As per the script, finance journalists were engaged in a fierce battle for readers yesterday with most getting very excited about the ASX All Ordinaries and S&P/ASX 200 posting gains of over 2.5%. It was the best day for the market since whenever they exclaimed and the bearish articles they had churned out just a week before were all forgotten.
Meanwhile on planet earth, the Australian stock market is essentially still bouncing sideways as it has done for years. The market has not even gotten close to reaching the pre-GFC high of over 6500 – although it did rally strongly from mid 2012 after being oversold.
Certainly the Australian stock market has moved around quite a bit over the last few months with most of this movement being within a range of 5% either side of the 5000 level.
Australian S&P/ASX 200 Index – 6 month candlestick chart
On this chart we can see how the rally that started back in 2012, kicked up again early in 2013 before reaching just over 5100 and falling back again. The market then bounced around for a while before starting another run up – peaking at just over 5200 before slumping back to just below 4700. (a correction)
Now it appears we are in another one of those phases where stocks will bounce around direction-less for a while before the next move up or down. That sort of movement may get the headline writers excited, but for me it’s simply the same pattern we have seen before as I mentioned in February in The ASX All Ordinaries March Towards 5000 – Been There, Done That.
I can’t say if the next move will be up or down, but I do feel fairly confident that whatever happens the ASX 200 (XJO) will settle back into the 4800-5200 range or thereabouts.
The chart above is focused on just six months and for some it may seem that the market action has been pretty dynamic, but if we look at a candlestick chart for the XJO over the last 10 years it will put this years movement into some perspective.
Australian S&P/ASX 200 Index – 10 year candlestick chart
Here we can see that the market movement for this year is not particularly unusual in terms of what percentage the market has bounced around. In past years there have also been moves up/down of 5-10% and as I have stressed many times before…corrections happen fairly often.
The unusual situation we have at the moment is that the Australian stock market has been treading water for years and it’s hard to see how that will change until the mining stocks get back their mojo.
Speaking of mining stocks, let’s have a look at two of the biggest – BHP Billiton and Rio Tinto.
BHP Billiton & Rio Tinto – 6 month stock movement chart
My perhaps simplistic view is that BHP & RIO stocks are feeling for a bottom and are probably both near being fairly good value.
Yes the Chinese economy is slowing (as I warned would happen) and commodities prices have fallen (again as I predicted) but both these factors are probably close to being fully priced into these stocks.
Speaking of China, now even the uber-China bulls are grudgingly admitting that growth there is slowing but the new buzzword is “re-balancing”. Once again it seems that some believe that command economies posses magical abilities and that the slowdown in China is actually part of a grand plan to shift from being export dependant to being more balanced.
What I see is happening is Chinese authorities re-acting to a whole range of problems they need to deal with including: a slowdown in foreign direct investment, higher wages/input costs, a real estate bubble and a shadow banking crisis.
How the Chinese economy fares will have a major impact on the Australian economy and the stock market so I suggest readers take the time to watch the video clip below featuring James Chanos, president of Kynikos Associates LP, and Stephen Roach, chairman of Morgan Stanley Asia.
In any case the clip is worth watching as investors will get more insights in just a few minutes by listening to Chanos & Roach than they will ever get from most of the mainstream finance media in Australia.