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Are Australian stocks poised to trend lower?

May 8th, 2012 · Greg Atkinson · 36 Comments

There is nothing particularly exciting about the Australian stock market these days. The malaise which has essentially paralysed the government seems to have spread to the business sector which in turn is slowly sucking the lifeblood out of the share market. It’s unlikely that things will improve soon and so investors should prepare themselves for the market to move lower over the next few months.

On a global level there is nothing much to help drag the Australian stock market upwards. The Chinese economy is slowing, the U.S. economic recovery is feeble at best, Europe is a mess & Japan is dealing with a range of challenges including rebuilding after last years disaster & the strong yen.

Yesterday the ASX All Ords & ASX 200 both fell by over 2% which was a correction waiting to happen since the market had been creeping upwards for no good reason for some months.

Normally I don’t focus too much on short term market movements but today I think it is worthwhile having a look at the 3 month charts for the S&P/ASX 200 because I believe they may be showing us the point at which the market is about to start a slide back towards 4000.

S&P/ASX 200 Index 3 month chart

asx200_index_3_month_chart_may_2012

The Australian stock market had been creeping unconvincingly upwards over the last three months but after yesterdays fall the market is almost back to where it was at the start of March 2012 as the chart above shows.

Investors appear to leap on any good news as a reason to buy and then sell when they realise that actually there isn’t much good news out there.

S&P/ASX 200 Index 3 month candlestick chart

asx200_index_3_month_technical_chart_may_2012

The candlestick chart for the ASX 200 for the last three months is interesting because it shows that yesterday the movement was always downwards.  In other words the market didn’t open higher and then fall or rally at the end of the day…investors just gave up and sold.

The first chart indicates that the simple moving average (SMA) has now reversed and I don’t expect it will turn positive this week.  The second chart suggests to me that there is not a lot of interest in investing in the Australian stock market at the moment.

Putting these thoughts together leads me to conclude that the Australian stock market is likely to head lower over the next few weeks or months.  I don’t know by how much but I am guessing when I look at the charts in 3 months time the S&P/ASX 200 will be lower than it is now.  (unless there is a change of government)

S&P/ASX 200 Index 2 year chart

asx200_index_2_year_chart_may_2012

So where could the market go? Well the logical bottom for the market would be around the 4000 level and as I have written before I believe that is where we will end up before the next bull market takes hold.

As the chart of the S&P/ASX 200 (XJO) above shows we are much closer to the 2 year bottom than we are to the two year top and I can’t see any reason why the markets would be climb towards 5000 just yet.  Why? Because the mining stocks are still falling & whilst the mining stocks are falling, the Australian stock market is not going to rally.

BHP Billiton, Rio Tinto, Global Mining Investments 1 year chart

bhp_rio_gmi_1_year_chart_may_2012

The chart above shows the stock price movement for BHP Billiton, Rio Tinto and the listed investment company (LIC) Global Mining Investments.

I am using these three stocks as a form of commodities index since they are not just exposed to mining or exploration issues in Australia since they have global exposure to the commodities markets.

Clearly they all have been trending downwards over the last year and I don’t see any indication that this trend is about to be reversed and with the Chinese economy slowing it seems likely iron ore & copper prices for example have further to fall.

So that is the reasoning & logic behind my assessment that the Australian stock market is poised to head lower.  Of course it’s just a forecast but I hope the charts will help investors make up their own minds.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


36 responses so far ↓

  • 1 Stillgotshoeson // May 11, 2012 at 12:36 pm

    Volatility is going to continue, I still feel there are no fundamental reasons for the ASX to rise. Spikes on “good” news and expected QEIII will give a lift but the trend imo is still for the downward momentum.

    Europe continues to be in a mess, China is taking a rest and friends in the USA are telling me all is not too rosy there either.

    Glad I have not been leveraged to the market and limited exposure and retained a healthy cash buffer. Have added to the portfolio this last week.

    Still believe the ASX will retest its “GFC” low before this is all over.

    H2 should see rises on the precious metals both physical and equities of same.

    Will not be surprised if we are going to the polls later in the year. Oct/Nov maybe.

  • 2 Greg Atkinson // May 11, 2012 at 2:13 pm

    The more reliable data (i.e. not the official stuff) indicates the slowdown in China will put a drag on the global economy. If construction machinery companies like Komatsu can see demand falling in China then you can expect this will flow across to other areas of the economy sooner or later. This will hit commodities prices and when that happens then a few of those big spending mining projects in the pipeline in Australia will be put on ice.

    I don’t think the All Ords/ASX 200 will get near the GFC low..I am thinking once we get down around 4000 (or a touch below) we hopefully will be getting ready for a bull market. It’s been a long time!

  • 3 Stillgotshoeson // May 11, 2012 at 3:26 pm

    Greg Atkinson // May 11, 2012 at 2:13 pm

    I don’t think the All Ords/ASX 200 will get near the GFC low..I am thinking once we get down around 4000 (or a touch below) we hopefully will be getting ready for a bull market. It’s been a long time!

    A bull market rally based on fundamentals is still some way off. A stimulus led rally is a strong possibility, but alas not sustainable so I won’t put much faith in any rallies in the short term.

  • 4 Greg Atkinson // May 11, 2012 at 5:39 pm

    I don’t expect we will see a rally until the market has truly digested the slowdown in China and investors know how severe it is. Hopefully once that is out of the way we might see some light at the end of the tunnel.

  • 5 Lachlan // May 13, 2012 at 8:39 pm

    Shoes, gold shares as you may have noticed have underperformed quite badly so I am hopeful the eventual rally will be well worth it. I continue to accumulate when I have surplus cash which very unfortunately for me is not right now… although I did buy more NMG at 32c a few weeks back. Unbelievable. Have to give Plornt full credit on his prediction there, and on NCM too, spot on. I felt the fundamentals would be strong enough to prevent a classic technical breakdown. Obviously I was wrong there.
    Now I’m just wishing my sales had not slowed in March/early April or I would be buying more. Patience I guess.
    I think buy and hold is going to pay off well here over a few years or maybe somewhat more even. At least I am not about to worry about shorter term downside as long as I can buy decent discounts.
    In other sectors I never purchased TLS either because my bid was too low. Now they are 3.60 or so but I don’t want to touch that. Patience again.

  • 6 Greg Atkinson // May 15, 2012 at 7:01 am

    Well the European & U.S. markets fell again overnight so it looks like the trend downwards for the Australian stock market will continue this week. While all eyes appear to be on Greece the economy in China continues to shows signs of slowing and the chances of growth there being 7.5% for 2012 are about the same as Gillard being re-elected.

  • 7 Stillgotshoeson // May 15, 2012 at 10:39 am

    Aussie Gold Miners where undervalued as it was compared to the gold price, whils gold has declined a little, the miners have come down even further.

    Aussie dollar has dropped as well which absorbs some of the USD gold price decline. Have pretty much got all the precious metal miner stocks I intend to own so at this stage I will not add to my holdings of these.

    Have been anticipating a pull back on the ASX and have kept cash to purchase non mining stocks to add to my portfolio, as I have said over on DRA, Income is my ultimate destination. I would expect Gold/Silver prices to have around 3 to 5 more years of good upside. A downturn in the ASX/All Ords is an opportunity to add good quality beaten down income stocks to set me up for my future income needs. Retirement before I am 50 is still looking like a possibility.

    Greg, Will not be surprised to see us going to the polls in Oct/Nov this year.

  • 8 Pat Cox // May 15, 2012 at 8:14 pm

    Agree with you Shoes re gold/silver stocks and that 3-5 year time frame.

    Also, my views on the markets:

    US is near all time highs nominally, profit margins all time highs, PE is about 14x (not the classic single digit when secular bull markets start), the dow is only down about 35-40% in real terms since the secular bear started (past secular bears have seen it go down 60-65% in real terms) and we are only into year 12 where all past secular bears have gone for around 16 years minimum up to 20 years, and div yields on the dow are still 3%, not 6%+ when secular bears usually end.

    So I see a good 30-40% correction, which has probably started now in the US. We are likely to follow, allthough probably not as bad as the US given we haven’t gone up as much. I expect this to play out over the next 2 years. This is common for secular bears and large trading ranges.

    Also, my research shows that gold/silver stocks usually fall the hardest at the START of a stock market down turn, but usually bottom about 1/3 or 1/2 way into the stock market bear. Usually, this is because at the start there is panic and large selling where PM stocks get sold off, but they always bottom really early as compared to the rest of the market as they are seen as the safe haven. This happened in 2000-2003, 1973-74 and even 1929-1932. Even during the GFC, which stocks bottomed March 2009, gold/silver PM stocks bottomed October 2008.

  • 9 Lachlan // May 16, 2012 at 5:57 am

    Your post was a great read Pat.
    Dollar index has taken off again too.

  • 10 Greg Atkinson // May 16, 2012 at 10:24 am

    Just about everything is heading lower today including the gold miners and even Telstra which has been moving upwards against the market for a while. Today’s action is a classic example of many investors taking what ever profits they have and getting out of stocks in a market with few buyers. Still further to fall I suspect when people focus on China again.

  • 11 Stillgotshoeson // May 16, 2012 at 10:58 am

    Only 3 of my stocks are still above purchase price. All the rest are down, percentages vary. Paper dollar value of losses from end of financial year position is $80k

    Times like this I am glad of my non leveraged, limited exposure rules. 🙂

    A friend emailed me this morning saying the next couple of months could be nasty and what am I going to do, I said I am going to sit and hold on what I have got and look to buy in on what I think becomes good value. I doubt any of my holdings will go under and I see no point io cementing paper losses into real ones.

  • 12 Lachlan // May 16, 2012 at 12:38 pm

    Couldn’t agree more Shoes. I am as sure now as when I bought in to my own shares that they were good value. This current sell-off is crazy really considering gold stocks have been hammered for so long already. The truth is though that the market is crazy much of the time. Anyhow if the show takes a while to bottom I might yet be able to make some more purchases. I feel it is important to be in the market when things get really crazy because it makes for the biggest gains later on. I always found that with CFD’s trading and this is the same just in verrry slow motion. And that is exactly what I want, as you say yourself, no leverage. Those sorts of instruments just supply stops for the “market makers” to blow out. They won’t be getting any of my dough I can promise you that. Sooner or later they’ll blow a bubble in this show and I’ll be there along with the others that didn’t give in.

  • 13 Greg Atkinson // May 16, 2012 at 2:25 pm

    This correction has been poised to roll across the markets for some time and I reckon in a few months we will look at the charts and see that nothing much really happened. I am not tempted to buy into mining stocks because I believe things are going to be a lot tougher in that sector over the next year or so, but if the market does get down near 4000 then some bargains should pop up.

    Maybe I will even get another look at Telstra at around $3.20? That could be tempting.

  • 14 BP // May 16, 2012 at 3:15 pm

    One can always find a silver lining:

    http://www.perthnow.com.au/news/breaking-news/japan-to-pay-us44bn-for-wa-gas-field/story-e6frg133-1226357768698?from=public_rss

  • 15 Lachlan // May 16, 2012 at 4:59 pm

    Greg I don’t think much of this in terms of the ASX200 in fact I tend to think it will slowly grind sideways for a long time without doing anything dramatic ( ie I am in the same camp as you on that), However gold shares indexes like these
    http://www.goldoz.com.au/83.0.html
    clearly show the carnage in that sector over the last 12-16months and the divergence with the metal itself (longer term), also with the ASX200 which has traded on average dead flat over the same period.
    As Pat said above an Oct 08 bottom is evident in pm shares. I guess they are just more volatile since they did reclaim more lost ground on the GFC lows to begin with than did the XJO itself.
    Looks poor short term anyhow.

  • 16 Greg Atkinson // May 16, 2012 at 5:42 pm

    Lachlan on the positive side stocks like BHP (less than $33 now) look close to be oversold. I don’t expect much of an upside for a while but I feel the miners must be getting close to some pretty solid support levels which will also hold up the ASX200/All Ords.

    Gold is interesting. My feeling is that it has further to fall..much further. Then again I have been a gold bear for a while 🙂

    Biker – the Japanese have been buying up LNG assets for a while, long before shutdown of the nuclear reactors and my understanding is that the current deal was in the works even before lasts years disaster. But the good old western media links any energy play in Japan to the nuclear power issue these days.

  • 17 BP // May 16, 2012 at 6:15 pm

    You don’t sense intense public disapproval of nuclear power in Japan, Greg?

  • 18 Greg Atkinson // May 16, 2012 at 6:48 pm

    Intense public scrutiny & concern – yes, but what doesn’t get reported is that some local areas want the reactors restarted. People also seem to forget that there has always been opposition to nuclear power in Japan..it isn’t a new movement. I have actually seen pro-nuclear rallies…not large by any standards but they do take place despite what the ABC might report. Anyway this is drifting off topic so I might write something later in a separate post when I have time.

  • 19 BP // May 16, 2012 at 7:06 pm

    Yes, it would be worthwhile hearing the other side of the story.
    If any nation should enthusiastically embrace atomic power, it’s Japan. Western media don’t report any Japanese pro-nuclear protests at all. The internet is pretty biased, too.

    Enter ‘pro-nuclear protests in Japan’ and this is what comes up:

    http://www.google.com.au/search?client=safari&rls=en&q=pro-nuclear+protests+in+Japan&ie=UTF-8&oe=UTF-8&redir_esc=&ei=JnuzT9W9MeuaiQf84YHKCA

  • 20 Ned S // May 17, 2012 at 8:39 pm

    Are Australian stocks poised to trend lower?

    That would be my guess. So I can only expect they are going to trend higher? 🙂

  • 21 BP // May 18, 2012 at 7:58 am

    If the internet provided little else than a glimpse of how the rest of us rationalise decisions, it would still be worthwhile, Ned. After any rout, there’s invariably (at least) one comment to the effect:

    “But the money was _there_… where did it GO?!”

    We found this article interesting:*

    http://www.smartcompany.com.au/superannuation/049678-six-lessons-from-australia-s-richest-self-managed-super-funds.html

    * Hopefully not simply because it confirms our own views and strategies… . As I say, here’s another glimpse of ‘how the rest of us rationalise decisions.’ 😉

  • 22 Ned S // May 18, 2012 at 2:24 pm

    It’s 40 mins off closing – Will the markets drop 2.5% plus today or are they gunna claw a bit back?

  • 23 Greg Atkinson // May 18, 2012 at 2:41 pm

    Ned the market has not been in a clawing back mood for a while and I doubt buyers will surge in on Friday to turn things around today.

    I have been saying for a while that we would get down near 4000 again and we are pretty close to that level now. The next trick is to spot the support level and try and guess where might be a good time to pick up some bargains.

    If BHP shares get below $30 that might be tempting. BHP is sitting on a mountain of cash and is still likely to be making plenty of money over the next decade even if the current boom is fizzling out.

  • 24 Stillgotshoeson // May 18, 2012 at 2:53 pm

    Went shopping yesterday and today and added to my portfolio, couple of new additions to the portfolio and some topping up of others. 1 was good timing yesterday, up over 10% today… I like to see that 🙂

    Next key support level under 4000 will be 3750/3800

  • 25 Ned S // May 18, 2012 at 6:06 pm

    One (of the numerous things) I agree with you on Greg is that this current gov is so bad for business that the markets are being depressed by having them there.

    So buy some shares maybe 6 months before the next election (it’s pretty much a given they’ll get trashed by the voters) and sell when they do sounds like a reasonably sensible play to me …

  • 26 Stillgotshoeson // May 18, 2012 at 6:53 pm

    I do not think the current government has 6 months left
    Ned. Keep thinking about The Day Trader in The Heraldsun
    and his, we “COULD” go to 1100 comment before this is
    all over. Could being a possibility, not a WILL.

  • 27 Lachlan // May 19, 2012 at 5:26 am

    Ya came back out to play Ned 🙂

    Well the dollar index has come close to a resistance area for now… although my coal company just drove straight through a major support zone ignoring all wrong way go back signs. DX may do the same on the upside.

  • 28 Greg Atkinson // May 19, 2012 at 7:03 am

    Ned a change of government bounce is almost a certainty I would say and I reckon we will get at least a 10% lift from this. The problem is working out what level the market will bounce off 🙂

    I think as far as the Australian stock market is concerned the sell-off is close to being overdone. The ASX 200/All Ords have not raced ahead like the DJIA/S&P 500 so I don’t see why they should follow the U.S market down now. (apart from panic of course)

    A slowdown in China and a post-mining boom era is getting priced into the mining stocks (and probably already is) while the rest of the market has been trading in a recession zone for a couple of years now.

    So I am sticking with my view that we won’t see the market fall much below 4000 and that we will see gains in the second half of this year.

  • 29 Ned S // May 19, 2012 at 5:28 pm

    G’day Lachlan – Yep, my “play time” has been VERY significantly eroded by work commitments of late! But it is nice to see my bank balance going up a bit as a result … 🙂

    Greg: “So I am sticking with my view that we won’t see the market fall much below 4000 and that we will see gains in the second half of this year.”

    There’s still plenty of big nasty stuff on the horizon Greg – Eg Spain and even Italy; And some are even murmurring about France. Plus the BHP bod reckons India isn’t likely to be another China I gather? And the Yank Congress’ “stitch an agreement together with wire and string” thing they came up with a year ago or whenever is about to expire I also gather?

    But by and large I personally expect inflation is the long term future. So think stocks aren’t an extraordinarily bad place to be if one has the guts and the knowledge. While knowing I have neither.

  • 30 Ned S // May 19, 2012 at 5:50 pm

    Just checked the BHP prices – They actually aren’t THAT far above their GFC lows (12% maybe?) – Which would seem a bit extraordinary – With things not being THAT bad being my best guess? :

    http://hfgapps.hubb.com/asxtools/Charts.aspx?asxCode=BHP&compare=comp_index&indicies=0&pma1=0&pma2=0&volumeInd=9&vma=0&TimeFrame=M10

  • 31 Ned S // May 19, 2012 at 6:16 pm

    Just checked CBA – They are volatile looked at over 10 years.

    My conclusion (as a numptie non trader type) is that WOW and TLS look far preferable to either BHP or CBA.

  • 32 Stillgotshoeson // May 19, 2012 at 9:10 pm

    The Big 4 banks and RIO, BHP are still stay away from stocks imho, too much downside risk still with the current world economic state. Their weighting on the all ords is very high too, so further falls in the miners and some serious declines in banking stocks does not bode well for the ASX.

    QEIII in the US and more money printing in the euro zone will be a catalyst for the next leg up in the share markets (here and abroad)

    This is still kicking the can down the road, so I maintain my view that whilst we may have short term rallies there just is no fundamental reasons for any sustained rise in the markets and they have a destiny with new lows during the continuation of this melt down.

    The year is running out fast so any central bank moves to pump markets will probably allow you to correct in your view on where the market will be at years end Greg.

    The time frame on how long stimulus lasts seems to get shorter with each fix, so maybe the hit will wear off before year ends helping my viewpoint.

    Shoes.. Adelaide.

  • 33 Lachlan // May 20, 2012 at 6:48 am

    The twist operation fuelled the US market just as did QE1 and 2 however the Oz market under twist stayed in cooling mode as did the HSI and hovering somewhere close to long term trend lines. I contend however that there is no stop to the monetisations at the Fed. It’s impossible. I am not saying this will result in wage inflation near term and I am sure there will be some large corporate failures nonetheless….the losses in some cases passed on to the masses no doubt.

    I’d like BHP shares and I would accumulate as the price drops (if it does) at places like 30 and 25 (crudely) where some support could be found.
    Having said that I won’t play until business picks up just a little. Pretty quiet presently.

  • 34 Greg Atkinson // May 20, 2012 at 8:03 am

    If the markets behave as they have been then attention will move from Europe and find something to rally about elsewhere. The big unknown out there at the moment is China and for Australian investors at the moment the thing to watch in the commodities futures and the Baltic Dry Index.

    The Australian stock market is a trend follower not a trend setter. Our market won’t rally if commodities prices are falling, it’s that simple at the moment in my opinion.

    P.S. I have started to set up an area where you can track commodities prices etc here: http://www.shareswatch.com.au/blog/commodities-prices-and-market-updates/

  • 35 Ned S // May 20, 2012 at 6:25 pm

    The state of the world has started to concern me again fellahs. Jim Jubak on America’s MSN has historically been one of the most conservative commentors I follow. And two of his most recent articles sound more accepting of it not being a matter of if things blow but more a case of when:

    “In the short run, investors will make money by betting with the world’s central banks. In the long run, the collapse of this global put will be very painful.

    The challenge is figuring out when this long run begins. I still flag 2013. But that timetable is subject to change. My leading indicator is how the U.S. government deals with the impending fiscal cliff that the United States is headed toward in 2013. (For more on that fiscal cliff, see my column, “Markets don’t fear a fiscal cliff.”)”

    http://money.msn.com/investing/can-the-central-banks-keep-us-safe-jubak.aspx?page=3

    “The fiscal cliff approaches …”

    http://money.msn.com/investing/markets-do-not-fear-a-fiscal-cliff-jubak.aspx

    And yep, if he’s feeling that convinced the world is in for a lot of grief and it’s pretty much unavoidable now, then given how conservative he’s historically been, I certainly think one has to take his thoughts onboard.

  • 36 Lachlan // May 20, 2012 at 8:19 pm

    If the ramifications of terrible global economic imbalances cause the type of disruption feared most in the USA and Europe then is it not logical to assume many people will want to flee here to Oz…and that the government may well choose to let many of them come?….esp if they can benefit off it somehow?
    Noting that many countries are preparing to restrict capital flight where they can.

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