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Australian equities continue to rise. Long live the bull!

July 31st, 2009 · Greg Atkinson · No Comments

It was just a few months ago that I was reading about how the financial markets were on the verge of imploding and that gold was the best place to put our hard earned moment. But here we are in July and the global financial system is still alive, stocks are rallying and it is looking like the next bull market might be under way.

I don’t like bear markets and not just because they cause havoc with my investment portfolios. I dislike them because when they are particularly severe the doom crowd become more extreme and politicians actually start to think they know something about how to manage an economy.

So I am currently enjoying the rise in Australian equities and feel more confident now that the next bull market may have emerged.  Death to the bear, long live the bull!

But before any of us get carried up with the current rally I suggest we calmly  have a look at a few charts of the All Ords & ASX 200 to see what they might be telling us.

S&P/ASX 200 Index. Daily movement chart 2000-2009

sp-asx-200-10-year-chart-jul-09

On this chart I have highlighted a few interesting areas.

  • Firstly you can see the correction from early 2002 just after the dip caused by the terrorist attacks in the U.S. in September 2001. It took about a year for the Australian stock market to hit a bottom and about 1.5 years for the market to recover. Note how the first move up from the bottom was quite sharp which is similar to what we saw when the market rallied off the bottom in March 2009.
  • Next I have underlined in red some of the many pullbacks, corrections or reversals that took place during the bull market run up to the end of 2007. I recall that when some of these were in progress many people were saying that they indicated the Australia market was entering a new bear market phase. In any case,  if we are indeed in a new bull market we should expect pullbacks on a fairly regular basis.

So the current movement we see with the S&P/ASX 200 is fairly similar to the movement we saw out of the last downturn back in 2002-2003. It is not surprising that the current rally looks quite steep on this chart as the fall was also quite steep. Stock market falls and rallies often look somewhat symmetrical.

When stocks fall and keep falling more investors start to sell out and this pushes the market even lower. If you add short selling and margin loans into the mix then this can give stocks quite a hard push down. Conversely when stocks start to rally again investors can start moving out of cash into stocks and take on margin loans etc. thus pushing the market up.

If we look at the 5 year chart for the S&P/ASX 200 we can get a clearer view of the movement from bull market to bear market and possibly back to bull market again.

S&P/ASX 200 Index. Daily movement chart over 5 years

sp-asx-200-5-year-chart-jul-09

Without getting into anything too technical we can simply look at this chart and say that the market fell for around 1.5 years and so if we were to follow the same sort of recovery seen from 2003 then at best we could be back above 6500 in mid to late 2010 or possible pushed back a little to 2011. But there is absolutely nothing to say the markets will not fall again or rally quicker. I am working on the assumption that we will not see the highs of 2007 again until late 2010 or early 2011.

This does not mean I will not have made any gains in 4 years..quite the opposite because as I have mentioned in this blog a few times I switched into buying mode when the market fell to around 4800 and have remained on the lookout for bargain stocks all the way down to the low in March.

If the stock market does get up near 6500 in 2010-2011 then my strategy should deliver good capitals gains as well as a nice stream of dividends many of which are fully franked. Of course if the market falls back again I am going to have more stocks in the red and might find my belief in long term stock market investing shaken.

Finally to put everything into perspective here is the 20 year chart for the ASX All Ordinaries (XAO).

S&P/ASX 200 Index. Daily movement chart over 5 years

asx-all-ordinaries-20-year-chart-jul-09

How you view this chart will depend  a lot on your view of the global economy. If you believe that the high growth days that helped propel Australian stocks higher from 2003 – 2007 are over, then perhaps you feel the stock market will resume a similar slow upward trend to that seen from 1989 – 2001. If you feel the good times are back again then you may be expecting a return to the sort of bull market run we saw from 2003.

Personally I am looking for something in between over the next few years as the global economy recovers, but I doubt we will see the same type of impressive run we saw from 2003. Hopefully if there is a surprise it will be on the upside and not the downside again.


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