At this time of year we are bombarded with the less than useful reflections of market analysts, brokers and finance columnists who use the benefit of hindsight to tell us mere mortals how they spotted the trends for the year and how easy it was to have profited from the stock market. I however will spare my readers this ordeal and calmly analyse charts of the ASX All Ordinaries Index going back 10 years. I will also look back on the long term outlook for the Australian stock market that I outlined in 2009 and review how events have unfolded since then.
I will start with the shorter term analysis and focus on the 1 year chart for the All Ords Index since at this time of year the usual “Santa Rally” babble does the circuit.
ASX All Ordinaries Index – 1 Year Candlestick Chart
This year has been (so far at least) a positive one for the stock market, but by the end of 2013 the situation may be quite different and I personally don’t expect much more than for the All Ords (XAO) to hang onto the 4800-5000 level.
Back in June this year I wrote that if the market moved sideways then it would be a good outcome. See: For the Australian stock market, moving sideways may be a good outcome I know that sort of outlook or forecast pleases neither the market bulls nor market bears, but the reality is that at the moment this is essentially what the All Ords has done notwithstanding a few ups and downs along the way.
On the technical or candlestick chart above I have indicated in green the approximate range of the significant market rallies and in red the approximate range of the significant market corrections. The thing to note is that earlier in the year the market gave up almost all of what it gained during the first of the year and so if that was to be repeated then we could see the All Ords fall to near 4900 and if it got particularly nasty, then we may even see it fall to around 4700.
I am not particularly good at calling short term trends but if I had to make a call, it would be that the market will not rally much from the current level and that it will finish the year around 5000 or below.
Since I’m more comfortable with taking a longer term view I will move onto the two year chart of the All Ords which I believe is fairly interesting.
ASX All Ordinaries Index – 2 Year Candlestick Chart
On this chart the blue bars indicate a week during which the ASX All Ords rose and the red bars indicate the weeks when it finished lower. Over the top I have drawn some lines simply to indicate the longer term movements up (green) and down (red). (In same cases the market falls did not need to be highlighted)
Generally speaking the Australian stock market over the last two years worked its way up in periods of a few months followed by shorter term term corrections. As I have written on many occasions (and despite the media hype) – corrections are a normal part of the market cycle and should be expected so the fact the market has fallen back at times is no surprise.
Needless to say selling into a correction is generally not ideal and for me personally, it is time to do nothing and wait until a possible buying level is reached.
Another interesting point is that since February-March 2013 the market really has not done that much. All that has happened is that the All Ordinaries has moved from an over-sold range to a level which I identified back in 2009 as being a rallying point. Reference: A technical look at the S&P/ASX 200 Index (August 09)
The chart above also shows how the All Ords moved beyond 5000, headed into the over-bought zone up near 5400 and then subsequently has come down again.
If we now look at the 10 year chart we can see how prominent the 5000 point level is and why I think it is important to focus on for now.
ASX All Ordinaries Index – 10 year Chart
The Australian stock market first hit 5000 points way back in 2006 therefore I find it hard to get too excited when the market is near that level again or passes it for a while.
So what has happened since the GFC hit the stock market? In simple terms the market fell too far, it then rallied back to 5000 and has bounced around that level ever since. I know that’s boring, but that is how it has been.
My approach has been to use boring reality, the global economic outlook and market fundamentals to come up with some trading ranges and zones to assist me with a long term investment strategy for the Australian stock market. I have marked those ranges and zones on the chart below.
ASX All Ordinaries Index (XAO) – Strategy Chart
I call this chart a strategy or long term trading zone chart because it is not meant to be a technical trading chart nor indicate precise entry/exit points. It simply highlights some levels or zones at which I consider making some portfolio changes or adjustments. I have been watching the ranges on this chart since 2009 and have also outlined some trades based on them over the last 5 years from time to time.
The top zone above 5200 (blue line) is what I consider for now, the over-bought range for the All Ords. The range between 5200-4800 (purples lines) is where I expect the market to move within and hence below 4800 is entering the over-sold zone.
When market falls below 4,600 I have been (and will be) looking to pick up battered or under-valued blue chips stocks.
But as I mentioned earlier, these levels are not precise and are just indicators. I also certainly do not want to suggest that anyone trades or invests based on these levels alone.
Basically what I have been doing and will continue to do, is take some profits if possible when the market looks over-bought and consider buying good quality stocks when the market looks over-sold. Generally speaking I have been limiting myself to the S&P/ASX 200 range of stocks and have been staying clear of lower cap/risker plays.
As we move into 2014 I don’t see any need to adjust my strategy for now. I think it’s unlikely for a sustained stock market rally to push the All Ords well clear of 5000 (and stay there) and do I think the market will settle down near 4400.
So for now it’s a case of steady as she goes, no sudden movements and prepare to enjoy the festive season because at the end of the day, there are far more important things than investing in stocks!
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