Today the ASX All Ordinaries Index is up near the 5400 level with few signs that the current rally which started in July is about to fade. For market bulls this is a joyous occasion and for long term investors such as myself, it is a welcome change from years of the market edging sideways. However I will not be breaking out the champagne just yet as there are risks out there which seem to be getting over-looked.
But first the good news. Since July the ASX All Ords has risen by 15% which is a good run no matter how you look at it. But this follows a correction that took the All Ords to down near 4600 after it had previously hit 5200 – so the gain from the pre-correction peak to now has only been around 4%.
Needless to say that the mainstream finance media, market analysts and uber-market bulls are currently focused on the 15% figure which to me is bit misleading. Let’s be honest with ourselves and realise that to have benefited from the recent rally fully we would have had to take positions just as the market hit a short term bottom and then have sold these positions within the last few days. Anything else is just theory.
Many people will look at the chart below of the All Ords in different ways and come to different conclusions. My view is that it shows a market that has probably rallied too far too quickly on the back of fairly weak fundamentals.
ASX All Ordinaries Index 6 Month Chart
I don’t see many signs that the global economy is doing much else but reacting to vast amounts of stimulus money & central banks maintaining low interest rates. Yes there have been stock market gains in most major markets and property prices have been on the rise too, but I struggle to see how these gains can be justified on fundamentals alone.
If and when the U.S. Federal Reserve starts easing back on Quantitative Easing (QE) (also called “Tapering”) there will be a high risk in my view that U.S. stock market will undergo a sharp correction along with markets in Europe & Asia including Australia. It’s a big risk that just stays in the background since scaling back QE seems to be as issue too hot to handle.
Other risks out there include the Chinese economy which is still growing but probably not in a sustainable way and the European Union, where most economies are still struggling.
In Australia the economy is still showing signs of weakness despite low interest rates which have no doubt helped move up home prices and given stocks a boost as well. But just as the RBA were too slow to cut rates I will now go out on a limb and say they have left rates too low for two long. I am not suggesting a big rate hike, just a small tweak upwards to cool things down a little.
But we are where we are as far as the Australian stock market is concerned, so let’s have a quick look at few stock charts to see the current rally in some different ways.
First up Flight Centre Travel which has been on a roll for quite a while.
Flight Centre Travel (ASX:FLT) 6 month stock price chart
Clearly FLT has had a good run and I suspect the strong AUD has helped entice people to head overseas for holidays. But FLT has been on a roll for a long time and it almost makes me weep to think it was below $5 a share back in 2009. Clearly it would have been wiser for me to take a position in this stock than Babcock & Brown!
Next a quick look at Newcrest Mining (NCM) which has been in the news for all the wrong reasons.
Newcrest Mining Limited (ASX:NCM) 6 month stock price chart
As readers may recall I disclosed a while back that I picked up a few NCM shares when they were under $10 and then lost my nerve and sold when they were just over $13. Personally I don’t see gold or gold mining stocks as being the place to be for now but if NCM drops below $10 again I will be tempted. I may even be tempted to move into gold via an ETF if prices drop say another 5-10%.
Finally a quick look at an example of a stock I have moved into recently. As always I am not offering any financial advice so please do your own research before making any investment decisions and seek professional advice if needed.
Metcash Limited (ASX:MTS) 6 month stock price chart
I started buying into Metcash at around $3.25 because it appears to be a stock that may have been over-looked and/or unloved. It pays a very respectable fully-franked divided, has a ROE of around 16% and a P/E Ratio of around 11. As you can see it has basically gone nowhere and the trend is not my friend, but hopefully the stock price will not fall much further and the dividends will keep flowing.
Once again I stress I am not suggesting anyone buy this stock, I am just using it as an example of the type of stock that catches my interest at the moment. In this market I am not tempted to buy stocks near multi-year highs as I feel a correction is looming (and over-due). On the other hand stocks which has not rallied & may have been over-looked attract my attention. This may or may not be a good thing though!
So in summary the Australian stock market has recently rallied nicely, but in my opinion we need to keep that in perspective and not ignore the risks out there!