Oil, gold, the Dow Jones and the ASX All Ordinaries.
July 29th, 2010 · Greg Atkinson · 8 Comments
Despite a fairly nasty stock market correction over the last few weeks the Australian market did not fall anywhere near the lows of March 2009 and as I have been saying for nearly a year, we won’t see those levels again for some time, if ever. So now that the market correction appears to be over, what are stocks, oil and gold prices likely to do during the next few months.
Since we are in the midst of an election campaign in Australia I will spare readers any spin and keep my analysis of the market very simple and straightforward. This may leave me vulnerable to some criticism but sometimes I believe that we can all tend to over-analyse stock market related charts and miss the big picture view.
Firstly lets have a look at what gold and oil prices have been doing since they are both very important market indicators. Gold prices help us get an insight into how fearful investors are and oil prices help us understand global economic activity so they are both worth watching closely.
ASX ETF:GOLD versus AMEX Oil & Gas Index 5 year chart
You don’t need to be a market expert to spot how oil/gas and gold prices went in opposite directions after the collapse of Lehman Brothers in late 2008. Since that time gold prices have headed up in sharp bursts as investors become more fearful and then when people realise the global economy is not collapsing, gold prices ease down again but have still stayed quite high.
I am again using the ASX Listed ETF (Exchange Traded Fund) GOLD to watch gold prices since it seems pretty pointless to me for Australian investors to track gold prices in U.S Dollars and then compare this to how ASX stocks are performing.
In regards to oil & gas prices we can see how AMEX Oil and Gas Index (xoi) plunged in late 2008, bottomed out in early 2009 and has since been basically trading sideways for a year with the occasional rally and correction along the way. This suggests to me that on a global scale, economic activity is still fairly sluggish.
In a nutshell my medium term view is that oil/gas prices are too low and gold is trading much higher than it should be. I know many people say gold will reach $2000 USD an ounce within the next years but I reckon that is complete nonsense. As I said earlier this year I believe gold prices are in a bubble and I feel fairly confident gold prices will fall by more than 10-15% over the next 12 months.
The next chart which I think is interesting to look at is the Australian ASX All Ordinaries Index versus the U.S Dow Jones Index. Why? Because despite the constant focus on the Chinese economy by most market commentators in Australia the fact is that the U.S economy is still the world biggest by a long way.
All Ordinaries Index versus the U.S Dow Jones Index 3 year chart.
It is pretty obvious that what happens on Wall Street has an impact on our stock market and as we can see the close correlation between the ASX All Ords (XAO) and Dow Jones (DJIA) remains very much intact.
Remember that the U.S is in the midst of a major recession and yet over the last 3 years the Dow Jones and ASX All Ords have pretty much traded in the same range.
This is a reminder of how our stock market is impacted by the flow of money across the globe. If the major global investment funds are not buying Australian stocks than our market will struggle to rally.
One reason why the Resources Super Profit Tax (RSPT) dragged Australian stock market down was because many major global fund managers were worried about the stability of the investment environment in Australia.
So if U.S stocks can rally over the next few months then Australian stocks will follow. Personally I think the stock market will have a good third quarter as signs that the U.S economy is gradually recovering become much clearer. If the mining tax debacle in Australia can also be resolved soon then our market will bet an extra boost upwards.
Now let’s have a look at the big picture and see what the All Ordinaries has been doing over the last 5 years.
ASX All Ordinaries (XAO) 5 year chart
On this chart I have marked with two red lines the range in which I expected the All Ords to trade within as I outlined about a year ago. What has actually happened is that the market has been moving over the last 6-8 months in a range just lower than I anticipated, but all-in-all my call was pretty accurate.
I have also marked on the chart in green the 5500 level and the reason for this is because in September 2009, I expected that by around September 2010 the ASX All Ords would be near 5500. (see: Australian stocks, house prices and the economy in September 2010
I am not hiding from that 5500 call although at this stage my chances of being correct appear very slim. But the ASX All Ords could easily get up to 5000 again over the next few weeks and I actually expect that is where the market will head in August.
Finally a quick look at the candlestick chart for the All Ords over the last 12 months will show us how the market has moved over the shorter term.
All Ordinaries 1 year candlestick chart
From the low of March 2009 the stock market rallied up above 4800 in October but since then has only briefly held above 5000 and in recent months it has struggled to get above 4500.
The 5000 level looks to me as where the stock market should be at and so I am expecting a rally over the new few weeks or months to take us back up to that level. I also think that below 4600-4500 looks like the area where the market appears to be oversold.
So at this stage my simple view of the investment outlook is that oil prices are set to rise, gold is set to fall and stocks will probably rally in Q3. But the chances are I could be wrong with all three calls so please don’t base any investment decisions on my ramblings!Search terms: All ords correlation dow, australian correlation dow, correlation dow jones asx, corrolation between asx and dow, web site showing dj all ords oil gold