Over the last few weeks I have found it difficult to write much about the Australian economy or stock market simply because events have pretty much unfolded as I guessed they would some months ago. Despite the hype from the Reserve Bank of Australia (RBA) and some sections of the business media the fact is that the Australian stock market is still trading around 30% below the highs of 2007.
Back in March 2008 I made an estimation that somewhere around 5200-4800 on the ASX All Ordinaries/ASX 200 would be the logical place for the stock market to find a bottom. This was based on the observation at the time that stocks appeared to reaching oversold positions and that the average bear market correction seen over the last 20 years was around 25% or so.
Sadly stocks took another plunge downwards in September 2008 after Lehman Brother failed, however I believed this extra shock to the system would be corrected over time and that the ASX All Ords/ASX 200 would work back up towards 4800-5200 fairly quickly.
Well I was half right. Yes the plunge in the markets after Lehman Brothers has now been basically erased but I did not expect it to take this long. I was also surprised to see the All Ords fall near 3000 and I recall earlier this year wondering if BHP shares could fall down below $15!
On the chart of the All Ords below I have marked roughly the range where I believe the market should be trading around as a result of the global economic downturn.
ASX All ordinaries (XJO) 2 year chart
You can see quite clearly on this chart how often the 4800 – 5200 range has come into play. The 520o level for example appeared to be a market bottom until around July 2008 when 5000 was hit. The stock market then traded around this level for weeks before falling of a cliff in September.
Now everything appears to be working in reverse with the 4800 – 5200 range acting as a point of resistance and the stock market has been unable to rally though this level for all of 2009. Indeed since October the market has lacked any direction and this pretty much reflects how the Down Jones has been moving during the same period.
This has not been a surprise to me and back in August I wrote:
In my view the latest rally is simply the stock market coming back up to a reasonable level after the panicked selling following the collapse of Lehman Brothers in September 2008. In other words, it is a correction upwards which is helped along by an improving global economic situation.
So what we have seen since March is simply the stock market crawling back up to where it should haven been after a nasty bear market correction and not much else. This was always going to happen, but as I have been writing about over the last few weeks it will be a lot tougher for stocks to burst through the 5000 level and rally much higher.
If we look at the All Ords 6 months chart then we can see that 4800 appears to be the level which the market is having a hard time rallying past. This also happens to be the level where I finally decided the market bottom would be late last year so there is certain symmetry at work here.
In truth though my view earlier this year was that the market would get stuck somewhere above 4800 but below 5200 so I am a little surprised that market has not been able to rally a touch higher by now.
ASX All ordinaries (XJO) 6 month chart
But let’s not forget the rally from March has been a good one and despite the gloom crowd calling it a “sucker’s rally” it did deliver some healthy returns to those who jumped on for the ride. In addition the long term bull market trend is still in place and I am quite confident that at some point in the future the share market will trend upwards again.
However a long term bull market does not mean non-stop surging stock and assets prices. For example I don’t expect 2010 to be a year of spectacular stock market returns, but I do expect that the overall upwards trend will remain in place and that by 2011 most of our wounds from the last few years will be healed.
At present most investors still appear cautious about the outlook for 2010. Yes the worst of the global financial crisis is behind us but that has already been reflected in the rally since March. From now on we will need to see concrete signs that the global economy is picking up as opposed to simply watching economic indicators bounce off historic lows.
The stock market is telling us that many Australian companies are still dealing with the fallout from the global financial crisis. Business is not back to normal, the economy has not fully recovered and with so much economic stimulus money in circulation across the world it is hard to really know where we are at the moment.
Overall I am fairly comfortable with my analysis of the stock market and economy over the last year or so. My timing has not been great as usual and the Lehman Brother’s debacle caught me by surprise (along with many others), but I have been able to spot a few long term trends and this has kept me out of some trouble.
It is however too early to say if my faith in the stock market is misplaced and at this point I would like to remind readers that have taken losses and seen some of my stock investments fail miserably, so please don’t think I am trying to suggest that I am a stock picking guru!