Here we are in the dreaded month of September and yet stocks are still on an upward trend. But as each day passes the bulls become more bullish and those suggesting a major correction is due become more adamant that this rally cannot last. So who might be right?
Well the answer depends on whether we are looking at weeks, months or years ahead. In the short term the chances are pretty high that there will be some sort of market correction or pull-back as investors take some money out of the market. This happens all the time and especially when people are trying to recover from the sort of stock market mauling we have had over the last 18 months or so.
However if we took a longer term view of the market then I would suggest that in 6 months time the market will still be creeping upwards and in 12 months time will be higher than it is today. How much higher? I am not sure and nor is anyone else.
Thankfully over the last few week the pace of the stock market rally has slowed and that is a good sign in my view as it means people are not madly rushing back into stocks. It also means that my belief that the logical recession level for the ASX All Ords/ASX 200 is around 4800 might turn out to be correct.
Since we are getting close to the 4800 level I have started easing back on buying additional shares and am more actively looking at taking some money out of certain stocks if I think they have run up too far.
To get a feeling of where the market is now let’s have a look what the ASX All Ordinaries has done over the last 12 months.
ASX All Ordinaries (XAO) 1 Year Chart (Sept 09)
I have marked on this chart some simple lines showing roughly the rate at which stocks have risen over certain periods since March this year. We can see that there was a quick rise from the market bottom after which the rally cooled a little and then the profit takers moved in.
Then from July the rally gathered steam again and has now once again cooled down, so I would not be surprised (and actually expect) another bout of profit taking soon. Many short term stock traders are expecting a correction and they will be quickly cashing in if they sense the market is about fall.
Next let’s check how the major bank stocks have been performing.
Commonwealth Bank, Westpac vs All Ords 1 Year Chart (Sept 09)
On this chart I have marked where the banks bottomed out (January 2009) and then when the All Ords hit the bear market bottom in March. Just as the financial stocks led the market down you can also see they are leading the market back up again.
Although only CBA and WBC are shown on this chart you will also get much the same result if you add National Australia Bank, and ANZ as well. The big banks have been helped by the Government’s deposit guarantee and have also gained market share at the expense of smaller non-bank lenders, so the recovery in their share prices is probably overdone a little.
I would expect if interest rates start to creep up and the first home buyers grant is wound back that bank stocks will not keep moving ahead as strongly as they have been in the last few months. I also imagine that there would be plenty of people who have made a tidy profit with banks stocks in the last 6 months who are probably ready to sell at the first signs of weakness in the banking sector.
Finally let’s have a look and see how gold has been tracking in Australian Dollar terms.
ASX ETF GOLD vs ASX All Ords 1 Year Chart (Sept 09)
The orange lines on this chart highlight the periods of fear that have sent gold prices in $AUD upwards, but as you can see after the fear subsides the price comes back down. Once again I am using the chart of the Exchange Traded Fund (ETF) GOLD as it is more useful for Australian investors than looking at gold prices in U.S. dollars.
Remember that a lot of the bullish talk about gold is coming from U.S. focused analysts and they are talking up gold as a way to hedge against the falling $USD. But the Australian dollar is rising against the U.S. dollar and this results in the rather flat performance of gold so far this year as shown in the chart above.
For sure gold was a good place to have some money before the market went off a cliff last year, but just be careful not to be carried away with all the bullish talk at the moment about gold because the price is being helped in USD terms not by strong demand, but by the falling value of the U.S. currency. If you are a technical trader this may be a good sign, but if you are looking at gold from a supply and demand perspective it is a red flag.
Overall I feel Australian stocks are getting back near a reasonable level and as with stock markets around the world the impact of the failure of Lehman Brothers is starting to wear off, but to be honest I did not expect it would take this long.
Thankfully as a long term investor I worked out some time ago that I am not good at timing the market. But I do feel that most of the positions I have taken while stocks were down over the last 12 months will look pretty good in 3-5 years time.