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Australian stock market outlook and forecast for Q4 2012

October 1st, 2012 · Greg Atkinson · 22 Comments

As we enter the last quarter of trading for 2012 we are confronted by a market which appears to be trending upwards since bottoming out in June on one hand, and a gloomy outlook for the global economy on the other. Surprisingly if we have another good few months the ASX All Ordinaries Index could be up near 5000 by the end of the year which just a few months ago, appeared very unlikely.

First let me start with an upbeat assessment of where the market is today by looking at the candlestick chart of the ASX All Ords over the last 3 months.

ASX All Ordinaries Index 3 month candlestick chart

asx_all_ords_3_month_candlestick_chart_sept_2012

During the last quarter the All Ords has risen by around 250 points which taking into account the almost daily focus  on the economic slowdown in China is somewhat surprising.  I had expected a major pull-back by now, but thanks to money being thrown around again by central banks in Japan, Europe & the U.S. the global markets have been given a short term boost.

Personally I don’t think the latest round of quantitative easing or money printing is going to prop up the markets for long which makes me cautious about the outlook for the stock market over the next few months.  But then again, the actions taken by the various central banks may be enough to support their economies until a broad recovery takes hold.

Now let’s look at the one year chart of the ASX All Ords which is  interesting to because it shows how quickly the mood of the market changes.

ASX All Ordinaties Index (XJO) 1 year chart

asx_all_ords_1_year_chart_sept_2012

Back at the start of October 2011 the All Ords was below 4000 as the European debt crisis gripped the markets.  However the Australia stock market quickly rebounded to near 4400 before reacting to another ‘crisis’ which sent it down towards 4000 again.

Since then things have calmed down a little and we seem to be in a pattern now of grinding towards 4500 and then when investors get spooked, the market comes crashing back near 4000 again.

On the positive side this supports my view that when the market is down near 4000 that it is in the oversold zone. The 4000 level (or thereabouts) is also in my view the bottom of the market and unless we have another GFC-type shock I doubt we will see the All Ords/ASX 200 fall much below that level.

On the negative side, the chart above indicates to me that there is no real confidence in Australian stocks and that investors will quickly exit their positions when bad news comes rolling in.  In other words, investors are not convinced that the medium term outlook for Australian stocks is good enough to have them leave their money in shares.  When there is a profit to be taken, they take it and are not inclined to stick around for the longer term.

Over the next few months there are two sectors I will be keeping a close eye on – banking & mining and the following charts will show why.

Commonwealth Bank (ASX:CBA) 1 year stock price chart

cba_1_year_chart_sept_2012

During the last quarter the major bank stocks have done well and this is one reason why the the All Ords Index (and especially the ASX 200 Index) have had a good run recently.

But the mining stocks have not fared quite as well with even one of the better performing ones like BHP is struggling to break a downward trend that has been in place for about a year now.

BHP Billiton (ASX:BHP) 1 year stock price chart

bhp_1_year_chart_sept_2012

For the Australian share market to make a run towards 5000 we will need the banking stocks to keep heading upwards plus we would need to see the mining stocks rally as well.  With all the bad data out there from iron ore prices to over capacity at steel mills in China and the struggling Baltic Dry Index I just can’t see what could possibly send the mining stocks much higher over the next few months.

My feeling at this stage is the market is overdue for another pull-back towards 4000 and that after that we should see stocks stage yet another run towards 4500. Could we see the ASX All Ords near 5000 by the end of the year?  Probably not, since the downside risks appear to far outweigh any upside potential at the moment but in any case I do expect we will some real market action this quarter so hang onto your hats!

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


22 responses so far ↓

  • 1 Lachlan // Oct 1, 2012 at 4:33 pm

    Despite the QE announcement I think it’s business as usual and there is no reason why our banks can’t drift along with the ASX200 toward 5000. The USDX has shown a weak, slightly upward, flagging behaviour after it’s big drop and although that slightly upward trajectory could be maintained for a time I would expect another sharp drop. That chart looks bearish for the intermediate term at least.
    At some stage Greg I think the market here will likely have another little scare to the downside as part of the program to stay sideways as the system attempts to resolve something. I’ll stick to a 3600/5000 trading range forecast..nothing too complicated.

  • 2 Stillgotshoeson // Oct 1, 2012 at 5:36 pm

    Double top to form early October and a retrace to 4050 +/- 50 is my reading. Negative economic outlooks over the coming months could finally break the 4000 support level.

  • 3 Lachlan // Oct 1, 2012 at 8:18 pm

    Likewise no reason that cannot happen either Shoes and I also think your prognosis has plenty of good foundations. The Bernanke signal to QE would maybe encourage a herd of bulls on to the wrong side of the trade, maybe (or has that effect worn down?). QE alone does not mean markets have to rally at any particular time. That expectation has been built into the market to some extent however. If our market took a trip back to something like the GFC lows before hitting 5000 then we would have a case for a stronger rally.

  • 4 Greg Atkinson // Oct 2, 2012 at 9:55 am

    It appears to me that in the U.S. the Federal Reserve simply feels it has no choice but to keep pumping money into the economy and is now creating another bubble in the equities market. Our stock market is at the moment going along for the ride, but as each day passes I feel the chances of a correction down near 4000 increase.

    I am still going to hold the line here and stick with my assessment that the correction when it rolls along won’t sent stocks much below 4000 and in fact the market may hold above that level. If/when that happens I will be checking for some signs of recovery in the global economy as a signal I should be snapping up some bargain blue-chip stocks.

    I still haven’t given up on a late surge towards 5000 though 🙂

  • 5 Lachlan // Oct 2, 2012 at 10:25 am

    “It appears to me that in the U.S. the Federal Reserve simply feels it has no choice but to keep pumping money into the economy”
    Agreed! It does go beyond the immediate patch ups too. Look at the people who are the Fed and study their politics. There are grand, global, environmental imperatives for one. Such central planning does require a monumental harnessing of human resources and that will mean liquidity. Cannot see those QEeasers giving up any time….
    I just hope they want a solar cell in every building so my silver will go up 😉

    President Koch tells Craig James to get of the fence 🙂

    http://www.youtube.com/watch?v=30eoZH0r-kA

  • 6 Greg Atkinson // Oct 26, 2012 at 12:14 pm

    This is worth remembering: “Mining has been a boom-bust industry throughout its history. The reason is the long development process of a mining asset. When demand pushes up prices for minerals, supplies take time to respond. Hence, prices can go very high in the initial phase of a demand boom.”

    From: Australia facing a hard landing

    This article is well worth reading and I agree with most of what the author says. I have written about similar issues over the last few years especially the peak in commodities prices and the end of the mining boom..which I flagged well before the RBA woke up by the way.

  • 7 Lachlan // Oct 27, 2012 at 12:39 pm

    Well Greg I agree with the demand side has obvious problems flowing from private credit conditions but with the RBA firing a few shots in the currency game I feel it is “possible” to see 5000 in the next few months or so before an intermediate term sell off starts in 2013 (around Feb/March).
    After the Banksia Securities collapse this week gone I also noticed traders saying they would short the AUD but that beast is littered with the bones of short sellers. I am tending to think the AUDUSD for now has little downside below .99/1.00 and upside to 1.20’s.
    A few more bets with the local pundits here. I am of the strong opinion that gold will go back to around 1900 and silver to the low 40’s at least. Therefore the stock markets which are currently near support levels (should see volatility this week)will be hazardous for short sellers at least a while longer yet. At ASX200 = 5000 short selling will be a fairer bet but it’s not my game at all since I see limited downside with the presses rolling. It should only be a game for bears who really believe in 09 lows again or preferably lower.
    Anyhow I guess this market could make me look a fool soon since it has a way confounding everyone at present but see how we go. Cheers Greg.

  • 8 Greg Atkinson // Oct 28, 2012 at 8:33 am

    Lachlan this market has made me look like a fool several times and I sure it will do so again plenty more times in the future.

    I agree with your comments about the actions of the RBA and the impact this may have on stocks. A few years ago I wrote that a good sign for stocks would be the start of rate cuts and if we see a couple more this will certainly help give shares a boost.

    Coming up over the next few months we have a presidential election in the U.S., a regime change in China and also a possible election in Japan. All three events may result in quite a shake-up politically in the world’s three biggest economies so the markets are also likely to get a shake as well one way or another.

  • 9 Lachlan // Oct 28, 2012 at 9:53 am

    For sure Greg, for sure. Politics and share markets. Should be excellent for the share watchers here. I better stock up on coffee and chocolate.

    I hope the RBA keeps their trigger finger restrained but I think Glenn has stayed cool enough under pressure to give one some hope. And I certainly appreciate getting some interest on my own business funds. The mining areas (Surat Basin etc) always look prosperous but here at home (coastal ranges) and away from that action the pace of spending has slowed a lot over the last 12 months and some jobs have been lost (not sure what the figures are but everybody can see its true). The 2011 share market sell off has affected the confidence/outlook of people I know also. Personally however I like these conditions for investing in various things. I will be a keen buyer at the next share market sell-off.

    QLD is down the ladder a bit on mining with NT and WA at the front according to commsec.

  • 10 Lachlan // Nov 23, 2012 at 1:35 pm

    Well Greg the Dow at least has broken down well and truly from a rising wedge and although short term TA is not so reliable in these choppy/changing conditions the Dow unlike other markets was extended a fair way and could go down to 12000 approx pivot point now imo.
    Our share market here looks fairly steady still, at least percentage measured losses in it may not be comparable with the Dow if we head south more. So the paradigm may have shifted just a little. The ASX is outperforming the Dow for a period of time. Not sure about XJO at 5000 however…maybe well into next year. Wait and see.

  • 11 Greg Atkinson // Nov 24, 2012 at 8:48 am

    Lachlan I have almost given up on the XAO/XJO getting near 5000 this year. Exports from Japan to Europe are down, construction machinery sales in China are down & the most major shipping companies appear to be bracing themselves for a tough 2013. In that environment it’s hard to imagine Australian stock market shining.

    I know some people getting excited about a ‘recovery’ in the U.S housing market but when money is effectively thrown around asset prices do tend to rise..for a while anyway.

    As for the Dow, I’d say much of its performance has had to do with the rounds of QE which almost force investors into stocks or precious metals etc. But it’s going to be tough for the DJIA to head much higher over the short-medium term and I agree with you, that a pull-back is quite likely. (I believe Marc Faber has predicated a fall of around 25-30%)

  • 12 Lachlan // Nov 30, 2012 at 5:56 am

    The dollar index favours the dollar bears based on TA for now but of course the market is choppy and unpredictable so that lowers the predictability. Anyhow it is interesting that it does not gel with the bear case for stocks. It is a bad time to call anything imo although I guess we all want the market to make up its mind.

  • 13 Lachlan // Nov 30, 2012 at 8:32 am

    oops
    ok it lowers the value of TA/ price studies prediction systems.
    LAte nIGht ya know 🙂

  • 14 Greg Atkinson // Dec 3, 2012 at 9:09 am

    Lachlan it still looks pretty bearish out there to me. Manufacturing activity in Australia appears to be declining, the Baltic Dry Index is down more than -35% for the year and the ASX All Ords/ASX 200 are stuck below 5000. On the plus side (maybe) home prices (on a national level) appear to be edging up and investment in the mining sector is still very high. But projects are being cancelled (as I talked about more than a year ago) so I don’t think we can rely on the miners to drag the stock market up next year.

  • 15 Ned S // Dec 3, 2012 at 9:31 am

    China: “… the revival of state-driven infrastructure projects and road-building points to a more durable rebound”, and

    “… regional authorities are storing up trouble by “riding to the rescue of debt-laden firms which – in a pure market economy – would be going bust”. She said the refusal to let market forces clear dead wood will sap the country’s dynamism over time, but for now there is no denying the power of stimulus.

    Moody’s said China’s recovery is on track for the next few years but the era of easy growth is coming to an end.”

    http://www.telegraph.co.uk/finance/china-business/9717705/China-shakes-off-hard-landing-by-reverting-to-bad-old-ways.html

  • 16 Lachlan // Dec 4, 2012 at 10:15 am

    I agree with your observations Greg and those when added to some other bullish ones (monetary) is what helps make this situation a stalemate sideways affair.

  • 17 Lachlan // Dec 4, 2012 at 3:30 pm

    I would add to the bear case that my gold stocks have been hammered again too Greg. They represent a small portion of my savings/assets and I am sure that is the only way to invest in such a volatile paper asset. They are however historically very very cheap.

  • 18 Greg Atkinson // Dec 5, 2012 at 8:24 am

    Ned one day I reckon many “experts” will look back and wonder why they put so much faith in the long term viability of a command economy like China.I wonder where the new era of growth in China will come from? Certainly not from an ageing population, increased competition from Vietnam, the shift of Japanese money from Chinese factories to elsewhere in Asia & more over-building.

    Lachlan, my ability to read the gold market is on about the same level as my golf game…i.e. almost non-existent. I do feel gold has been in a bubble for some years but there has been money to be made by investing in gold that’s for sure.

    I have noticed Newcrest Mining (NCM) coming back to $20 but I wonder why? Has the outlook for gold mining stocks turned sour?

  • 19 Lachlan // Dec 5, 2012 at 5:49 pm

    They have been a very sad little asset for a very long time Greg. It seems the more gold goes up the more gold stocks get slaughtered. NCM at twenty sure seems cheap but.

  • 20 Lachlan // Dec 6, 2012 at 7:00 pm

    Just looking around the charts Greg. I think the that the Dow is having a little dead cat bounce here before dropping down to an 11700ish area. Gold is being hammered which fits with the program. It could go to a 1625 support area and the gold stocks have given their notice.

    Having said that the dollar index looks bearish and the AUD looks relatively strong. Just the way it is. I maintain an outlook the AUDUSD will go in to the 1.20’s in the next year or so.

    See how we go. cheers

  • 21 Greg Atkinson // Dec 7, 2012 at 10:14 am

    Lachlan the BDI is now under 1000.00 so I reckon a pull-back across the markets before the end of the year is a very real possibility.

    The All Ords is up at around 4500 at the moment so maybe we are set for a fall like the one we had in May when it was also in that area?

  • 22 Lachlan // Dec 7, 2012 at 11:41 am

    It might be that we can keep grinding up and down on the spot here in Oz without any hard falls Greg but I don’t want to expect anything in particular here. Our market is definitely trapped in a compressed pattern of trading. The Dow however has a clearer technical gap to fall into. Bernanke could keep it from happening but I doubt he needs to and price inflation is a constant threat in a money printing, declining output economy ie the election is over and he can let it take a breather/reduce inflation/currency event risk. It can’t be easy running a CB. But it’s their choice I guess 😉

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