold has traded sideways for 18-months with still no clues as to what comes next.

  • We like Evolution Mining (EVN) but not until we see weakness back towards the $3 region, almost 15% lower.

Market Vectors Gold ETF Chart

Evolution Mining (EVN) Chart

3 Has Telstra (TLS) bottomed?

Telstra (TLS) rallied close to 6% last week but we cannot get too carried away at this stage, it remains way down from the levels of 6, 12 and 18-months ago.

The big question is what does TLS plan to do moving forward to halt the wealth destruction its shareholders have experienced over recent years. Everyone’s second guessing what Andy Penn will unveil during its investor day next Wednesday, special focus will be given to its intentions around 5G, cost reductions, financial targets and dividends moving forward.

  • MM still likes TLS into weakness below $2.70 but will not chasing current strength as we already have exposure from well above $3.00

I expect a decent part of the almost 10% bounce from the $2.71 low is down to short covering ahead of next weeks investor day as opposed to committed fresh buying.

Telstra (TLS) Chart

4 The $US remains strong, implications?

Last week the $US index made fresh highs since late 2017, its now rallied ~8% from the 2018 lows in February – the Fed signalling more interest rate hikes moving forward than the market consensus proved just the tonic for the $US which was looking a touch tired after its 4-month rally.

The question we re looking to be answered next week is “can the $US accelerate further, or does it need to consolidate its recent gains”, the later would imply fund managers are interpreting that’s the end of the good news for now – we feel this is a 50-50 scenario at present but the likely ramifications are significant.

  1. On Friday the ASX200 showed yet again how much it likes a strong $US, if the $US remains strong / pushes higher, fresh decade highs for the ASX200 look very realistic and even likely.

The $US Index v ASX200 Index Chart

  1. Over the last 2-years the base metals have enjoyed a weak $US but surprisingly to the team at MM they have ignored a resurgence in the greenback over the last 4-months. If we see the $US maintain its recent strength we believe a snap back in base metals, similar to Friday night, is a very strong possibility – this ties in with our opinion on resources.

The $US Index v Bloomberg Base Metals Index Chart

5 The banks have found a little love.

One day most definitely does not make a summer but it does offer a little hope. On balance we believe the snap back by our banking sector has travelled about half of its course, it still remains hard to see investors become too excited with Australian banks before the degree of pullback in housing becomes clearer.

  • At this stage we think CBA will pop its head back above $70 in this initial drive, or another 1-2% higher.

Commonwealth Bank (CBA) Chart

Second tier banks rallied even harder last week with BOQ bouncing almost 7% from its low, a likely reaction we had outlined in an earlier report. 

  • We think BOQ will challenge the $11 area before this bounce may encounter selling i.e. another 6% higher.

Bank of Queensland (BOQ) Chart

6 Are Cochlear (COH) and CSL Ltd (CSL) commencing a correction?

When stocks slip out of favour it often lasts a few months e.g. the last two 13% corrections in COH unfolded over around 8-weeks. Some profit taking appeared to hit COH last week but for now its just a blip on the radar. Whether COH has commenced a decent correction is far from clear at present but if we are going to see further rotation to the “risk on” end of town it may encounter further selling over coming weeks.

  • Currently we are keen buyers of COH around $175, or 8% lower.

Cochlear (COH) Chart

CSL feels like its become a buddy of COH as they’ve both enjoyed stellar years but last weeks almost 4% pullback from another all-time high, in a strong market, did prick up our ears. This is a stock we took profit on way too early but if some EOFY portfolio rebalancing is going to provide a buying opportunity we are keen to be prepared.

  • MM likes CSL below $180 and especially close to $165 if the stock does experience a more meaningful correction.

CSL Ltd (CSL) Chart


Again no major changes following last week’s small gains by the ASX200:

  • We remain net positive equities for the coming weeks (just) with a preference for one final high to complete the post GFC bull market advance.
  • We will continue to slowly increase our cash position and remain firmly wearing our “sellers hat”. 

Have a great day,

James & the Market Matters Team

The above is an exert from the Market Matters Weekend Report. To get our latest market views and hear when we take new positions, trial Market Matters for 14 days at no cost by clicking here.


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.


6 stocks mentioned

James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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