Sometimes when confronted by a seemingly endless barrage of economic data it is beneficial to just grab a cup of coffee and calmly review a few stock market related charts to see if they are trying to tell us something. Yes it is pretty chaotic in the global economy these days but believe it or not, some order appears to be creeping back into the Australian stock market.
The first chart that I will focus on is the All Ordinaries versus the S&P 500 (or you could also use the Dow Jones) because it illustrates quite clearly how the stock markets in Australia and the U.S. (and many other countries as well) have bounced off the lows hit in March.
ASX All Ordinaries versus S&P 500 (6 month chart)
It is important not to read too much into charts of course as they merely tell us what has happened, but the interesting aspect of this chart is how the ASX All Ords and S&P 500 are both now heading sideways after a strong rally over the last few weeks. Normally markets do not move sideways for long, so next we will either see a clear shift back down towards the recent lows or the rally will resume.
I wish I knew for sure which way to market will move over the next few weeks but sadly I do not, however my feeling is that the Australian stock market will head up again and that we may soon see the All Ordinaries break through the 4000 level.
The next chart I keep an eye on is the Baltic Dry Index (BDI) simply because it provides an insight into the volume of Dry Goods being shipped around the globe.
Baltic Dry Index (3 Years Chart)
The Baltic Dry Index is also off it’s lows and has been on an upward trend for all of 2009. Sure it is a long way below the peak reached in 2008, but it does not have that far to go before it is near 2007 levels once again. The rise in the BDI suggests to me that the global economy may have either bottomed out of be close to reaching a bottom.
But the BDI is not a perfect indicator and there are a number of factors that can drive the BDI up or down besides the demand for commodities, so it is too early to say the global economy is on the mend. However we can certainly say the BDI trend so far in 2009 has been positive and that if this continues the markets will take this into account. By the way you can find a very good overview of the BDI at Wikinvest see: Baltic Dry Index – BDI
As we have all been reminded over the last year or so the stock market is not only driven by fundamentals but also by fear. So when trying to work how much fear is at play I look at the movement in the price of gold.
ASX Gold (ETF) versus Australian Worldwide Exploration (AWE)
To track the price of gold I am using the ASX listed Exchange Traded Fund: GOLD. This simply allows me to track gold prices in Australian dollar terms and plot this against ASX listed stocks or indices like the All Ords or ASX 200.
In the graph above you can see the impact of the post Lehman Brothers meltdown in September 2008 when gold prices shot up and oil prices fell further. The fall in oil prices is reflected in the stock price movement of AWE, note how the relationship between oil and gold basically broke down after the Lehman Brothers failure but now this relationship shows signs of normalising.
By looking at the chart above it appears that either oil is undervalued or gold is overvalued at this point in time. Of course there are many complicated factors driving oil and gold prices but the facts are oil prices at present are relatively low whereas gold prices are quite high. In addition the oil price is being driven largely by supply and demand fundamentals whereas gold prices are being pushed up largely by fear, so keep this thought in mind when looking at the next graph.
ASX All Ordinaries versus ASX GOLD
The above chart shows the All Ords plotted against the ASX: GOLD. What this chart clearly highlights is how gold prices are moved by fear and panic. You can see that when the Australian stock market (and markets across the world) were heading towards the March lows that gold was heading in the other direction. This is simply because people were buying into the perceived safe haven that gold offers.
But the chart also shows that as the stock market rallied the movement into gold waned and actually stocks are now outperforming gold as an investment. I am not going to try and predict the future but I think we can assume with some confidence that if the world markets continue to rally, that gold prices will most likely decline.
There are of course exchange rate issue to be taken into account when talking about gold prices in Australian dollar terms but these can be put to one side when discussing the overall price trends. In any case, most investors in gold in Australia will be using $AUD when buying into a gold ETF or coins etc. hence the reason I focus on the gold price in Australian dollar terms.
So putting all the above information together I believe a few broad observations can be made:
- The Australian stock market has rallied off it’s lows and the overall trend remains positive.
- The BDI is up and this indicates that global trade is slowly picking up.
- Oil prices have rallied from their lows but this has probably more to do with OPEC production cuts than any increase in demand.
- Gold prices remain relatively high but will probably correct downwards if global stock markets continue to recover.
There is of course no guarantee that the signs of life we are seeing in the stock market will last but I still believe we have seen the lows of this bear market and that we just might be witnessing the the start of the next bull market.