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For the Australian stock market, moving sideways may be a good outcome.

June 10th, 2013 · Greg Atkinson · 12 Comments

Over the last few years I have written on several occasions about how the Australian stock market has essentially moved sideways and how I expected both the All Ordinaries Index and ASX S&P/ASX 200 to both bounce around between 4800 – 5200.  Even when the market bulls got excited recently as the 5200 level was briefly breached, I maintained my long held view that the market is trading in a recession like zone.

For some years I have also be talking about the end of the commodities boom, super-cycle or what ever term is thrown around to describe a cyclical peak in an area of the economy or investment sector.  Now the reality that commodities prices can fall has dawned upon the RBA, Treasury, Wayne Swan and much of the mainstream media it seems to have spooked many investors and the All Ords & ASX 200 are now both a touch below 4800.

But I don’t expect a market crash or for the All Ords/ASX 200 to breach the next support level at 4400 and if it does, it will present investors with a blue-chip stock buying opportunity.

True to form most mainstream finance media sites and assorted business journalists/commentators will move from bear to bull mode and back again in the course of just a few weeks. One week they are talking about soaring Aussie stocks and as the market turns, we see headlines about investors losing billions.

But let’s look at the facts and start off with the 10 year chart for the ASX All Ordinaries Index (XAO)

ASX All Ordinaries Index 10 year chart – June 2013

asx_all_ords_10_year_chart_june_2013

I have marked two lines on the chart. The top blue line shows that the market is around a level where it paused during the GFC before a short rise then falling off a cliff.  I have talked about this level before as being around the zone where the market should be trading. (i.e. when investors are not in panic mode)

The second red line is drawn from where the market bounced back to after being oversold to where it is today. These lines show levels which are not that far apart and although the market has dipped way below these levels it has since 2009, always edged back up there again.

But perhaps you are thinking I am using hindsight when talking about at which levels the market would bounce around? If so I draw your attention to a chart I posted in August 2009.

S&P/ASX 200 10 Year Technical Chart – August 2009

asx-200-candlestick-chart-2-aug-09

Now here is what I wrote back in 2009 directly under this chart:

“On this chart I have drawn a simple line that shows the overall trend between 2003 and late 2007. You can see how this trend became much steeper after the correction in 2006 (at which time many people were calling the top of the market) and this point is also around the 5000 level on the ASX 200 Index.

I have once again drawn a line at the 5000 level and also added a second line at around the 4800 as this is where I believe the Australian stock market in a recession should be trading at or around.  So I assume at this stage that it should be relatively easy for the Australian stock market to hit 4800, but with the Australian economy as it is now it will be difficult for stocks to rally much past 5000 for 2009.”

From: A technical look at the S&P/ASX 200 Index (August 09)

Now what actually happened? Well let’s have a look at a chart near at the end of 2009.

ASX All Ords 2 year chart with market bottom – December 09

asx-all-ords-2-year-chart-dec-09

At the end of 2009 the ASX All Ords finished pretty close to 4800 and as I expected, it never did rally past 5000.

Back then one of my observations was this:

”The stock market is telling us that many Australian companies are still dealing with the fallout from the global financial crisis. Business is not back to normal, the economy has not fully recovered and with so much economic stimulus money in circulation across the world it is hard to really know where we are at the moment.”

From: The Australian stock market indicates all is not well

From 2009 I have written about these two themes or trends. The first is that the market would trade around 5000 while the economy struggled and secondly that in fact the economy was struggling and that the mining boom was simply acting as a smoke screen.

So here we are now in June 2013. Commodities prices have fallen, gold prices have fallen, the EU is still a mess and the U.S. stock market is on a stimulus high while the underlying U.S. economy is still weak. In Japan the Nikkei has done well on the back of Abenomics but just how the Japanese economy will fare over the next year or so is unclear.

This leaves China and since I am a China bear this logically means I am also cautious about the outlook for commodities like coal and iron ore. I am of course not the only person bearish about the outlook for the Chinese economy and there are signs this bearish view is justified. Gordon G. Chang on Forbes for example wrote recently:

“Analysts are busy revising their China 2013 growth estimates downwards after Beijing, ahead of a three-day holiday, released May numbers this weekend.

Trade figures, announced yesterday, shocked analysts. Exports increased only 1.0% year-on-year, against consensus estimates of 7.4% growth.

Everyone expected the May number to be lower than April’s 14.7% figure, which had been obviously inflated by fake invoicing. Nonetheless, May also came in below estimates of true April export growth, which ranged from 4.0% to 5.7%.

Evident weakness elsewhere means that China will not get a boost from abroad this year. That’s a problem because the Chinese economy is also showing signs of weakness. The country’s imports, significantly, fell 0.3% last month, suggesting faltering domestic demand. Analysts had expected a 6.6% gain.”

Source: China’s May Numbers Disappoint, No Remedies In Sight

Taking all the above into account I don’t see much chance of the Australian stock market staging a major rally past 5200 over the last half of this year, but a nasty set of numbers out of China could certainly send it down towards 4400.  Therefore I reckon a good (and likely) outcome for the medium term would be for the Australian stock market to bounce along sideways….again.

That’s probably not what many people want to hear and it doesn’t lend itself well to a spectacular headlines, but I just call it as I see it.

Greg Atkinson is the editor of Shareswatch Australia and Managing Director of Ohori Capital. He currently works & resides in Japan. He can be followed on twitter via


12 responses so far ↓

  • 1 Colin Rae // Jun 10, 2013 at 3:52 pm

    Greg,

    I’m with you on the sideways prediction. I hope for a December break-out, maybe 5400.

    I’m sure other commentary sites will fill the void with a great many bulls v. bears and fundamentals v. technicals talking heads for the next few months. After a while, the seasoned reporters will begin to talk about the only thing that’s moving anywhere: VIX (volatility).

    I find it refreshing that, unlike other sites, you don’t feel the need vomit noise into an already crowded space. Actual news comes along relatively infrequently. Spewing something out daily serves mainly to inure readers to drivel and to make the real news less noticeable when it comes.

    Personally, I find the times when the market moves sideways most rewarding as an investor. I’m no trader. I love just sitting on my investments, occasionally adding to my position, with little concern for share price movements. Oh, and I really like my dividend yields in the 5 to 7% range. This allows me to be happy regardless of share price. And to sleep well at night.

    My plan is to get rich slowly and sleep well all along the way.

  • 2 Greg Atkinson // Jun 10, 2013 at 4:20 pm

    Cheers Colin. I much prefer the market to move sideways then for it to soar up and then come crashing back down again. At the moment we have time to sit back and put some longer term investment strategies/positions in place which hopefully will do well in the years ahead.

    You may be right about a breakout around December. There probably (hopefully) will be a new government in Canberra and so that should give the market a little lift I imagine. Also although I am bearish on China I feel that the major mining stocks have already been sold down quite a bit and are probably getting down to levels where they will find support.

    Yes some of the dividends yields are pretty good at the moment which would be pleasing for those building an income focused portfolio.

  • 3 Colin Rae // Jun 11, 2013 at 6:53 pm

    China is gonna go way down from here (temporarily). But Australia will be just fine.

    My take on China is based on a really crude model of the global economy. The model goes like this: Something happens in Europe, add a time delay, see it affect China. I think of the global economy in terms of sound waves bouncing around the world, refracting, adding, cancelling, amplifying, dissipating, all in a complex network of new sounds and echoes. For me, timing is too hard to predict, but direction over 2 to 3 years is easy. China has got 1/3 of the way through her indigestion related to the “great recession”.

    Of course, if China’s materials demand and growth slows further, we could see an additional 18-month slide in material prices (sorry to the gold bulls, but there just ain’t enough inflation to counter this trend right now). Unusually for such a context, I fully anticipate growing company profits in the NAFTA and here. In a few years’ time companies like Apple will still be sitting on their *huge* cash reserves, as if Basel III somehow applied to them. Those companies who still run debt on their balance sheets, will keep on reducing that debt over the same time period.

    Australia is in the enviable position of being in her Golden Age. Basically, the world could fall apart around us and we’d be just fine. However we do it, we need to stick with China through these times when the numbers disappoint, quarter after quarter. It’s not just for strategic defence reasons I say this, but there is something enduring about a friendship that’s been tested and found to be true. So, here’s to 140 years of good relations with China – cheers!

  • 4 Biker // Jun 11, 2013 at 11:50 pm

    “…there just ain’t enough inflation to counter this trend right now…”

    Right. And, as you say, it’s “…all in a complex network of new sounds and echoes…”

    I find myself reassessing what ‘contrarian’ really means, given that increasing complexity.

  • 5 Greg Atkinson // Jun 12, 2013 at 9:48 am

    Colin the issue facing the Australian economy is that it is geared up in boom mode & the shift to normal mode might be a little painful. Certainly the demand for commodities will not slump but the last few years of bumper prices are over and there will be many high cost mining operations and planned projects that will be cut.

    A while back I also wrote about supply coming online outside Australia for such commodities as coal, iron ore, copper and uranium and this extra supply is going to keep a lid on prices for a while. (apart from uranium perhaps)

    I don’t quite share your optimism about Australia being able to withstand a global collapse though. If the Chinese economy does keep slowing things might get a little tough down-under for a few years.

  • 6 Biker // Jun 12, 2013 at 10:49 am

    My perception is that China is itself applying the brakes in an effort to ensure a softer landing than its critics foresee. Yes, the shift to a more domestic focus will be difficult, given income levels of the majority of consumers.

    Like you, I have mixed feelings about the demise of manufacturing in Australia, Colin. While we attempt to find (and buy) high-quality Australian-made goods whenever we can, there’s minimal incentive given their cost, (often) high failure rate, and, frequently, minimal warranty periods. I could bore us all with examples (mainly related to water supply equipment) but automotive supplies also fit the bill… . We’ve resorted to _making_ some of our own equipment recently, more than halving the cost.

    Your echo complexity analogy seems to help explain the current global situation. New technologies probably mean less time waiting to hear those echoes… .

  • 7 Greg Atkinson // Jun 12, 2013 at 11:06 am

    Biker the slowdown in exports to Europe and of inward investment by Japanese firms are two major examples where the brakes have been externally applied.

    Also if you look at the amount of money being spent on infrastructure in China I would say the foot is probably nowhere near the brakes but rather a gear change is in progress.

    Is the rebalancing of the Chinese economy all part of a master plan or a reaction to global economic developments? Probably a bit of both I suspect.

    Anyway I see you have moved on from the days when you were critical if a slowdown in China was mentioned to now accepting it is happening but is under control. Sounds like a view right of the Treasury.

  • 8 Biker // Jun 12, 2013 at 12:54 pm

    “I see you have moved on from the days when you were critical if a slowdown in China was mentioned…”

    Only a fool and a signpost never change their mind, Greg. 🙂 I’ve never, ever proposed The Major China Crash some here foresee, nor do I expect (or quite desperately need) that D & G outcome.

    My views regarding China haven’t cost me a cent (in cash or on paper.) Like Colin, I see the Chinese / Australian relationship as highly productive.

    I also share Colin’s view that “Australia will be just fine…” but I’ll most certainly remain a value investor if a(ny) temporary opportunity presents… .

  • 9 Greg Atkinson // Jun 12, 2013 at 1:54 pm

    Hard to be quite sure what is happening underneath the surface in China. Much of the official data is “interesting” to say the least & the whole shadow banking sector appears to be one area where there are more unknowns than knowns.

    Maybe the great balancing act in China will work…over the longer term it probably will, but command economies worry me.

    Anyway I don’t know enough to make crash predictions, but what I will say is that I tend to agree more with Jim Chanos for now than with the China bulls.

  • 10 Biker // Jun 12, 2013 at 3:02 pm

    Yes, I discerned a certain contrarian bias in the list of experts you listed, Greg.

    That’s not a criticism. You may recall that we benefitted greatly from DRA’s warnings about an impending sharemarket crash, moved to cash, then shifted cash back into ASX at the bottom.

    This stuff all needs sifting.

    One of the chief values of your site is that few are afraid to point out a(ny) flaw(s) in a(ny) proposal ‘floated’ online. I expected to read some negatives in response to our sons’ investment strategies. Factored into the picture, they assist us to make better decisions… .

  • 11 stock market trading // Jul 3, 2013 at 7:10 pm

    With the RBA holding the cash rate for another month, the sideways market is surely doing to stick. China would be as mentioned one of the biggest influence.

  • 12 Biker // Jul 3, 2013 at 11:16 pm

    W-e-l-l, ya never know… .

    It really doesn’t matter all that much, if you’ve given y’self the flexibility to take advantage of really chaotic times. Mine dew, if you’re committed to hold really poor investments long-term, you don’t have a great deal of capacity, do you? You have zero liquidity… .

    Sideways or any other position, you’re up-the-creek…

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