Recently every move upwards the stock market takes, no matter how slight, is greeted with almost ecstatic cries of joy from many analysts, finance journalists and assorted market watchers. It’s as if the ASX All Ordinaries was heading towards a new high and investors were being showered with money in the midst of a raging bull market that had no limits. Certainly there have been good returns of late for those investors who timed their entry into market almost perfectly, but for longer term investors it’s more of case of here we go again.
Context is important when talking about stocks & the stock market as is time. At the moment most stock market watchers appear to be focused on the All Ords being at the highest level for a number of years which is true – however it is also still stuck in a rut which started some years ago and overall the market still looks to be trending sideways to me.
First let’s look at some charts focused on the recent bullish phase and see why many investors are getting excited.
ASX All Ords Index (XAO) 3 month chart
Clearly the All Ords has had a stellar run since it found a support base just below 4400 back in November 2012. It has basically been all uphill since then and my doubts about the Santa rally were obviously not warranted.
There’s little doubt that the 3 month chart of the All Ords Index is virtually screaming out “bull market”.
Now let’s review the one year chart.
ASX All Ords Index (XAO) 1 year chart
This chart confirms that the Australian stock market is technically speaking in a bull market, since the rise from the low in 2012 to the high at the end of last week is around 20%. For those who got the timing just right there were some very healthy gains to be made and not just from riskier stocks – but from blue-chips like Telstra (TLS) & Macquarie Group (MQG) for example.
But now if we start to look back further the current rally although impressive, is put into some perspective or context.
ASX All Ords Index (XAO) 3 year chart
During the last three years the Australian stock market has flirted with the 5000 level four times which includes this most recent flirtation. However each time it has reached the 5000 market it has been unable to hold at that level and has on average has fallen back around 10% fairly quickly after that mark was hit.
As you can also see on the 3 year chart of the All Ords, the fall-back in 2011 was particularly brutal with the ASX All Ords slumping from around 5000 points to just under 4000 points. Quick lesson – the mood of the market can shift from bull market optimism to bear market pessimism in just a few weeks.
If we now go back further and look at the All Ords over 5 years (see below) then we can see that the current stock market rally is indeed significant but it still just brings the market up into a range in which it has been trapped for over 3 years.
ASX All Ords Index (XAO) 5 year chart
You can look at the 5 year chart in two ways I guess. On one had you can be encouraged that the market is now around the highest it has been since 2008 or you can be a little despondent when you realise that the All Ords is still way below the market high set in 2008.
Finally let’s look at the 10 year view and compare how the ASX All Ordinaries Index has been tracking again the U.S. Dow Jones Industrial Average.
ASX All Ords vs Dow Jones Industrial Average 10 year chart
Clearly the ASX All Ords outperformed the Dow Jones in the run up to the GFC and much of this over-performance was due to the mining boom. The All Ords also recovered fairly well in 2009 again which again was helped by the mining related stocks which were boosted by the economic stimulus measures taken across many G-20 nations and particularly in China.
What is interesting about the chart above is that it gives us a glimpse into how the All Ords might perform versus the DJIA if commodities prices were to slip back again & remain lower. You can see this reflected in the chart from around mid 2011 to mid 2012.
As for the Dow Jones, well this has benefited largely from Quantitative Easing (QE) and low interest rates in the U.S. hence the reason it has outperformed the All Ords over the last few years. However over the last decade the All Ords and DJIA are fairly close together performance wise.
So where will the ASX All Ordinaries go from here? Well my guess is that once again it will flirt will 5000 and then fall back around 10% or maybe more. I have no idea when this will happen and it is also quite possible the XAO will keep pushing higher but at this stage I am still more inclined to take profits than to take long positions.
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp