It may appear to some investors that the Australian stock market has started 2012 in the same volatile manner as we have become use to over the last few years, however trading so far this year has been fairly calm. An optimist might believe that this is an indication that the markets are finally settling down though I fear we are simply enjoying a period of calm before we enter a stormy phase again.
Since I am more of a long term investor I often like to step back and get my bearings. For me this involves looking back over the last 5 or 10 years to try and work out where we might be in terms of investment cycles. In simple terms this essentially means trying to work out if the share market is on the way up or on the way down.
Sometimes it appears fairly easy to spot a market rally or a market decline in progress, but at the moment when I look at the S&P/ASX 200 Index it’s pretty hard to make a call either way.
S&P/ASX 200 Index (XJO) 5 Year Chart
Back more than a year ago I suggested we would see the stock market trade in a fairly narrow range and commented that the market was essentially moving sideways. That is basically what happened and from around mid 2009 to around mid 2011 the S&P/ASX 200 traded within a range where the bottom was near 4400 and the top was near 5000.
There were certainly some days & weeks when the market was very volatile, but compared to 2008 to mid 2009 the trading range was quite narrow.
Then from around the first quarter of 2011 the global markets got the European debt wobbles and the Australian stock market slid back from being near 5000 to just above 4000 by the end of the year.
So far this year the ASX 200 & All Ords have both scratched out modest gains but as we can see from the chart below it’s hard to get too excited about this and it is far too early to be suggesting that the stock market is about to rally.
S&P/ASX 200 Index (XJO) 1 Year Chart
On the S&P/ASX 200 chart above I have underlined what could be the market low of what I am going to call the European debt crisis phase. By late September/early October we had absorbed as much bad news about the Euro-zone economies as we could handle and in many ways the impact of this has now been priced into the stock market.
Normally I would be tempted to say that the stock market should eventually recover from that point however as I have mentioned on numerous occasions, we have yet to deal with the Chinese economic slowdown phase. This phase I am pretty convinced will be played out during 2012 which is about a year or so later than I had first thought.
So my assessment at this stage is that we have another correction (or corrections) to go before we will be set up for a sustained rally. At this stage I reckon we will see that rally start sometime this year and I still believe the All Ords/ASX 200 can close up near 5000 by the end of the year.
But if the Chinese economy has an particularly nasty hard landing then all bets are off. (that is my escape clause!)
Finally let’s just have a quick look at two charts which I think are interesting for different reasons.
JB Hi-Fi (ASX:JBH) 1 Year Stock Price Chart
The JB Hi-Fi share price chart is a good one to look at as it is an indicator of how consumer sales are doing. Unlike Harvey Norman (ASX:HVN) JB Hi-Fi does not have retail operations overseas which affect its share price so taking that into account, the chart above suggests to me that consumers are not as free with their cash as they were 12 months or so ago. This is one stock I will be keeping an eye on this year.
Lastly a quick look at the QBE share price versus the All Ords can be useful as quite often they move in alignment apart from more turbulent times when they appear to move out of alignment.
QBE Insurance Ltd versus ASX All Ordinaries Index 5 Year Chart
I don’t want to read too much into the chart above except to say that it indicates to me the Australian stock market appears poised for a correction rather than a rally. Certainly QBE as a company is dealing with some challenging issues and this has hit its stock price hard, but I reckon the QBE versus All Ords chart is still worth watching.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp