So far in 2009 the Australian stock market has basically moved sideways with little movement that would suggest that the 4000 level will soon be breached. However this might actually be a positive sign and could signal that finally a bottom in the stock market is forming.
Trying to predict where the stock market will peak or bottom is risky, and I already have egg on my face from suggesting the market had bottomed last year at around 4800. But life goes on, and as an investor I need to make some assumptions and forecasts from time to time so that portfolio decisions can be made. Therefore it is time once again to look at the charts and see if they may indicate if this bear market is coming to an end.
ASX All Ordinaries 2 Year Chart (February 09)
In 2008 we saw a stock market bottom in July/August (underlined on the chart above) and I was fairly convinced at that time that stocks would slowly recover and the end of the bear market was approaching. But then the Lehmann Brothers failure came along in September and since that time stock markets around the world have continued to fall. Not even the election of Barack Obama was able to turn the tide, although we did see the start of a few rallies in October and November but they quickly faded.
So here we are now in February 2009, another stock market bottom has formed (see chart) and therefore it is time to wonder once again if this is the “bottom” and if we might see a bull market again. Or is this new stock market bottom just a pause before stock markets around the world tumble downwards once more. Of course we cannot know with any certainty which way the market will go so let’s look at some arguments for and against a stock market recovery and see if we can get a “feel” for what might happen over the next few weeks.
The case for a stock market recovery.
- It cannot get any worse. There is now so much bad news out there that most stock market investors have already sold out.
- Most of the margin calls have now been dealt with. People who took margin loans to invest in stocks during the last few years have already been hit hard (wiped out) and most have probably sold their holdings.
- Stock prices are now so low that savvy buyers will be actively snapping up bargains. This activity should support the market at these levels and help boost stock prices this year.
- Eventually the bad news will start to subside and positive news will emerge. Over time therefore investors will start to creep back in into the market and the next bull market will start to take shape.
- Low interest rates will entice people back into stocks with good yields. This will not only support the market at current levels but help drive the overall market upwards.
The case against a stock market recovery.
- We ain’t seen nothing yet. There are more big firms that will fail and another wave of panic selling will send the market tumbling.
- Stock markets around the world have only stopped falling because investors are hoping “Obama Magic” will save the day. Once this hope vanishes then stocks will continue on their merry way down to new lows.
- The credit bubble has not been fully deflated yet. There is still more pain to be felt.
- Forget about the charts and historical analysis, we are into a new era where stocks will under perform cash and bonds for years.
Frankly I see evidence to support both cases and at the moment I am simply doing nothing. Over the next few weeks we should have a better idea of where the stock market may be heading and if it is still moving sideways I will be tempted to pick up a few beaten down blue chip stocks. I am not however expecting any sustained rally in the short term, but rather just hoping (like many others) that things simply do not get much worse!