Over the last few weeks the tragic events in Japan and the political unrest in the Middle East have shown just how fragile the Australian stock market is. Investors appear ready to move quickly out of shares and shift funds to less riskier assets when they sense trouble. This suggests to me, that people don’t quite believe that the Australian economy is as robust as many market commentators would have us believe.
It is true that global markets have also been affected by recent events in Japan and the Middle East, but there is more at work here than a simple move to safer assets by investors. My view is that despite a lot of the bullish talk by some market experts most investors still see plenty of risks out there for the global economy and that few are willing to put much faith in 2011 as being a year of strong recovery.
In Australia stocks were falling even before the terrible earthquake hit Japan and the Australian Securities Exchange (ASX) had finished trading for the week on Friday 11th March before news of the disaster in Japan broke. As we can see in the chart below, as tragic as events were (and are) in Japan, the ASX All Ordinaries Index had already slumped below 4750 by the close of trading on March 11th.
ASX All Ordinaries (XAO) 1 month candlestick chart
The Australian stock market had been slowly creeping down after closing clear of 5000 in February and recent geopolitical events simply convinced even more investors to sell and take what ever profits they could.
To get a better feel for the big picture view let’s now have a look at the ASX All Ords candlestick chart over 6 months.
ASX All Ordinaries (XAO) 6 month candlestick chart
Without getting too complicated the blue bars in the chart above show days when the ASX All Ords closed higher and the red bars show the days it closed lower.
An important thing to note when looking at any stock market chart is the period it covers and the scale it uses. The chart above may seem to indicate we had a massive rally over the last 6 months but in fact we basically just saw a rise of around 400 points or around 8-9%.
I am not saying that’s a bad return, but after the recent correction all that gain has been effectively wiped out so unless you timed the market almost perfectly, then it would have been less stressful and possibly more profitable to leave your money in a high interest bank account.
Short term stock traders may have a different view, but personally I am not inclined to move into stocks in any significant way at the moment and remember, I am a stocks sort of guy!
For some time readers will also have noticed I have become somewhat bearish regarding the Australian economy and Australian stocks. A quick look at the All Ordinaries Index versus the Dow Jones Industrial Index gives me no reason to change my view at this time as the chat bellow indicates.
ASX All Ords versus Dow Jones Index 2 year chart
Over the last two years the U.S Dow Jones Industrial Average (DJIA) has gradually opened up quite a lead over the Australian ASX All Ordinaries (XAO). As of today the DJIA is up just over 50% over the last 2 years whereas the All Ords is up around 30%.
Certainly the strong Australian dollar would work against investors if they were selling US stocks now but it would have been working in their favour over the last few years if they had been taking positions in the right U.S stocks.
Remember I am not a financial or stock market advisor so please take into account that this is simply my own personal observation and I am not suggesting anyone buy hold/sell U.S stocks etc.
Finally let’s have a look at how gold has been trading in Australian dollar terms over the last 6 months.
ASX All Ordinaries (XAO) vs ETF GOLD (GOLD) 6 months chart
As usual I am using the Exchange Traded Fund GOLD since it reflects gold prices in AUD and makes it easier to chart it against the All Ords.
The latest rally in gold prices started when the unrest in the Middle East spread and investors were actually moving into investments like ETF:GOLD before the stock market correction actually took hold.
But despite everything that has happened, gold has yet to reach the $2000 USD an ounce level despite many analysts saying that this would happen for over a year now. Like I have said before, I don’t think we will see gold hit $2000 USD an ounce any time soon and the next major move (i.e more than 20%) I believe will be downwards. Having said that, gold prices have certainly risen when investors fear is high and I don’t suspect that relationship will be broken in the short-medium term, if ever.
At this stage I don’t see any reason to change my somewhat pessimistic outlook for the Australian stock market as I outlined in January this year in: Australian stock market outlook for 2011 and I am now probably cautious than I was at the start of the year. But I am quite happy to hear from readers why my cautious outlook is unfounded or any other comments readers may have about the current stare of the stock market.