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
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
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.”
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
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 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.”
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.