Over the last couple of weeks the Australian stock market has been on the rise with the ASX All Ordinaries & S&P/ASX 200 heading towards 5500. As a result there is now much talk about a bull market and of investors chasing yield which for me, is simply background noise. What I am really interested in is trying to understand if the market is set to keep rising or if it’s time to adopt a defensive strategy for the time being.
So that I can try and grasp what “mood” the stock market and investors are in I will start by reviewing some candlestick or technical charts. A good place to start is the ASX 200 and review what is has been doing over the last six months.
S&P/ASX 200 Index 6 Month Candlestick Chart
There are two main aspects of this chart that interest me. Firstly it appears as if the ASX 200 has almost settled into a new trading range between 5000-5400 and secondly, the rallies have been rather quick while the declines more gradual. (most often it is the other way around)
It looks to me as if the market is about to head down again and if the pattern were to repeat itself, then the ASX 200 would once again push up towards 5500 once the next correction was finished. Some investors may use that pattern as the basis for a trading strategy and be buying on the dips and then selling when the market was about to turn down again. However my short term market reading skills are not very good so I am content at this stage to sit back and watch the action.
To explain the reasons for my caution let’s have a look a major banking stock – Commonwealth Bank (CBA) and a major miner – Rio Tinto (RIO).
Commonwealth Bank (ASX:CBA) 6 Month Candlestick Chart
This chart suggests some weakness in the share price for CBA which doesn’t surprise me since banking stocks in general have had a fairly good run for quite a while now. But with clear signs that the Australian economy is slowing I expect home prices growth to come under some pressure and that the CBA will start trading more like a defensive blue-chip. In short this means the CBA share price is unlikely in my opinion, to break through $80 any-time soon and will probably drift along over the next six months.
Another interesting chart to look at is the stock price action for Rio Tinto.
Rio Tinto (ASX:RIO) 6 Month Candlestick Chart
Obviously shares in Rio Tinto have done quite well over the last six months and much of this I suggest, has to do with the expectation that Rio Tinto will return some cash to shareholders via increased dividends rather than a fundamental improvement in their core business areas.
The thing to remember about the big mining companies is that their operations are very capital intensive and they have to invest (and risk) large sums of money to bring new resource operations into production. So in the good years much of the profit they generate needs to go back into new projects whereas when outlook for resources cools, they start to ease back on investment. This in turn often frees up a lot of money.
Not all of this will head back to shareholders though as the management of a company like Rio Tinto will also be looking at acquisitions so that the company is ready for the next resources cycle.
To me it looks like the RIO share price is probably going to struggle to push much higher this year. So I am more inclined to be a seller rather than a buyer of a stock like this for now.
Back in May 2013 I actually outlined a trading strategy based around these two stocks in this article: Commonwealth Bank and Rio Tinto – a shorter term trading strategy so it seems like a good time to quickly look at what has happened with these stocks since then.
Rio Tinto (ASX:RIO) and Commonwealth Bank (ASX:CBA) 1 Year Share Price Chart
The black vertical line indicates the approximate date that I wrote the above article and generally speaking, I am fairly pleased with how things worked out. Although I did sell some CBA stocks below their peaks on the other hand I did move into RIO stocks at a fairly good price. For now I am not actively moving in or out of either of these stocks but over the next few months I will review both these positions.
Next up – the S&P/ASX 200 Small Ordinaries Index which does not get much attention in the finance media but it’s a chart that I reckon is worth watching.
S&P/ASX 200 Small Ordinaries Index (XSO) 1 Year Chart
My reasoning is that small companies (just like small businesses) and a good indicator of how the economy is faring at the street level. Therefore if the Australian economy is gaining strength then I would expect to see that reflected in the XSO.
I don’t exactly see weakness reflected in that chart above, more of a case that I don’t see any strength either which is another reason I am cautious about the outlook for the Australian stock market at the moment.
Finally here is a chart which looks back over a longer period.
S&P/ASX 200 Fund (ASX:STW) vs ETFS GOLD (ASX:GOLD) 5 Year Chart
I will not comment much on this chart expect to say it does show quite clearly how money often moves from gold to stocks and vice versa. At this stage I really don’t have much of a clue where the gold price will go, so I am simply not touching it although I am watching Newcrest Mining (ASX:NCM) closely.
So my overall strategy at the moment is to basically do nothing. I am sitting on my long term holdings and will look at taking profits if I feel a particular stock is starting to get expensive. But overall I remain cautious for now regarding the outlook for the Australia stock market.
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp