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Is the Australian stock market reaching a bottom?

May 25th, 2012 · Greg Atkinson · 15 Comments

For sometime I have been talking about the Australian stock market searching for a bottom of around 4000 for the ASX All Ordinaries & S&P/ASX 200. At of the close of markets yesterday, both indices were around that level, so could this mean the Australian stock market has reached a bottom?

In my view the answer is yes. I am not saying the market will not fall some more, but I doubt it will fall much more. I am not however expecting a strong rally off this level yet, but I do think it’s time for investors to look for some over-punished and under-valued ASX listed stocks.

Back in April I made the following comment regarding the state of the stock market:

“My view is that we have a market that is looking for a bottom rather than a top. I expect that bottom to be around 4000 or a touch below after which we could finally see a multi-year bull market take hold.”

Source: Stock charts review: BHP, RIO, GMI, GFF, S&P/ASX 200 Financials & Small Ordinaries Index

I have also mentioned before that the Australian stock market was unlikely to rally while the mining stocks were falling and although the mining stocks are still under pressure, I sense the major ones like BHP Billiton & Rio Tinto have the slowdown in China pretty much priced into them already.

The BHP Billiton stock price chart over the last year (shown below) clearly indicates that a lot of heat has been taken out of its share price.  This is largely due to the slowdown in China and because investors realise the mining boom is over for now.

BHP Billiton (ASX:BHP) 1 year stock price chart

bhp_1_year_chart_may_2012

BHP shares are trading now at around $32 and although they may slip back a little further my feeling is that the sell-off is nearing an end.  I don’t BHP shares to stage a major rally but if they don’t keep falling that will help support the ASX All Ords/ASX 200.

On the 8th May I suggested that the market was about to trend downwards and the chat below shows my reading of the tea leaves was correct for a change.  See: Are Australian stocks poised to trend lower?

ASX All Ordinaries Index 1 month candlestick chart

allords_1_month_candlestick_chart_may_2012

The market has fallen quicker however than I expected, but the candlestick chart above suggests to me that the major wave of selling might be coming to and end.  At some point investors are not willing to sell their stocks at such low prices and start looking for stocks to buy.  We are probably near that phase now.

If we look at a few charts of other stocks we can see a similar pattern.  Firstly let’s look at a defensive type share – Wesfarmers Limited.

Wesfarmers Limited (ASX:WES) 1 year candlestick chart

wes_1_month_candlestick_chart_may_2012

Wesfarmers (WES) stocks haven’t moved that much (as you expect with a defensive stock) but the chart above shows a support level has been reached and that the shares have been holding around that level.  In other words it’s another sign that investors are not in the mood for selling.

Newcrest Mining Limited (ASX:NCM) 1 year candlestick chart

ncm_1_month_candlestick_chart_may_2012

Shares in Newcrest Mining (NCM) tend to move around a bit as the outlook for gold changes and on the back of the performance of its mining operations.  I can’t see a bottom here although I guess the technical analysis traders may see one around $24. My only comment is that again I think the wave of selling may be close to being over.

Finally I will have a quick look at a financial stock since the All Ords & ASX 200 these days tend to follow the bankers & miners.

Macquarie Group (ASX:MQG) 1 year candlestick chart

mqg_1_month_candlestick_chart_may_2012

The Macquarie Group (MQG) stock price has fallen during May but once again we can see signs of a bottom forming.  Could the price of MQG shares fall further?  Of course, but a lot of bad news has been swirling around recently and my guess at this stage is that all this is priced into the stock already.

I am not suggesting yet that a bull market is about to take hold, however it does look like the market is settling around a bottom and I don’t expect the Australian stock market to fall much further from this point over the next month or so.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


15 responses so far ↓

  • 1 Greg Atkinson // May 28, 2012 at 11:28 am

    I don’t normally post information about actual stock trades in real time but today I did pick up a small parcel of IOOF Holdings Limited (ASX:IFL) shares at $5.53 each since I believe we are bouncing around the bottom of the market at the moment.

    This is not a recommendation to buy though. Remember I purchased Babcock & Brown shares during the GFC so let that be a warning to readers about my stock picking abilities 🙂

  • 2 Lachlan // May 28, 2012 at 4:40 pm

    Crumbs Greg if your not licking a few wounds your not in the market I guess. I’m just looking the other way at the moment

  • 3 Greg Atkinson // May 30, 2012 at 7:58 am

    Lachlan it looks like we might see the market head higher because someone in China mentioned the word ‘stimulus’. But I doubt this will be the start of any long term bullish run just yet.

  • 4 Greg Atkinson // May 30, 2012 at 9:59 am

    Well now the markets are heading lower because it seems the large scale stimulus package to give the Chinese economy a kick was just a rumour.

    “The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua said yesterday in the seventh paragraph of an article on economic policy, without attributing the information. “Current efforts for stabilizing growth will not repeat the old way of three years ago.” In 2008, policy makers unveiled a fiscal stimulus of 4 trillion yuan ($586 billion at the time).

    Source: China Has No Plan for Large-Scale Stimulus (Bloomberg)

  • 5 Lachlan // May 30, 2012 at 8:35 pm

    Greg if I were a day trader I would say….. as of now I see a fair case for further short term downside. The action since over recent days has been to weak for mine. The DXY could go to a resistance area at 88 approx. The ASX200 could drop another step or two with next closing targets around 3990, 3800 and 3600, and the AUDUSD could dip into the general support area between 94 and 96 which it has not closed in yet.
    But since day trading is not my game now days I choose to buy some individual stocks on their merits and hold long term. Some stocks I look at show signs of bottoms on high volumes and most are not so clear maybe setting up for another leg down.
    http://www.perthnow.com.au/business/local-business/riding-the-monadelphous-contracts-wave/story-e6frg2s3-1226374869831
    I have a feeling that may end in tears. Anyhow MND were a good stock when I paper traded them in late 1990’s (they were around back then..and I should have made a fortune). Maybe they still are good. Maybe they would be a good buy on further weakness towards $17 if they go there. I think you have them yourself?

    All in all Greg I think the unclear trend in this market is going to cause troubles but if your happy with your trade why sell anyhow. As an inflationist I can’t see protracted downside in good shares at least. I would not invest so much that I would need to sell in a liquidity crunch either personal or market in nature. I’ll change my name to Macro Man I guess. I doubt any of us will complain either if we can buy quality blue chips dirt cheap down the track.

  • 6 BP // May 30, 2012 at 10:38 pm

    Isn’t it a little remarkable that we disbelieve the Chinese when they tell us how well their economy is doing… then believe them when they tell us they’re _not_ going to stimulate?

    Is it possible the Chinese are, in fact, players in a game where they can almost instantly deflate global sharemarkets, and/or inflate them at will?

    Lachlan: “I doubt any of us will complain either if we can buy quality blue chips dirt cheap down the track.” Or switch from Super cash to Super ASX if/when the market really bottoms… .
    Or buy quality _gold_ chips if PMs sink?

  • 7 Greg Atkinson // May 31, 2012 at 7:01 am

    Lachlan I suspect some clever day traders and short sellers are doing well from the up/down action lately especially from some of the resources stocks which are moving around quite a lot.

    Last night the markets in Europe & the U.S. fell again so it seems like the All Ords/ASX 200 will get another nudge downwards today. However I think we are bouncing around the bottom in terms of the longer term outlook so this gets me looking at stocks which seem to be oversold.

    This time of year tends to put some selling pressure on stocks are many investors start to clean up their portfolio for the end of financial year. For sure it’s risky to be buying stocks getting hammered so people need to seek professional advice and do their own research of course. I am also not suggesting its time to open your wallet and go on a buying spree that’s for sure!

  • 8 Lachlan // May 31, 2012 at 8:19 am

    BP i am sure much of the doom one day, sunshine the next (risk on, risk off) is just another tool for maintaining a broad transition in the global markets. China is not hiding the fact they have a command economy (implying emphasis on central control). There is otherwise a background trend and some simple fundamentals. I will stick with them. But like Greg I think its prudent not to go on the spree either rather I can add a little on dips. I am happy the blue chips are coming down from the sky now so I can add some.

    Greg to day trade there is a very high investment in time which don’t care for. Best day trade I have is bulk buying good discounts at the super market. Never lost on a trade yet 🙂

  • 9 BP // May 31, 2012 at 10:29 am

    Lachlan, if we had the power to manipulate global markets with few repercussions, I’m sure we’d be tempted to experiment in the same way I suspect China does… particularly with (but not limited to) currencies.

    Greg: “clever day traders” (?) I suspect that’s an oxymoron.
    Substitute ‘lucky’ for ‘clever’ and we may be on-the-money.
    If these CDTs had the power to _influence_ global events, as we all know the Chinese cleverly can, I’d accept the adjective.

    Comment from My Old Man, around 1974:
    “Devilishly tricky, these Chinese…”

  • 10 Lachlan // May 31, 2012 at 4:56 pm

    BP I think it is somewhat a game between the money on all sides with the rule book being the eleventh commandment.

    I reckon the US gold price could find itself in an area around 1450 too since it is showing little inclination to shoot higher. AUS Au should hold above its support around 1550 as the AUD comes off a little more. I expect a decent move on the usdx, its already gone up some last night.

  • 11 BP // May 31, 2012 at 6:34 pm

    Lachlan: “BP I think it is somewhat a game between the money on all sides with the rule book being the eleventh commandment.”

    You’re not wrong, Lachlan! 😀

  • 12 Lachlan // May 31, 2012 at 7:33 pm

    I believe we will hit the 3990 target and even money @ 3800. If we get to 3600 any time I would be hoping the gold shares will have decorrelated with the market by then and correlated with the flight to safety trade, and with gold itself and…well, bonds(haa!). This has been the trend previously although anything can happen of course.

  • 13 Greg Atkinson // Jun 5, 2012 at 10:18 am

    This week we should find out if last Friday was the market bottom or if the market will slip well below 4000. My view is that on Friday we hit the bottom and with any luck the market should rally clear of that level. Hopefully it won’t take that much effort for the All Ords/ASX 200 both to get up near 4200 again early in the new financial year.

  • 14 Senator13 // Jun 16, 2012 at 2:51 pm

    Could be a little “Sell in May and go away” happening at the moment, Greg?

    I suspect things will keep around current levels (give or take 100pts) as the Europe situation has a little way to play out and don’t see much of a turn around any time soon.

    We might just be in for another winter of sideways movement.

  • 15 Greg Atkinson // Jun 18, 2012 at 1:42 pm

    Senator we also have to factor in the U.S election which could make things interesting. In addition we still don’t have a clear view of the slowdown in China expect that the economic growth there is slowing.

    But with any luck the Eurozone will limp to the end of the year in one piece, the U.S economy will avoid a recession & the emerging economies will allow some nations to slowly trade themselves towards growth again.

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