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Australian Stock Market Set for a Pull-Back

August 31st, 2016 · Greg Atkinson · 24 Comments

The last couple of months have been eventful for the Australian stock market. First, for reasons unknown, it was was moved by the Brexit referendum result and then as the 2016 Australian Federal Election saga slowly unfolded the market really didn’t do much at all, even-though Malcolm Turnbull almost managed to lose all the seats Tony Abbott had won for the coalition parties in the previous election. Despite these events however the S&P/ASX has gained ground and has edged up to around the 5400-5600 range…again.

At first it may appear that the Australian stock market has posted some decent gains, but we must bear in mid that the ASX 200 was around 5400 in early 2014 and so from a long term point of view the market has actually done very little. Some stocks have of course done very well such as Domino’s Pizza Enterprises Ltd. (ASX:DMP) – but overall there’s not been much to get excited about.

S&P/ASX 200 Index (XJO) 3 Month Chart

ASX 200 1 Year Chart (Aug 2016)

There have been market pull-backs during the last 12 months that did present buying opportunities but of course getting the timing right is a lot easier to do in hindsight.  However in late 2014 I did outline some trading ranges regarding the ASX 200 (see S&P/ASX 200 Index – Charts & Trading Ranges ) and I believe these are still valid today – namely at around 4600 the market appears oversold and around above 5200 it appears overbought.

Another useful chart to look at is the S&P/ASX Small Ordinaries Index (XSO) which I view as the canary in the coal mine in terms of how listed companies are faring. Generally I expect movements in this index to be more pronounced than the ASX 200 Index or All Ordinaries Index due to the more volatile nature regarding trading conditions for smaller companies. As we can see from the chart below the ASX Small Ordinaries Index has been trending down for some years but has recently rallied from around 2000 to 2500. Why?

S&P/ASX Small Ordinaries Index (XSO) 5 Year Chart

ASX XSO 5 Year Chart (Aug 2016)

I have no good answer to this question. It’s certainly not because the outlook for the Australian economy has improved. The weaker Australian dollar may have helped along with the continuing environment of low interest rates, but neither of these explain the rather sudden rally to 2500. At this stage it appears to me that the XSO is poised for a pull-back and my guess is this also likely to happen to the ASX 200 as well.

My reasoning? Firstly because that’s what the market has been doing for years – reaching towards 6000 then pulling back towards 5400 – 5200 or lower. Secondly I don’t see too many reasons why the Australian stock market should rally. The economy looks to be be running out of luck, the federal government seems unable to reign in spending and share prices in many ASX 200 listed blue-chip companies like QBE Insurance Group Ltd (ASX:CBA) are under pressure.

QBE Insurance Group Ltd (ASX:QBE) 5 Year Stock Price Chart

QBE 5 Year Chart (Aug 2016)

Of course there are company specific issues affecting the QBE share price but it’s a stock I use as a risk-on/risk-off indicator due to the nature of its business. When the QBE stock price is rising it’s often during a period when the stock market is rising as investors are tempted into riskier/higher return assets like stocks. When the QBE stock price is falling then I look further for signs that the market might be about to give up some gains. Since the QBE share price is now at a multi-year low that suggests to me that we are about to see the Australian stock market move near 5200 or lower again.

If the mood is shifting from riskier assets then typically we would see defensive assets like gold rise. My usual way of tracking gold in Australian dollars is via the ETF ASX:GOLD and the one year chart is posted below.

ASX ETF GOLD (ASX:GOLD) 1 Year Price Chart

ASX GOLD 1 Year Chart (Aug 2016)

Over the last year ETF GOLD has pushed higher but it has fallen since reaching a multi-year high in July. Overall the movement in the gold price I feel is not as useful as an market indicator as it was in years past since Quantitative Easing (QE), Zero Interest Rate Policies (ZIRP) and other government/central banks measures have distorted the markets. One observation I will make however is that the movement in the price of gold suggests that perhaps some investors are hesitantly or cautiously preparing for market correction.

Although I do not have any direct holdings of gold I would place myself in the group of investors who are cautiously preparing for a market correction. I’m certainly not in the “sell everything” camp but the U.S. stock market appears overdue for a significant correction and that will mostly likely also send Australian stocks heading considerably lower before the year is over.

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Australia but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp


24 responses so far ↓

  • 1 Biker // Sep 9, 2016 at 2:08 pm

    Your headline might be quite prophetic, Greg. The ‘Pull-Back’ you predicted is right on schedule…!~

  • 2 Greg Atkinson // Sep 10, 2016 at 8:37 pm

    It is looking that way Biker. I guess on Monday we will see the ASX take a hit after the markets slumped in Europe and the U.S on Friday.

  • 3 Biker // Sep 12, 2016 at 12:12 pm

    More on the way?

    “…the selling is expected to continue through the month. Mr (Nader) Naeimi said investors should wait until the selling exhausts itself, and a good buying opportunity emerges…”

    Hmmm. That might be the time to switch from cash to ASX… . But I also note that we have just _six weeks_ to prevent a property crash!

  • 4 lachlan // Sep 13, 2016 at 10:56 am

    Got a very nice discount on a small parcel of STO today. It kinda looks like it could go down more but I’m not sure so there ya go. Can get more later at lower prices if need be.

  • 5 Greg Atkinson // Sep 14, 2016 at 8:34 am

    I’m not inclined to buy into the market at the moment and it looks like the ASX will head down again today anyway. It looks like that the trading ranges I outlined a few years ago will come into play so I will be patient.

  • 6 lachlan // Sep 22, 2016 at 10:22 am

    Nice green day today after the Fed did nothing again Greg. Some of my gold and oil stocks are distinctly indicating more downside though which may well recommence after todays big spike. I took some large cap profits today and sold NCM for a loss. I hope to buy it cheaper, maybe in a month or two.

  • 7 Greg Atkinson // Sep 29, 2016 at 10:20 am

    Another good day with a higher oil price giving the energy/commodities sector a boost. Looks like the ASX 200 is shaking off the recent pullback..for now at least?My guess is however that the downside risks still outweigh the potential for further gains from here.

  • 8 lachlan // Sep 29, 2016 at 7:22 pm

    Well the XJOs rally since February is threatening to end here Greg. The selling we just had recently forced a trend-line break. I’m not saying the trend change/breakdown will hold but I am alert. WOR is still trying to rally here however it too had a trend line break recently. DCN and SAR have tops in place now too. Waiting to see if they actually break down.

  • 9 Biker // Oct 9, 2016 at 11:10 am

    Interesting, as we drive through Oregon, to be buying ULP at just US$2.31 per _gallon*_. .. . That may mean the US is fracked, of course; but it does raise questions about ‘peak oil’. Meanwhile, bio-diesel is still hip… and free recharge for EVs widespread.

    Biker,
    Portland
    * That includes 10% ethanol in 87

  • 10 Biker // Oct 10, 2016 at 7:37 am

    … and we just sat inside a Tesla X in Portland’s Pioneer Square. The missus is stoked. Couldn’t get her out of that SUV! Think we’ll wait for the Y, though.

  • 11 Lachlan // Oct 12, 2016 at 6:05 pm

    Incredibly cheap fuel there Biker. Australia can afford to pay more apparently. Yes peak oil looks further away than ever now. Obviously we need to look for new options though considering the trouble we go to for the black gold. Those offshore rigs are incredible.

  • 12 Biker // Oct 12, 2016 at 9:13 pm

    Extraordinary to top up our half-full tank at a servo for US$14, Lachlan. The last time we topped up, it cost just six bucks, in fact. Embarrassing paying at the till… !

    Aussies certainly can afford to pay more for our fuel, but the _average_ American seems to be doing OK. Yes, Portland, which we left yesterday, appears to have more homeless than any city we’ve visited in the last two decades, but despite lots of hi-tech EVs and hybrids, there are still many more fuel-guzzling V8 pickups than EVs.

    One question lingers. Is it possible that US oil companies are quite effectively fighting the new technologies with low fuel prices?

  • 13 Lachlan // Oct 13, 2016 at 5:31 am

    I am inadequately educated on that latter subject Biker, the economics of those new technologies. Otherwise I’ve heard that alternative energies are often subsidised which, if true, infers that they are dearer to produce/less competitive, for now. One should question then how I could buy into conventional energy in that ignorance. When it comes to investing though I felt confident enough with oil recently because its price relative to preceding years was many multiples lower, oil rigs were closing down in record numbers and it was possible to identify some players with strong balance sheets who could actually thrive in that environment. I submit that somebody, somewhere, needs to be producing oil at a profit or else society in it’s present form will cease.

  • 14 Lachlan // Oct 13, 2016 at 5:38 am

    Sometimes things cannot be ideal eh. Sadly I had to sell some energy shares recently albeit at a good profit. Business cash flow was doing what it can easily do, swing around violently. Will be looking for opportunities again in a month or so.

  • 15 Biker // Oct 13, 2016 at 1:20 pm

    Driving between Portland and Seattle yesterday, we avidly listened to Malcolm Gladwell’s latest (audio)book: ‘Tipping Point’.* It helps explain some of these ‘swings’… . Wish I’d understood these principles a few decades ago, Lachlan!~
    * Also enjoyed ‘Outliers’ a previous book, a few years ago… .

  • 16 Lachlan // Oct 13, 2016 at 9:56 pm

    Thanks Biker…I will consider all of that.

    Actually in two or three months i will have a giant blob of cash, if I can describe a number on a screen in such a way. Most of my POs go out in October.

    Tipping points?…Maybe Europe will get to a tipping point soon.

  • 17 Biker // Oct 14, 2016 at 9:28 am

    Lachlan :”Maybe Europe will get to a tipping point soon.”

    How true!~ It’s possible though that economists will identify a point at which it (has already) happened, Lachlan. Apparently, the trick is pin-pointing causal events long before any real trend is apparent.

    Gladwell points to seemingly (to us) insignificant events, which set off an avalanche. He also identifies individuals and groups such as mavens and connectors responsible for massive sales trends.

    I participate in a large number of online surveys… and, until we listened to ‘The Tipping Point’ , I had no idea exactly why the instrument designers often asked some very specifically-pointed questions. They’re attempting to locate mavens, connectors and influential groups* and assess their likely effect on future markets.

    * Probably wasting their time surveying _me_… as I’m *none of the above*… but I suddenly realised why these questions were included!

  • 18 Biker // Oct 15, 2016 at 9:56 am

    Lachlan: “…in two or three months i will have a giant blob of cash, if I can describe a number on a screen in such a way… ”

    About to arrive home after a couple of months away, Lachlan. I’ve thought a lot about your comment above… and have to admit I don’t know what I’d / I’ll do in the situation you’ve described.

    We’ll face the same dilemma soon… probably a couple of times in the next two years… and I’m unsure just what _we’ll_ do about it.

    My inclination is to ‘start all over again’ … and buy a few blocks and commence three or four new builds. That’s just _my_ inclination. It’s not a shared view… and I’m one of two decision makers in this. We will probably start buying ETFs, but timing will be critical. At our age, we don’t have sufficient recovery time if we get the timing completely wrong(!)

    The shaky political situation doesn’t help. That’s possibly why we’re starting to look beyond the usual sources for a guide to likely trends in the next decade or two.

  • 19 Lachlan // Oct 15, 2016 at 6:59 pm

    Biker I have the same conundrum. There are so many tipping points in view. I would like to identify trends for the next twenty years however so many flavours of paradigm change seem possible in a short period going forward. The politics yes they’re shaky alright. Apart from Europe we have the US/Saudi condition which flows on to Russia and Iran. Then emerging into modernity are many lesser powers effecting the equilibrium. I could go on listing for a page though, I wont. In markets there are so many things that appear either over-bought or just plain trend-less. We’re in a milk shake machine today, like one we had when we were kids. We used to increase the speed to full blast just before the process stopped and the end result could be assessed. I don’t want to be chopped up in the final shake-out. If you have money now its just steady as she goes for mine. Cheap things are normally good investments, things I have some experience with too and otherwise I don’t want my eggs all in one basket esp when there’s uncertainty.

  • 20 lachlan // Oct 23, 2016 at 5:29 am

    From a purely technical perspective the markets have my attention right now. They’re at one of those decisive points. The XJO has been fighting some resistance and is yet to win that fight; it may fail. The DJ popped a new high, pulled back to the old high and just limped sideways; it may collapse proving a bull trap. None of this predicts anything but I have more reason than normal to wake up each day and see if the DJ is breaking free to the upside again. Or is it doing one of its dramatic dives.

  • 21 Biker // Oct 31, 2016 at 7:31 pm

    Well, there you are:

    http://www.watoday.com.au/business/markets/brighter-november-tipped-for-asx-after-octobers-yield-selloff-20161030-gsecq3.html?eid=email:nnn-13omn632-ret_newsl-membereng:nnn-04%2F11%2F2013-news_pm-dom-news-nnn-watoday-u&campaign_code=13INO003&promote_channel=edmail&mbnr=NjEzMTg2Nw

    Something will certainly need to lift dramatically soon, if some earlier predictions of 6000 are to eventuate… !

  • 22 lachlan // Nov 2, 2016 at 6:12 pm

    Biker, the xjo painted a bearish chart today. Being careful however, I am waiting to see what the dj will do, whether it may lead into a sell-off or will it actually do its old trick of killing bears just when you thought the big short was due. It’s still limping dead sideways keeping people in suspense. Interesting timing with the election due.

  • 23 Biker // Nov 2, 2016 at 8:03 pm

    Doesn’t look too good to me, Lachlan.

    Back in mid-January, I cited WAtoday (17/01/2016):

    “Macquarie Group, Citigroup and Credit Suisse are among the most bullish, forecasting the ASX200 will recover from the worst start to a year on record and reach 5900 to 6000, a 16 per cent rise.

    Morgan Stanley is tipping 4800, a 2 per cent drop from Friday’s two-and=a-half year low of 4892.”

    Interesting times… .

  • 24 lachlan // Nov 2, 2016 at 8:45 pm

    Gold turned up today also as the stock market fell. That isn’t a great sign for the next period ahead if you are a determined bull. Despite my agnostic position on market direction I would actually like stocks to sell of now of course because my cash blob is approaching fast. And I took profits a month back. Come to think of it there do not seem to be bears everywhere at present. Normally you can tell when these bearish technicals are going to reverse to the upside. Usually every man and his dog has a stocks letter telling you to go short. Maybe the dj will be 500 points lower tomorrow morning.

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