Yesterday the ASX All Ordinaries finally closed above 5000 and many stock market investors will now be wondering if this is the start of another period of rising stock prices, or simply the prelude to another downwards correction. Well the answer to both questions in my opinion, is yes.
Last year when the stock market bears and doom crowd were predicting a global depression, I consistently held the position that what we were seeing was simply a nasty stock market correction and the bursting of a major economic bubble.
Like many investors, I did not enjoy seeing some of my holdings wiped out or my stocks portfolio take a major valuation hit, but I did not equate a severe market correction with the end of capitalism, or the need to carry around a bag of gold to do my shopping, because paper money was going to be worthless.
I know some people will claim I am just saying all this because the worst of the global financial crisis is now behind us, but actually I have been mocking the doom crowd for a long time.
Just in case you have forgotten what I was saying during the dark days of early 2009, you can refresh your memory by reading: World stock markets rally: is the bear back in its cage?
So if am optimistic about the outlook for the stock market and the global economy why do I think the recent market rally means a correction is on the way? Well simply because that is normally what happens. In my opinion, if you expect stock market corrections to come along then they become less of a shock when they finally do arrive.
To try and get a feel for how the market is moving and where it might head next, let’s look at some candlestick charts for the ASX All Ordinaries Index starting with one covering the last 6 months.
ASX All Ordinaries Candlestick Chart over 6 months
I am using the above technical chart not to try and spot any short term trading trends, but rather to get a feel for how strong the rally has been.
The chart above shows that the All Ords rallied quiet strongly after the correction in January, but it also gives me the impression that the rally is running out of steam.
Therefore I have been waiting for a little weekly pull-back or correction for a week or so. It hasn’t happened yet, but I reckon it will and that will be a good sign, because that is the way a well functioning stock market operates.
Let’s now have a look at what the All Ords has been doing for the last 2 years or during the worst of the global economic crisis.
ASX All Ordinaries Candlestick Chart over 2 years
The red bars on the chart indicates a week when the All Ords closed lower, the blue bars indicate a week in which it closed higher.
From around June 2008 until March 2009 the bad weeks were a lot more numerous than the good weeks. But now for over a year, it is pretty obvious that the weekly rises outnumber the weeks where the All Ords has closed lower.
The Simple Moving Average (SMA) shown on the above chart illustrates how the overall trend since the market bottomed out in March 2009 has been up, however over the last few months the upwards trend has flattened out quite a bit.
Finally if we look at the All Ords candlestick chart over the last 3 years we can see how it has moved from the bull market high in 2007, down to the bear market low in 2009 and is now slowly heading back up again.
ASX All Ordinaries Candlestick Chart over 3 years
Again I am not trying to use this chart to spot any short term trading trends, but rather to try and get a big picture view of what has happened, and what might happen over the next few months.
Quite clearly the All Ords is still a long way below the highs of 2007 and so although we have seen it rise quite sharply over the last year, it looks to me as the bounce off the market low is over and that for the market to push higher, investors will want to see tangible signs that the global economy is recovering.
In short that means the All Ords is unlikely to rally strongly from here until we start seeing some good company earning reports across a range of sectors, not just mining and banking.
I do expect the stock market to move higher over the rest of this year but at this stage I expect the gain to be modest, simply because of rising interest rates, higher commodities prices and doubts over the strength Chinese economy. But I will touch upon those issues in more detail in a few days!