The Australian stock market has had me baffled for the last couples of months as have the global markets in general. Despite the global economy still showing signs of weakness and the Chinese economy clearly slowing, the ASX All Ordinaries Index & ASX 200 Index both finished yesterday above 5500. So is the Australian market poised to head towards the 6000 level or is the old saying “sell in May then go away” going to ring true this year?
In an attempt to get a feel for how the market is moving I am going to focus on charts of the SPDR S&P/ASX 200 Fund (ASX:STW) for two major reasons. The first is that it tracks fairly closely the movement of the ASX 200 Index but more importantly, it is something that can actually be invested in. In a way, the SPDR S&P/ASX 200 Fund I believe can be used as bit of a confidence indicator as I would expect the gap between what it is trading at and the actual the level of the ASX 200, to be fairly narrow if the market is bullish.
First up let’s look at the one year view of the STW candlestick chart.
SPDR S&P/ASX 200 Fund (STW) 1 Year Candlestick Chart
Looking at this chart I see three major stages or phases. The first stage was a correction from May 2013 to near the end of June 2013, the second was the rally that took hold in July 2013 which took the SPDR S&P/ASX 200 Fund (STW) well past 5000 & then the third stage (which we are in now) has been a bumpy ride sideways.
My view of the chart above is that it suggests that STW is set for a correction and that May might turn out to be when this correction takes hold. However one could also argue that during the last few weeks the market has rallied quite strongly and that this in turn suggests further movement to the upside is likely. Both views appear supported by the 1 year chart above so I am prepared to be proved wrong during the next few weeks.
SPDR S&P/ASX 200 Fund (STW) 6 Month Candlestick Chart
It is important to remember when looking at stock market charts that the view can change quite considerably depending on the time period you look at and the 6 month chart of the SPDR S&P/ASX 200 Fund is a good example of this.
If I were to focus on this 6 month chart alone then I would most likely be in a more bullish mood because quite obviously the trend since early February has been upwards. However a quick glance back up to the 1 year chart puts this movement upwards into perspective and shows it has been more of a bounce after a correction, rather than what I would consider a serious breakout towards a much higher level.
If we change the time-scale to 3 months then once again we get a slightly different view of how the SPDR S&P/ASX 200 Fund has been moving.
SPDR S&P/ASX 200 Fund (STW) 3 Month Candlestick Chart
This 3 month candlestick chart focuses on how the SPDR S&P/ASX 200 Fund has drifted sideways since late February and it’s a good way to filter all the noise churned out by the finance media and analysts. Despite excitable headlines and analysts switching from bulls to bears and back again, the reality is that when it comes to money actually heading into the market then things have been a bit more stable then we might have expected.
Looking at this chart alone does not suggest any correction is brewing, but rather supports the view that the SPDR S&P/ASX 200 Fund is poised to head higher and perhaps that’s right if we think of just the next few days ahead and not weeks.
Now let’s have a look at the action over just the last month.
SPDR S&P/ASX 200 Fund (STW) 1 Month Candlestick Chart
I’m not a short term trader nor am I very good at spotting short term trends, but I just wanted to post this chart to highlight once again that if we change the time-scale then we can obtain a different view regarding how a stock or the market has moved.
In this case the chart suggests a clear trend upwards but if we glance over the previous charts then this shorter term movement is put into perspective.
Finally let’s have a look at the SPDR S&P/ASX 200 Fund charted against the S&P/ASX 200 Index.
SPDR S&P/ASX 200 Fund (STW) & S&P/ASX 200 Index
This charts shows the correlation between the SPDR S&P/ASX 200 Fund (STW) and the S&P/ASX 200 Index (XJO) which we would expect to be fairly close since the Fund was set-up to track the movement of the ASX 200 Index. (thereby giving investors the chance to effectively invest in the Index)
But a gap does open up between the Index and the Fund at times and it is this gap or margin that interests me. My theory is that we can look at this gap we can get a feel for how confident investors are that the market will keep rising.
The same logic may be applicable during times the market is falling in that if investors feel a major correction is taking hold, then the fund may trade quite a bit lower than the actual level of the ASX 200 Index itself.
I am not suggesting this is a perfect or accurate indicator, but it is one that I reckon is worth keeping an eye on.
At the moment the gap or margin between the Fund (STW) & the Index (XJO) is relatively small so this suggests to me that money is flowing into the fund because further gains are expected at least over the short term.
At this stage I would not be surprised if the Australian stock market moved higher in the days ahead but I would be very surprised if it held onto these gains over the next couple of months. I base this view not just on the charts above, but on such things as the outlook for commodities prices, a slowing Chinese economy and an upcoming federal budget that will probably cut government spending.
In any case, the month of May is going to be very interesting indeed as it generally is!
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp