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The ASX 200 – On a Road to Nowhere

May 8th, 2015 · Greg Atkinson · 20 Comments

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

asx_200_3_month_chart_20150507.gif

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

asx_200_1_year_chart_20150507.gif

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
bhp_wbc_cba_rio_1_year_chart_20150507.gif

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


20 responses so far ↓

  • 1 lachlan // May 9, 2015 at 5:02 am

    The AUDUSD has made a strong reversal pattern Greg. Well worth watching that one. Not to say that couldn’t fail to a lower support either but I am looking for a rally in commods, commod currencies etc at “some” stage and believe the AUD will eventually top out 10-15points higher than its highs to date which I think were about 1.10. Also the XJO just broke down technically in textbook fashion after that bear signal last week but I am preferring the short-intermediate term long side now as we get to initial levels of support. Maybe the feds are all bluff about rate rises and just steering markets as they do although i can’t be sure on that forever if you know what i mean. In fact i have thought about locking in interest rates a lot. It’s hard to produce a tightly coherent argument for the big crash or the big rally from my perspective. Only for now it seems that commods may be due some relief gains, at least obviously they’ll rally past this point at some stage.

  • 2 lachlan // May 9, 2015 at 5:31 am

    Actually, “tightly coherent” arguments can be created on either side of the bull/bear divide… until you evaluate those arguments in terms of ALL available and pertinent facts/info and of course after we delete all of the false/invalid/pseudo-supporting premises that are possibly being offered. And that there is the crux of the predicament, to find an argument which appears irresistible when all available information is factored in. Anybody think they have it?
    We’re all epistemically up the creek ha ha, ironically in the age of information. Oh well I know something at least, that I know nothing….and there ain’t nothing new under the sun about that eh.
    My final unbeatable prediction for today then is that markets will go up and down in the future 😉

    Sorry Greg.

  • 3 Greg Atkinson // May 9, 2015 at 9:14 am

    Lachlan I must keep a closer eye on the USD/AUD. To be honest I have been distracted by commodities prices lately especially since I taken a long term position regarding oil.

    I am guessing (and it’s a guess) we are getting into one of those volatile phases where the markets over-react to every bit of news but most likely for the ASX 200, the end result in a few months will be that it has basically just edged sideways. Although another sharp drop is likely if some further news of the slowdown in China emerges such as another weak PMI number or a further slowing of exports.

    As for the US Fed. I think it’s fair to say that no Central Banker wants a recession on their watch so I sure rates won’t move anywhere until Janet Yellen is quite sure the US economy can handle them.

  • 4 lachlan // May 9, 2015 at 10:11 pm

    Fair enough too but historically rates never go down forever so I’ll assume they’ll go up a lot sometime and work back. Actually yes I have worked it all out Greg…the markets will pop a little higher, then they come off sharply trapping the bulls, QE4, rates rise initially which they do, external shock/black swans/aliens invade lol, QE expanded for whatever it takes to fund MIC elimination of moon nazis and other opportunist intergalactic menaces, rates continue up and inflation takes a hold.
    Rock solid conclusions I know. Plenty more I go too. But at least we could say rates will rise sometime for some reason?

  • 5 lachlan // May 9, 2015 at 10:18 pm

    No kidding either 😉
    https://www.youtube.com/watch?v=yGQMYPhymI0

  • 6 lachlan // May 10, 2015 at 5:25 am

    http://finance.yahoo.com/echarts?s=%5Edji+interactive#{}
    Back on Earth, I’ve ignored the Dow lately however checked it last night too. On Friday it popped upwards through a trend-line, I’ll watch that closer now until things work themselves out.

  • 7 lachlan // May 12, 2015 at 6:07 am

    Greg, there’s a “chance” now also of a trend change in the USDX ie a technical breakdown. I’m loath to be too sure these choppy sideways days but we may end up with a validated bottom in the audusd and likewise a top in the usdx.

  • 8 Greg Atkinson // May 13, 2015 at 4:58 pm

    I am waiting to see if any trend emerges next week but for now it looks like the ASX will continue to bump sideways for a while. I guess we will also start focusing back on the VIX again soon.

  • 9 lachlan // May 23, 2015 at 6:05 am

    After this week Greg things have gone the opposite way. USD strong AUD trying to break down, and a delicate bounce in the CAD looks more fragile still. Then our XJO also has left a bearish signature for the week. Next week will be interesting for sure.

  • 10 lachlan // May 23, 2015 at 6:06 am

    However let us not ignore the dow. He looks quite bullish, whats new?

  • 11 Biker // May 23, 2015 at 9:27 am

    What’s new, Lachlan? I’m pondering the implications suggested here:

    http://www.watoday.com.au/business/comment-and-analysis/low-interest-rates-mean-its-no-longer-business-as-usual-20150522-gh7by8.html

  • 12 lachlan // May 23, 2015 at 10:48 pm

    Implications BP?
    Transition in Aussie economy: they (Phillip etc) have no idea where things are going (or refuse to articulate) except that they believe the mining boom is over and we’re headed somewhere else.
    Transition in global interest rates (perma low):what else can we do when the economy is permanently half dead?

    Summary (implications): perma crisis/low rates.

    I’ll note that I can believe in the possibility of rising inflation and interest rates at some point.

  • 13 Biker // May 24, 2015 at 8:00 am

    Implications in reference to your earlier comments about ‘locking in’, Lachlan. We’ve never done so, in almost forty years of buying property (and, fortunately, that has worked well for us) but I must admit that if we were needing to borrow, I’d be considering going for a fixed rate, especially if interest rates fell a further half percent.

    I’m not so sure about inflation. The UK is in negative territory and I suspect we’ll maintain our relatively low rate here… although a falling dollar might change that.

  • 14 Greg Atkinson // May 25, 2015 at 11:40 am

    Most in the finance media spent so long convinced that the mining boom would last for decades that they find it hard now to adjust to reality. As I have written for some years, it has not been business as usual since the GFC and the slowdown in China (that many said would not happen) is going to have long term implications for the Australian economy as well.

    Some people call what is happening a “rebalancing” as if it is some sort of managed process which is nonsense, as there is nothing planned about the current “transition” at all. Instead what is happening is simply a series of forced reactions to changes in the global economy and which Australia should have been better prepared to deal with.

  • 15 lachlan // May 25, 2015 at 10:09 pm

    Thanks BP. Yes it appears there are various sound arguments for locking in rates. Maybe you see less to lose for those locking in at low rates; insurance for a relatively low price? I don’t want to be dogmatic either, I just think rates have gone down a long time, so sometime they’ll probably go up for a good while. It’s like oil; you see it have a historically significant sell-off and if you were an oil trader you’d obviously want to buy it up. If you were smart too then you’d have been anticipating the event and preparing as best you could. Rates somewhere near the end of a long bear market; if you’re a debtor then maybe you buy into those cheap rates, so to speak.
    I don’t know Greg. It looks chaotic but I guess somebody, somewhere has an idea of a sort. People try to manage and control, it’s what we’re born to do. Kaos and Control go hand in hand though eh.

  • 16 Biker // May 27, 2015 at 8:11 pm

    The main reason the missus would never allow me to lock-in a fixed rate is that for decades, we’ve had unanticipated offers on blocks or houses we hadn’t anticipated selling.* Had we locked-in, we’d have been penalised by our bank(s) at point-of-sale.

    Rates are now so low (4.38 comparison rate) that were we still buying or building, I’d make a stronger case for fixing. Our kids, who are still buying, would disagree.

    * This is again happening, right now. Unlisted house, no For Sale sign, very keen buyer.

  • 17 lachlan // May 28, 2015 at 6:07 am

    Yeah, so I am more than happy to accept Phillip and others “may” be right and an extended period of low interest rates will unfold. But I am not married to the idea and neither the idea that rates will rise at any particular time. And insurance has a cost, in the real world so it should.

  • 18 lachlan // May 28, 2015 at 6:12 am

    dji gave some breakout traders a beating yesterday Greg. I’ll stick with bullish there for now though.

  • 19 lachlan // May 30, 2015 at 6:49 am

    The dji is extended to the point that even just a correction to initial light region of technical support would be a 22% sell-off approx. The xjo can do the same no doubt. I’ll stick with my vague view of a reversal (like most others seem to have here plus Chris Vermuelen in the previous article) but while the long term bull trend is holding together I’ll keep my shorter term view bullish…that means I will necessarily be wrong one day…but only once at least. Not forgetting the long term reversal you’d expect in commodities at some stage either…in relation to which it should be noted that the tentative reversal in the AUDUSD was under threat this week. Was it the real deal or an early bull trap?…remains to be seen. Depending on ones trading time frames of course it possibly doesn’t matter either. To my way of thinking the AUD is a long term buy just like oil.

  • 20 Greg Atkinson // Jun 1, 2015 at 10:42 am

    Lachlan I generally stay away from Forex related trades but you could be right, the AUD might be a long term buy. I still think the Australian economy is facing a few years of low growth although so far it has done pretty well especially compared to most other G-20 economies.

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