If you are confused about the conflicting reports regarding the Australian economy and outlook for the stock market you are not alone. Much of this confusion is caused by financial journalists who one day are talking about a double dip recession and then suddenly switch to chirping about a robust Australian economy once some positive economic data appears.
So let’s look at some stock market charts and see if we can pick up on what is happening in the economy and see if they may give us some hint of what trends may become evident in the months ahead.
Since last year I have held the view that the Australian economy is not doing well and that the problems I see with the economy have simply been masked by government spending and strong mining exports. We also need to remember that Australian mining exports have been greatly helped by economic stimulus measures taken in other nations such as Japan and China.
But you will find few in the mainstream finance media who would agree we with me and I must be wrong since they are the experts. But let’s have a look at a few stock charts and see where I might be getting my crazy ideas from.
First it always helps to have a glance at the big picture view.
ASX All Ordinaries Index (XAO) 3 years chart.
I have marked on the chart the 5000 level which acted briefly as a level of support back in July/August 2008 and then has been a level of resistance since early in 2010.
What we know is that the Australian stock market tumbled down to around 3000 as a result of the financial crisis that swept global markets but has since recovered and has now been bouncing around 4500 for a few months.
What I have mentioned above is significant for two reasons. Firstly, our stock market was not immune from the global financial crisis despite a resilient housing market and a strong mining sector. Secondly, despite frequent comments from the Government, Reserve Bank and Treasury about how well the economy is doing, the stock market is not looking particularly bullish.
As I have mentioned many times since late last year, I believe the stock market is reflecting the true state of the economy and if I am correct, the Australian economy is fragile and will struggle to grow in 2011.
Let’s have a look at a some more charts which illustrate what investors are thinking and reveal I believe the true state of the economy.
ASX All Ords (XAO) vs BHP and CBA 3 years chart.
The chart above shows how BHP Billiton (mining) and Commonwealth Bank (banking) both fell during along with the wider stock market during the GFC and then rallied very strongly after hitting their lows in late 2008 or early 2009.
There was a crazy phase in 2008 where BHP rallied strongly against the market on the belief that somehow mining stocks traded by their own rules, but BHP’s stock price corrected fairly sharply from mid 2008 to around the end of 2008 especially when the Lehman shock came along.
The chart above tells us what we already know; that the major banks and major miners survived the worst of the GFC in fairly good shape and have helped drive the recovery of the stock market over the last year or so.
But despite record profits, both BHP and CBA shares have struggled to trend upwards over the last few months. Profit takers have moved in and sold off shares and it seems that many of them feel that perhaps the next few years will be a little tougher for the banks and miners.
If the mining sector is really in the middle of super cycle then this is not being reflected in their stock prices.
But banks and mining stocks don’t give us the complete picture so let’s look at a retailing related stock; Harvey Norman.
Harvey Norman (ASX.HVN) versus All Ordinaries 3 year chart.
Harvey Norman is a good stock to watch because it is an indicator of how well things are tracking in the retail sector and thus gives us an idea of how freely people are spending.
It is no surprise that HVN shares tumbled when the GFC struck and it is no wonder that Gerry Harvey was a big supporter of the Rudd Governments cash handouts.
Although HVN shares did rally along with most other major stocks they have struggled recently and the share price does not suggest to me that people are in the mood to shop until they drop.
Of course Harvey Norman’s foray into Europe won’t be helping it’s share price, but the stock is still a good indicator of how the Australian retail sector is faring and the chart above suggests to me that all is not well and not quiet as rosy as the RBA would lead us to believe.
Now of course my view of what the charts are suggesting is just that, my view. But one thing I am absolutely sure of is this: if we mining exports come off the boil then a quarter or two of economic contraction in Australia (i.e a recession) is quite possible in 2011.
The concern that I have is that the mining cycle might be peaking or may have already peaked and if history is any guide, mining companies will soon suddenly find they have an overcapacity issue and start cutting projects. If that were to happen the psychological shock to the consumer could be quite significant.
I still expect shares to rally more this year (if the election result ever becomes clear) but I would be looking to take some profits if the All Ords gets above 5000 and certainly if it moves near 5500.
But I am likely to be wrong, so I welcome people leaving comments and setting be straight!