Another week is over and the ASX All Ordinaries Index has finished just above 4600 and the S&P/ASX Index just below 4600. Here we are again at the bottom end of a fairly narrow trading range in which the Australian stock market has traded within for more than a year. It’s enough to make you sleepy.
Rather than get into the reasons why the market is stuck in a rut (since I have discussed this before in Why is the Australian stock market unable to rally? let’s take it easy and just look at some technical charts and see what they might be indicating.
ASX All Ordinaries 6 month candlestick chart
As you can see from the All Ords (XAO) chart above we are basically back down to where we were the last time the market slumped. This time the correction has been more gradual than the one we had in March so perhaps if the market rallies the movement towards 5000 will also be fairly gradual.
Certainly I am not expecting a strong rally in June so I doubt we will see the market near 5000 again for some weeks…if we are lucky. But don’t forget, corrections are normal and happen even in bull markets, so there is no need to panic.
Now let’s have a look at where the real action should be – the miners and banks.
ANZ Banking Group 6 month candlestick chart
The chart of ANZ (ASX:ANX) tracks fairly closely that of the All Ords except that the stock didn’t rally as strongly after the correction in March. My view is that the bank stocks will not have a good year in 2011 and that I will not be relying on them to drive any market rally this year.
If the underlying economy was really as good as many people seem to think I would expect the banks stocks to be doing better. As it is, it’s pretty clear investors are not that bullish on bank stocks at the moment.
Rio Tinto 6 month candlestick chart
The stock price of Rio Tinto (ASX:RIO) has also tracked the ASX All Ords fairly closely or it’s probably more accurate to say, the All Ords has been tracking the mining related stocks.
I would expect that it is more likely for a stock like Rio Tinto to rally back strongly rather than a stock like ANZ – but that all depends on the China economic story of course.
What the ANZ and RIO charts suggest to me is that investors are cautious about the outlook for the banking and commodities sector. There is no rush towards these stocks when investors are fearful so they are trading like the cyclical stocks they are.
Now let’s look at a couple of stocks which should indicate how the domestic economy is faring – David Jones and Harvey Norman Holdings.
David Jones Limited 6 month candlestick chart
Again I don’t want to try and read too much into a quick look of candlestick chart above, but what is fairly obvious is that shares in David Jones (ASX:DJS) have not done well since late May. Not only has the stock price been dragged down by the overall stock market correction but stocks like DJS have also been weighed down by signs that the Australian economy (excluding mining) is not doing so well.
If we look at another consumer related stock, Harvey Norman, then we can see again how investors are moving out of cyclical stocks that are exposed to the domestic economy.
Harvey Norman Holdings 6 months candlestick chart
Harvey Norman shares (ASX:HVN) have not been doing well for a few months and I suspect Gerry Harvey misses those cheques that the Government tossed around during the height of the global financial crisis.
Not only is the weak retail sector in Australia not helping HVN shares but the company also expanded into Europe some years ago when debt was not a dirty word and the Celtic Tiger economy was still the darling of the OECD.
Finally let’s have look at what should be a defensive type stock – Domino’s. (ASX:DMP)
Domino’s Pizza Enterprises Limited 6 month candlestick chart
Thank goodness for pizza! Domino’s share price has been performing true to form as a defensive stock and has traded within a narrow range despite the recent correction and the one before that in March. Even when people are worried about the economy they still want to have pizza delivered and that is what makes a stock like Domino’s such a traditional defensive play.
So in summary I believe the charts above indicate that the Australian economy (outside mining) is indeed struggling as I have been suggesting for some months. At this stage it’s not looking like 2011 will be a good year for the Australian stock market and it’s looks like investors are becoming increasingly cautious.