Over the last 6 months despite signs the Australian economy is heading for tougher times, the Australian stock market has continued to edge higher despite the occasional minor correction along the way. Currently the S&P/ASX 200 is just above 5600 and if it’s going to make a run towards 6000 before the end of the year, then now seems the time for this to happen. But maybe stocks are poised to slip back again and around 5600 is as good as it will get for the S&P/ASX 200 for 2014?
Despite much bullish market talk the reality is that over the last 6 months the Australian stock market has been essentially been moving sideways apart from two fairly recent significant moves upwards – one in July and then another in August. Both of these can be clearly seen on the candlestick chart of the ASX 200 Index (XJO) below.
S&P/ASX 200 Index (XJO) 6 Month Candlestick Chart
It is also worth noting that back in March the ASX 200 dipped below 5300 and so a correction back down near that level over the next month or so is not out of the question. Perhaps the run up in the market in August is sustainable, or maybe it’s a sign that the ASX 200 range of stocks are in the overbought zone?
Personally I am inclined to believe that the market is now overbought simply because I don’t see much macro-economic data that suggests that bank and mining stocks can rise much from here. After all, if the major banking and mining stocks fall back then so will the ASX 200 Index and this movement will in turn drag most other ASX 200 stocks down as well.
But on the other hand there is no denying that since mid-2012 the overall trend (see chart below) for the ASX 200 has been positive, although as I noted back in 2012 the market was oversold so a rally back to the 4800 – 5200 was very likely anyway. Nonetheless, the ASX 200 has pushed through 5200 and remained above this level for quite some time so those who see the market reaching 6000 this year do have the trend on their side…for now.
S&P/ASX 200 Index (XJO) 3 Year Chart
Now if we step back and take in the big picture view and look at the S&P/ASX 200 Index 10 year chart we can make a few general observations.
S&P/ASX 200 Index (XJO) 10 Year Chart
Firstly the ASX 200 is currently at the same level as it was in late 2006. Secondly the Australian stock market was been given a boost upwards from mid-late 2012 via combination of lower interest rates, record commodities exports (albeit at lower prices recently) and a change of government plus of course a external factors such as QE in the US.
Yes there have been other factors at play, but when it comes to the Australian stock market the major banks and major miners set the tone – so in short what moves their stock prices around will also move the ASX 200 Index.
If the RBA were to cut interest rates again then maybe stocks would get a boost, but apart from that I can’t see too much on the horizon that would give banks stocks a lift and almost nothing that will push the miners significantly higher. (apart from short term price boosts via buybacks, de-mergers and increased dividends etc)
Therefore despite the clear current trend that suggests the market may be heading to 6000 this year I remain bearish and may in fact be one of the few market bears around. So if I have to wear the dunce cap at the end of the year then so be it!
Finally I just want to sneak in a chart of the ASX 200 versus ETF Gold which I think is interesting simply because it shows how gold has lost it’s lustre (for now).
S&P/ASX 200 Index (XJO) vs ETF GOLD 5 Year Chart
It’s worth remembering that many “experts” a few years ago were sure gold was headed for $2000 USD an ounce (and beyond) whereas today it is just below $1300 USD an ounce and gold miners like Newcrest Mining are doing it tough.
That serves to remind us that sometimes when a trend looks hot it’s already too late to jump in and despite being tempted by possible gains, it’s often best to stay on the sidelines and be patient.
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