Back in October last year I wrote about the relationship I saw between the QBE stock price and the ASX All Ordinaries Index. At that time I suggested that the relationship had broken down as a result of the chaos caused by the failure of Lehman Brothers in September 2008, so now around 6 months later it seems a good time to have a look again at the relationship between the QBE and All Ordinaries stock price charts.
Over the last week or so the Australian stock market has crawled back from the depths reached in early March and has cracked through the 3500 level. As I write today another rally is on after a strong lead from Wall Street but the question is of course, has this rally got legs? Or even if it does not have legs, does it still tell us anything?
In my blog from last year: QBE and the All Ordinaries – do the charts tell us something? I suggested that there were two possible paths forward for the relationship between the QBE share price and the All Ordinaries Index namely:
1. The relationship between the QBE stock price and the All Ordinaries Index is restored.
2. The relationship between the QBE stock price and the All Ordinaries is broken forever.
The first path would suggest to me that although the Lehman Brothers failure was indeed a major shock to the financial system, that over time the global financial system would work though the chaos. At the time of writing the blog article in October 2008 I indicated this is what I expected to happen.
The second path would indicate that we had truly entered an era where the markets were going to fundamentally work in a different way. Instead of being a just a major shock to the financial system, the Lehman Brothers failure would turn out to be the beginning of the end of the financial system as we currently know it.
So what do the charts suggest? Well let us look again at the 1 year chart.
QBE vs ASX All Ordinaries – 1 Year Chart (March 2009)
I have drawn some very rough trend lines on the chart merely to highlight how the relationship between QBE and the All Ords broke down completely after September 2008 and as you can see they clearly moved in opposite directions until just recently.
The turning point seems to have taken place earlier this month when we touched new lows and it seems now that not only has the wider market rallied, but the relationship between the QBE stock price and the ASX All Ordinaries has also come back into sync. The bottom part of the chart shows momentum and this highlights the recent rally in the QBE share price. (and flow of money back into the stock)
At this point I would like to remind readers that the relationship between QBE and the All Ords charts is a theory based on my observations and analysis…I could be wrong. Also I own shares in QBE and therefore I could be simply too optimistic and finding signs of life in places where it does not exist.
Having said that, I am starting to feel that the stock market is beginning to move in a more logical manner where stocks are judged on their individual merits and not merely sold off on rumours or by panicked sellers. This does not mean that there will not be further falls, but I am becoming more confident that we may be witnessing a bottom of this bear market and that within 2009 we may even see the next bull market take root.
The run up until the end of the financial year will be interesting, but if we are still above the 3500 level on the ASX All Ords/ASX 200 in July, then I think we should be able to look back and say the worst part of the stock market rout is behind us.
As for when the Australian economy will recover, well that is another matter. But if we follow the conventional wisdom that stocks start to recover 9 months or so before the economy, then we are looking for a turnaround in the Australian economy in late 2009 or early 2010.