Now that the Australian stock market has staged a very modest rally over the last few weeks an assortment of finance writers, brokers & market watchers will begin to speculate if this rally is the start of something big. Indeed if we focus on the short term the market has done fairly well over the last few weeks, however the longer term trend suggests that the Australian stock market is still stuck in a rut.
Back in November I wrote a post called: Australian stocks aren’t bouncing, they’re limping in which I discussed how the finance media tended to exaggerate every market rally whereas in reality, the stock market was essentially moving side-ways.
Back then the ASX All Ordinaries Index (or All Ords) was just below 4100 and since it’s now just below 4400, one might be tempted to think the Australian stock market is on a roll. But if we start looking at some charts we will be able to see how short term trends can be very misleading.
First let’s have a look at what has happened over the last month.
ASX All Ordinaries Index (XAO) 1 month candlestick chart
Since late July the All Ords Index has moved from near 4100 to just under 4400 at the end of trading on August 17th. But as I have written many times when the market is down near 4000 it looks oversold to me, so I don’t believe the movement upwards over recent weeks is anything to get excited about.
Some market watchers my leap on this latest short term trend as something important, however my view is that it is simply part of an overall sideways trend that has been ongoing for some years.
If I really wanted to talk-up the rise in the market over the last few weeks I would use the chart below.
ASX All Ordinaries Index (XAO) 3 month candlestick chart
The chart above is the candlestick chart for the ASX All Ords over the last three months and I have marked on it a crude trend-line from the lowest point in July to the latest market close.
It looks impressive and some would say that the Australian stock market is poised to surge higher. But we have to ask ourselves why would this happen?
Why for example would the Australian share market rally when it’s clear the Chinese economy is still slowing? Why would the stock market rally when the Baltic Dry Index has slumped down near 700.00 USD? Why would the stock market rally when mining companies are starting to reconsider projects & have even started to trim back staff?
In my view the only reason the Australian stock market may keep rising at this stage is because it’s still oversold.
Let’s have a look at a few more charts so I can explain what I mean.
ASX All Ordinaries Index 5 year chart
On this 5 year chart of the All Ords it’s clear that recent move upwards is pretty insignificant when viewed over a longer time-frame. Hence my view that it would be a mistake to place too much emphasis on the short term movement of the market at this stage.
I still expect the All Ords to finish up near 5000 at the end of the year but I doubt the current short term upwards trend will last much longer.
How investors play the market at this point will depend on their trading style. Shorter term traders may look at locking in some profits fairly soon which may send the All Ords back down again into a region where longer term investors will find some stock bargains. At times I feel the market is essentially being driven by the exit & entry of short term traders and longer term investors.
But the global economic outlook is very unclear and as the saying goes – anything could happen!
If we now look at the 10 year view of the Australian stock market we can see how the last few months fit into the big picture view.
ASX All Ordinaries Index 10 year chart
On the chart above I have marked the big three trend over the last ten years. First we have the bull market run from 2003 to the peak in 2007. Then we had the crash back to earth during 2008 and in early 2009 followed by a sharp bounce back to 5000.
Since the rally back up to 5000 in 2009 the stock market has moved in a range between 5000 (marked in green) & 4000 (marked in red) with just a few short brief moments when it has ventured outside this range.
The last little creep upwards over the last month is in my view just part of the ongoing drift sideways which I don’t see being broken during 2012. However the market is trading near the lower part of the 4000-5000 range which suggests it may still be a touch oversold.
But in the current environment it’s more likely the market will drift towards being oversold than overbought so I think we need to wait a bit longer before trying to convince ourselves that any significant upwards trend is taking hold.
This article was written by Greg Atkinson who 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