This week we have seen the S&P/ASX 200 bounce around quite a bit, but generally speaking the trend of late has been back down towards 5600. This movement has probably surprised some investors especially those who were quite bullish just some weeks ago when the ASX 200 appeared poised to rally past the 6000 level.
However back in March I suggested that the outlook for the ASX 200 was negative and even earlier still in my forecast for 2015 (see: Australian Stock Market Outlook & Forecast for 2015) I stated that I believed the Australian stock market would post only a modest gain this year. This was at a time when the ASX 200/All Ords were on a roll and many finance commentators and market analysts were confidently predicting that both would soon break though and keep heading past 6000.
But as of today the ASX 200 is struggling to hold above 5600 and is once again down near the trading ranges I first discussed years ago. Yes the market enjoyed a solid rally earlier this year, but the reality is that the Australian economy and Australian stock market are both running out of steam.
Nothing the RBA nor the Government can do much that will compensate for the slowdown in the Chinese economy and as far back as 2009 I was stressing the need for policy makers to take steps to diversify the Australian economy away from being too reliant on China.
Unfortunately little was done to mitigate the impact of an economic slowdown in China and instead it was popular back them to simply keep talking up the commodities boom. Now the economy is drifting along with the only bright spot being property prices which have been doing very well in Sydney and less so to varying degrees in other capital cities.
The Australian economy without doubt has entered a period of lower growth at best and at worst, it will slide into recession. Therefore it’s difficult to find fundamental reasons why the Australian stock market would finish this year much higher than it is now and it may even finish lower.
But before I look at the longer term trend for the ASX let’s first look at the last 3 months using a candlestick chart.
S&P/ASX 200 Index (XJO) 3 Month Candlestick Chart
What this chart shows is that the ASX has basically been bumping along sideways for the last there months apart from the sharps falls this week, which sent it down near 5600. This indicates that the momentum behind the rally that sent the ASX 200 up near 6000 has now been exhausted and the market is basically just reacting to data releases, forecast updates & interest rate decisions etc.
True these issues will generally impact the overall market trend to some extent, but in a strong bull market much of the shorter term news or data releases etc. will effectively be brushed aside as investors remain focused on the longer term or big picture view. At the moment I doubt anyone really has a clue how the global economy will fare over the next few years and so the reality is the markets are edging forward with no real sense of direction.
In terms of the Australian stock market this is nothing new. For much of last year the ASX 200 actually did not develop a clear trend in any direction and it was only early this year that quite suddenly a bullish move upwards developed as we can see clearly on the 1 year chart below.
S&P/ASX 200 Index (XJO) I Year Chart
So let’s put what we know all together. Firstly the Australian economy is at the very least struggling and growth in the Chinese economy is slowing. Commodities prices have slumped, unemployment is edging upwards, the manufacturing sector is still in decline and about the only sector apparently doing well is housing in some capital cities. (Personally I think residential property prices in Sydney are in bubble territory but that’s another story)
Secondly the rally that sent the ASX 200 towards 6000 is well and truly over. Another major rally my form this year and push it over 6000 – but I doubt it.
Lastly the outlook for the growth in the global economy is unclear but at best we can expect moderate growth and probably the IMF and OECD, World Bank will revise down their growth forecasts as they have done on a pretty regular basis over the last few years. (The RBA has already revised down its growth forecast for the Australian economy)
Therefore I can’t see the ASX 200 doing much else over the medium term apart from bumping along sideways and it may even correct further down towards 5400 or lower.
Remember the ASX 200 doesn’t do much unless either the banks or miners have their mojo working and as this last chart shows, both these sectors are struggling now to give the Australian stock market a boost.
BHP, WBC, CBA, RIO – 1 Year Price Trend Chart
From late last year mining stocks like BHP Billiton and Rio Tinto (RIO) begun trending lower but the ASX 200 still managed to rally thanks largely due to banking & financial stocks like Commonwealth bank (CBA) and Westpac Banking Corporation (WBC). But recently even the big four banks have started to fall back and this doesn’t bode well for the wider 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