Shareswatch Australia

Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?

Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?

Thus far in 2011 the overall stock market movement has been much different from what we had in 2010. This year we have seen nothing but sideways to lower prices with wild price swings on a day to day basis. There just has not been any really solid trends to take advantage of this year. Instead we had to actively trade the oversold dips and sell into the overbought rallies to just pull money out of the market on a monthly basis. Last year we saw 3 major rallies that lasted several months making it easy for anyone who bought into the trend to make money if managed properly.

Prices for hard commodities such as copper, iron ore & coal have risen strongly over the past decade and are now trading well above their long term historical averages.  This in turn drove the ASX All Ordinaries Index to a bull market high in 2007 and has helped put some support under the market ever since.  But is it realistic to expect high commodities prices will keep propping up the Australian stock market?

Often it is useful to step away from looking at the daily movements of the stock market and review what has happened over the last decade.  This won’t exactly tell investors which stocks will do well during the next 10 years, but it does show which trends have moved the market to where it is now.

Over the past seven trading sessions we have seen stocks plummet in price because of the debt issues in the United States. I think a lot of individuals including myself thought that a bill would have been passed last week and with a plan underway money would flow back into stocks for a relief bounce at minimum. Instead, nothing was passed and that lead to strong selling into Friday’s close.

We are almost through a third of 2011 and the mood across global markets appears to be decidedly downbeat.  The bullish voices of late 2010 have now faded and even the Reserve Bank of Australia and Federal Treasurer are sounding cautious. But don’t be fooled by the talk that recent events have caused the global economy to face headwinds because the reality is that 2011 was always going to be a tough year.

Now that 2010 is behind us, let’s look at some stock market charts for last year and see if we can pick up any trends that might be of some use  as 2011 unfolds. Do the charts reflect a booming Australian economy and set the scene for a bull market in 2011? Or should we be a little more cautious?

Over the last few months it has become increasingly difficult to write about the Australian stock market simply because not much has been happening.  During the last 12 months the market has basically moved sideways with just the occasional dip or rally to break up the boredom.

With the election over and congress divided, it may be difficult for the president to get much done. None of this will take affect until the near year but traders are asking the big question… Will the government work together as a team or will it be a stalemate?

The Australian stock market has been trading in a fairly narrow range since hitting a yearly low in late May, however over the last few weeks it has pressed above 4600 and we could see it move further towards 5000 in the weeks ahead.  In addition some interesting trends are emerging in terms of gold, oil and gas prices and and they might be giving us a good indication of where the market is heading next.

Despite a fairly nasty stock market correction over the last few weeks the Australian market did not fall anywhere near the lows of March 2009 and as I have been saying for nearly a year, we won’t see those levels again for some time,  if ever.  So now that the market correction appears to be over, what are stocks, oil and gold prices likely to do during the next few months.

According to many major news outlets and financial commentators in Australia, the recent trade data released by the Australian Bureau of Statistics (ABS) is proof  that the Australian economy is “booming”.  The Reserve Bank also seems to think the nation is in the midst of a boom and the amazing Ken Henry (of where is my tax report fame) reckons Australia will enjoy a “golden age” for decades.

I have a message for those people who fled to the hills over the last few years fearing that global trade was going to collapse, paper money would be worthless and that gold would be the only thing worth owning for years to come and that message is:  “the global economy is recovering, please come back and join the rest of us”.

It may not appear to some investors that the stock market is functioning normally again, but the manner by which the  recent correction was quickly reversed indicates that in fact things are getting back to normal. Certainly there is a long way to go before the ASX All Ordinaries crawls back up to 2007 levels, but at least now a correction is just a correction and not the start of a massive wave of panicked selling.

One of the best investments an Australian investor could have made over the last 10 years would have been to buy a large chunk of BHP Billiton (ASX: BHP) stocks.  This is simply because BHP shares have outperformed gold, listed or unlisted property and most ASX listed blue chip stocks I can think of. But have BHP shares now rallied too far and what does it’s share price tell us about the demand for commodities?