Has the stock market correction gone too far?
May 24th, 2010 · Greg Atkinson · 51 Comments
For more than a week investors have been watching stock markets across the globe drop sharply as concerns over debt in Europe have raised doubts in people’s minds that a global economy recovery is really taking shape. But is the current correction really that bad, and is there a chance that stocks have fallen too far, too quickly?
Back on April 13th when the ASX All Ordinaries was around 5000 I wrote:
“….why do I think the recent market rally means a correction is on the way? Well simply because that is normally what happens. In my opinion, if you expect stock market corrections to come along then they become less of a shock when they finally do arrive.”
So here we are and the market has indeed corrected and fallen past the 4500 level, which to be honest, I thought it would bounce off.
But on reflection it seems reasonable that the ASX All Ordinaries Index has fallen as far as it has. Not only is the European Union a bit of an economic mess at the moment, but we also have tensions between South and North Korea to deal with, the mining sector in Australia in open revolt against the Government’s new mining tax and still plenty to worry about in regards to the U.S economy.
With so much bad news around it is no surprise that stocks have slumped so much. But is the correction really that bad? Well let’s have a look at a few charts and see what they might be telling us.
ASX All Ordinaries Index 6 Month Candlestick Chart
It is pretty clear from this chart that around the 4500 level is an area of strong support, and yet this time instead of the All Ords bouncing off this level it fell through it. Why?
In my opinion we can thank Ken Henry, Wayne Swan and Kevin Rudd for this because the reason the market did not hold at around 4500, was due the mining stocks being heavily sold off. A major factor behind this sell off was the infamous Resources Super Profits Tax. (RSPT)
The RSPT is a shocker of a tax and will be watered down because Rudd doesn’t have the backbone to stand firm with an election coming up. If he can back-flip on the ETS then he easily back-flip on an increasingly unpopular tax, unless of course this is an even greater moral challenge than global warming!
Therefore I see no reason why stocks won’t get back up to 4500 and if we don’t get any other market shocks, I reckon this will happen in a matter of days rather than weeks.
But I would imagine many people would say that blaming the RSPT for stocks falling below 4500 is nonsense. So in my defence I offer the chart below to support my view.
ASX All Ords (XAO) versus Dow Jones (DJIA) 1 Month Chart
Here we can see how the Australian stock market has moved compared to the U.S market (Dow Jones Industrial Average) during the current correction and guess what? Our market has fallen further than the U.S stock market.
How can that be when our economy is so well managed and according to Rudd and Co., the proposed new mining tax has had no impact on the Australian stock market or mining stocks?
Quite obviously Rudd, Swan & Henry have no idea how money moves around the markets and have blundered their way into mess that has shaken international investor’s confidence in Australia as a stable investment destination.
Unless the tax is dropped or heavily modified soon, Australia’s investment reputation will be damaged permanently.
At this stage I believe that the stock market will recover over the next few months and once again move towards 5000. (unless that North Korean nut-case does something again) Yes the stock market has had a nasty week or so, but if you take away the impact of the RSPT then it is a pretty normal looking correction as the chart below illustrates
ASX All Ordinaries Closing Levels Charts (over 2 years)
So the current stock market slump is nasty that is for sure, but when we look at the big picture over the last two years it is hardly something to panic about…. for now anyway.
But please remember, I am not suggesting that anyone act on my view of how the markets are moving or will move. I have no ability to see into the future just like everyone else. Please as always, do your own research, seek other opinions and obtain professional advice as needed before making any investment decisions!