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
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
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
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
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