Over the last few weeks I have been simply watching the markets and have not even attempted to analyse the various swings and moves of the ASX All Ordinaries Index and S&P/ASX 200 Index. Just when I thought I might have been able to make sense out of what was happening, along would come news of the IMF cutting their global growth forecast, more mixed economic news out of China or recently and almost out of nowhere, the Bank of Japan (BOJ) sprung into back action and ramped up its version of Quantitative Easing (QE).
Meanwhile gold prices have fallen, commodities prices have slumped again with iron ore now down below $80 USD a tonne and even oil prices are struggling. So clearly the outlook for global economic growth is not good as I have been suggesting for a while and now even the IMF and World Bank finally agree.
Yet the Australian stock market has recovered much of the ground it lost during the recent correction despite continued weakness in commodities prices. But these prices falls have been partly being offset by a weakening Australian dollar which the Reserve Bank of Australia (RBA) clearly wants to be weaker.
There are so many Central Banks tinkering with currencies and the markets these days that it’s enough to make you dizzy. The big problem is that they are not really fixing anything and the only game in town seems to be to pump money into the financial system and hope sustainable growth follows.
Now that the U.S. Federal Reserve is exiting from it’s unprecedented QE experiment we will soon see if it worked. My guess is that the U.S. economy is going to struggle next year and that 2015 is going to be tough one for stock market investors.
At the moment however the ASX 200 is still showing signs of recovery and is almost back up to where it was before the dive down to near 5200 recently, as we can see in the chart below.
S&P/ASX 200 Index (XJO) 2 Month Candlestick Chart
But this chart also shows that the rally is slowing and we are now into a period where the market is starting to drift sideways. If you are a market bull, then you would probably see this as a pause before the next move up. If you are bearish however (as I am), then you may see this as a sign that buyers are getting weary and that the sellers will soon dominate again.
In an article some weeks ago I suggested that the banks & financials would primarily move the Australian stock market, and if we look at the next chart we can see that is what has been happening
ASX 200, ETFS GOLD, CBA & BHP 2 Month Chart
During the recent correction the banks and miners led the way down (as they dominate the ASX 200), but you will notice that on the way up it was banking stocks like the Commonwealth Bank of Australia (ASX:CBA) not a mining stock like BHP Billiton (ASX:BHP) that pulled the ASX 200 Index back up.
So if the bank stocks can’t maintain their momentum upwards, then the ASX 200 will lose ground again.
I have also included the ETFS GOLD (ASX:GOLD) just to show what the gold price has been doing in AUD terms. As we could expect it gained a boost when investors were fearful and has since lost ground as the stock market rallied.
Now since I am a long term stock market investor and am always holding some long positions, I tend to zoom out of the short term view and look at what the market has been doing over a few years.
First a look at what has happened over the last couple of years.
ASX 200, ETFS GOLD, CBA & BHP 2 Year Chart
Clearly over the last two years gold has not done well and as regular readers will know I have been bearish about gold for many years. Secondly, mining stocks like BHP have lost their mojo and again I am on the record (going back a few years) as warning about a fall in prices for iron ore and coal for example. This can easily be checked by having a look at my posts under the Commodities Category on this site.
It’s pretty clear that what is supporting the ASX 200 Index are mainly the major banks and financials stocks. These stocks have been helped along by plenty of low interest money swirling around in the global financial system which makes me wonder how well risk is being priced these days. Sometimes I get an eerie feeling we are in the midst of another global economic bubble and that the Central Banks have played a key role in creating it.
Finally a quick look at the Australian ASX All Ordinaries Index (XAO) versus the United States Dow Jones Industrial Average (DJIA).
ASX All Ords (XAO) vs Dow Jones (DJIA) 5 Year Chart
Clearly QE in the U.S. has given the Dow Jones Index a major boost over the last few years whilst the performance of the ASX All Ords looks (and has been) pretty average at best. Yes if you had moved into ASX stocks at just the right moment and timed selling stocks just right as well then there were good gains to be made. But overall the All Ords is up just 20% since 2010 which is pretty dismal actually. Thank goodness for fully franked dividends!
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