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!
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111 responses so far ↓
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101 Anon // May 21, 2010 at 10:24 am
Yep Ned, they wont drop rates…and fund managers can only short a currency for so long with a negative carry cost! No to mention our country has one of the lowest government debt to gdp ratios in the world.
Could be huge short covering rally now with the RBA argubaly comming in on market and buying.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
102 Greg Atkinson // May 21, 2010 at 10:54 am
Well at times like this having assets in Japan does not look that silly after all. The Yen has jumped 15% higher against the AUD during this mess.
As for Oz, the problem with the debt is that a) it is mostly owed offshore and b) Australia is sliding further into debt and our balance of trade is not helping.
On top of that, households in Oz carry a lot of debt.
But I guess the miners won’t mind seeing a weaker Australian dollar..good news for exporters.
103 Anon // May 21, 2010 at 11:09 am
Well i’m done…set my longterm stuff up…stopped at ~40% invested. We might go lower but that would just be the last capitulation…no point trying to guess that! Risk 5%, Reward 20%…no brainer imo! (provided you dont buy dogs and overvalued pieces of crap of course)
Greg have you loaded up or are you still sitting on your hands?
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
104 Ned S // May 21, 2010 at 11:18 am
Debt just doesn’t seem to concern Henry and co Greg (for better or worse) -- As their line seems to be that we need it to keep developing. (Can’t really argue with that given our low rate of saving -- Albeit that an issue a chap a bit smarter than Swanny might have given a bit of thought!)
But irrespective, their big concern would still be not being able to attract credit I guess?
105 Ned S // May 21, 2010 at 11:34 am
My concern would be that the markets could still be in for a pretty torrid month yet -- Until the G20 maybe? -- When the big UK and US banks might really be able to say they’ve figured out what Merkel is up to and just how it may or may not affect their longer term profitability.
Just a thought from an interested observer.
106 Greg Atkinson // May 21, 2010 at 11:40 am
Anon I have just been adding a little to stocks I like with the view that I won’t see a return for 2-3 years out, except for dividends.
I am not in the mood for taking large bites out of the market yet.
107 Anon // May 21, 2010 at 6:17 pm
Most people think this is silly, but I think for the moment its clear there an above average correlation here (~70%). You would have done well following this over the last 2 years. Be silly not to use it as indicator (for the moment at least).
Correlation may disappear later -- who knows.
http://www.mrci.com/special/ddji39.php
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
108 Anon // May 22, 2010 at 11:42 am
Thought this was a great passage by Roger on Market Timing:
“Cliché 2: Its ‘Time in the market’ not ‘Timing the market’ that leads to success.
Another cliché that comes to mind is the idea that time in the market is the key to success rather than timing. At the outset, let me state that I don’t believe that timing the market or share prices works. Nor do I believe that time in the market works always, and if it sometimes does, the time can be so long that the returns are meaningless. Take for example the investor who purchased shares in Macquarie Bank at $90 some years ago; they are still waiting for a positive return. Or what about the investor who bought shares in Great Southern Plantation when the company listed? No chance of a positive return at all. If you purchased shares in Qantas or Telstra ten years ago, you would now have an investment with less value than you what commenced with.
Time in the market is no good if you buy poorly performing businesses or pay prices that are far above the intrinsic value of a company. For the seventeen years bound by 1964 and 1981 the Dow Jones rose just 1/10th of one percent. Time, it seems, was not the friend of the merely patient investor. I can show you equally long periods of low returns on the Australian market too.
The point however is that time is only the friend of the investor who buys wonderful businesses at large discounts to intrinsic value. Otherwise, time is an enemy that steals returns just as surely as it steals a great day.
Don’t use time then as a band-aid to heal your investing mistakes. Stick to A1 businesses bought at discounts to intrinsic value and time will be your friend. So what are the businesses that time has befriended the most? What businesses have been increasing in intrinsic value the most over the last three, five or ten years?”
http://blog.rogermontgomery.com/who-has-time-favoured-the-most/
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
109 Anon // May 22, 2010 at 12:37 pm
Some contrarian buying signals:
Sell Anything
http://pragcap.com/richard-russell-sell-anything
Fear of a Double Dip could cause one
http://www.nytimes.com/2010/05/16/business/16view.html
2010′s coming stock market crash: 1987 all over again
http://money.cnn.com/2010/05/17/magazines/fortune/2010.crash.1987.again.fortune/index.htm
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
110 Anon // May 22, 2010 at 12:45 pm
Bullish signs for financials:
““We are DONE FOR THE FORESEEABLE FUTURE INVESTING IN LARGE, COMPLICATED FINANCIAL INSTITUTIONS. By “investing”, I mean taking long positions with the view of holding for 9-24 months based on some view of normalized earnings and a forecast of what will happen over the next several years.
As the war on speculators, banks (indeed entire financial system) rages on, one big US hedge fund has had enough.
Writing to investors, the fund says it’s now too risky to invest in large financial institutions for anything other than the short-term.”
http://ftalphaville.ft.com/blog/2010/05/20/237401/we-are-done-with-financials/
I am overweight financials. Big rally comming for the banks over the next 12 months. Historically financials tend to outperform after a major credit crisis in the proceeding decade. Its enevitable that loan losses/provisioning will/continue to fall…there is no need for credit growth in order to fuel bank earnings…less provisioning will do that.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
111 Anon // May 22, 2010 at 3:16 pm
“This opens the chance to buy selected stocks which have been trashed in the stampede, and with the overall market trading on a prospective price-earnings ratio of 11.4 times against the long-term average of 14 times, the equity market is cheap.”
http://www.theaustralian.com.au/business/opinion/market-correction-will-be-a-buying-opportunity/story-e6frg9if-1225869811232
Earnings now below historical average…market is not expensive here. Unfortunately we cant expect to get credit crisis 08 prices all the time. If you wait for those under priced extremes, you will be waiting a very long time! I’ve seen value managers underperform (from their investor letters) for 10+ years waiting for prices to fall back to ultra-bargain levels.
11.4 -- ~8.77%
cash rate -- 4.50%
~94% Margin of Safety over the cash rate…Benjamin Graham would be happy
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
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