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The stock market rout has paused, but will it return?

August 14th, 2011 · Greg Atkinson · 23 Comments

This week was quite a ride for stock market investors with the ASX All Ords and ASX 200 both trading at one stage under 4000 points.  However as the week progressed the markets started to claw their way back up and things are not quite as worrying as they were a few days ago.  What investors will be trying to work out now is if the stock market rout is over, or is it just having a rest before it once again sends stocks falling?

When the stock market is making big daily moves downwards it’s easy for us to lose our heads and start to panic, especially when the media start using headlines like “stock market bloodbath” and “billions wiped of the market” once again.

So when the weekend comes along it’s a good time for us to catch our breath and calmly look back at what has happened.  We can then try and brace ourselves for the next trading week and be better prepared for what might happen.

Firstly let’s have a look at what the ASX All Ords  has been doing over the last 3 months.

ASX All Ordinaries 3 Months Candlestick Chart

asx-all-ords-3-month-technical-chart-aug-11

Up until the end of July the stock market was not really doing much and was still moving in a fairly narrow range.  The debt problem in Europe was on the table, it was known that growth in the U.S. economy was sluggish and if investors had been watching the Baltic Dry Index then they would have been cautious about the global economic outlook as well.

But then the debt ceiling debate (chaos) in the United States made investors feel uncomfortable not only about the outlook for the U.S. economy, but also about how the economy and political process were being managed.  Then the markets started to worry about Europe again and suddenly gloom and doom were the order of the day.

The ASX All Ords fell in just over a week from being over 4600 to trading below 4000 but managed to close above 4000 points even on the worst day of the rout.  As you can see from the length of the bars in the chart above, there were some big daily swings and these seriously test the nerves of investors.

At the moment the downward trend seems to have been reversed and would say in the absence of any more bad news that the ASX All Ords/ASX 200 will move back near 4600 fairly quickly. (i.e. within a few weeks)

But that is my guess as things stand now.  When the markets open on Monday the situation could have changed dramatically.

Now let’s move onto gold as it usually shines when markets are volatile and investors are fearful

ASX All Ords (XAO) versus ETF:GOLD 2 Year Chart

all-ords-vs-gold-1-year-chart-aug-11

This chart highlights two important things. The first is that despite all the hype in the media, gold prices in AUD have not been doing that much apart from recent weeks.  Once again I stress that looking at gold prices in U.S. dollar terms is misleading because the USD is weakening – it’s not just  a simple case of gold prices are rising.

The second thing to note is how quickly gold prices react to fear in the market. As you can see gold prices posted major gains in just a couple of weeks as stocks plunged.  But are those gains sustainable or will gold prices come back down?

Please note that I use the Exchange Traded Fund (ETF) Gold to track gold prices in AUD so there will be some difference between the movement shown on this chart and that shown on a chart looking at actual gold trading prices versus AUD.

Now let’s look at something else that has been rising as the USD has become weaker.  I am not talking about silver or another precious metal, I am referring to the U.S. S&P 500 Index.

S&P/ASX 200 (XJO) versus U.S. S&P 500 Index

asx-200-vs-sp-500-2-year-chart-aug-11

Over the last few years U.S. stocks have actually done pretty well despite the recent correction.  U.S. stocks have in fact been a good place for people to store wealth especially when we factor in dividends.

It’s also worth mentioning that the  S&P 500 (SP500) has outperformed the Australian S&P/ASX 200 (XJO) over the last few years although you wouldn’t get that impression if you followed the ramblings of some of the newspaper economists and market watchers in Australia.

If our economy is truly booming and is the envy of the world then why isn’t there a rush to buy our stocks? Maybe the markets don’t quite buy into the Governments and RBA’s  view of the economy? I certainly don’t.

Finally let’s keep everything in perspective and look at the ASX All Ords over the last five years.

ASX All Ordinaries (XAO) Index 5 Years Chart

asx-all-ords-5-year-chart-aug-11

Well we are a long, long way from the days when the All Ords was over 6,500 but we are also quite a long way from the market bottom in early 2009.  Even after a bad week or so the big picture view is that the Australian stock market is still trending sideways.

I know that doesn’t sound very scary, but I try to deal with facts here and leave the sensationalism to the finance writes and journalists on the news websites.

The latest correction has sent the market lower than I expected but it never closed below 4000 so that gives me some confidence that the worst is over for now.  (That statement could really come back to bite me!)

I have marked on the chart the range in which the All Ords has been trading between since late 2009 and I expect we will be back into that range within a few weeks, unless of course the markets find a reason or reasons to be spooked again.

So for now I think the stock market rout is over and that the trend has reversed. That doesn’t mean I personally will be rushing out to buy stocks, simply because significant downside risks remain.   I also believe that we have narrowly avoided a bear market and that we will see the market claw higher over the next few years albeit with plenty of market corrections along the way.

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


23 responses so far ↓

  • 1 JasonD // Aug 14, 2011 at 4:43 pm

    I think we are basically in for another year of… nothing, mainly because the powers that be will be focused on external issues.

    For example dont expect much from the US politics situation as they have just started the circus for the Republican Presendential Nomination… Democrats will be on soon.

    Europe is still a basket case and could go either way.

    So regardless of our own economic situation the very life blood (aka share price) will be sucked dry thanks a lot to overseas and a few local issues, there is little to no guidance or will power and not likely to be much for atleast 6 to 12 months

    Just my 2 cents

  • 2 Greg Atkinson // Aug 14, 2011 at 5:54 pm

    Jason the best I am hoping for this year is we get back up near 4800 and recover some lost ground but that’s it. The Australian economy is the tail on the dog of a global economy with fleas.

    To make matters worse the Government seems intent in causing as much damage to the economy as possible and the chances of us seeing any productivity gains are basically nil.

  • 3 Plornt // Aug 14, 2011 at 7:10 pm

    “The Australian economy is the tail on the dog of a global economy with fleas.”

    lol

  • 4 Lachlan // Aug 14, 2011 at 7:40 pm

    Hi Jason
    Maybe events will force the political process to morph into something a little different from the usual. The weather is closing in on a lot of unhappy campers around the globe, especially in the USA.

  • 5 Ned S // Aug 14, 2011 at 9:34 pm

    Look to Europe for upcoming excitement I’d guess:

    “In the past couple of weeks, the world has moved from a troubled multi-speed recovery – with emerging markets and a few economies like Australia having good growth, and developed markets struggling – to a new and more dangerous phase,” Zoellick (Bob Zoellick, World Band President) says.

    Off topic but he also makes an interesting comment re the Chinese attitude to the European system:

    “He says the Chinese want to build in more social and economic protections for their population, but: “They say to me, ‘We don’t want a European model, it’s too expensive’.” (There’s no fooling those Chinese hey! :D)

    http://www.theaustralian.com.au/news/world/now-is-australias-time-world-bank-chief-robert-zoellick/story-e6frg6ux-1226114027454

    Another briefer report on same contains this interesting line:

    “Despite decades of fixing problems at the top of US and international institutions, Mr Zoellick could offer no ready solution to Europe’s problems.”

    http://www.theaustralian.com.au/national-affairs/danger-ahead-says-world-bank-chief-robert-zoellick/story-fn59niix-1226114114095

    Though I’d feel better if he wasn’t telling Gillard and Swan anything that would make them feel especially confident. Bearing in mind your comment “The Australian economy is the tail on the dog of a global economy with fleas” Greg.

    And yes, I agree wholeheartedly with you about it seeming a bit strange that the XJO has underperformed the SP500 !!! (Though the exchange rate variation could make a significant diff I guess? Does your graph attempt to take that into account? – Also I can’t actually see that third graph?)

    But anyway, this bloke is hot on the trail of the Europeans as well:

    http://www.dnaindia.com/analysis/comment_satyajit-das-the-real-debt-crisis-is-in-europe-not-the-us_1574351

  • 6 Jimbo Jones // Aug 15, 2011 at 2:39 pm

    “Most believe world heading for 2nd GFC” August 15, 2011 – 3:29PM SMH

    Do i need to say anymore!!!! Again contrarians in the minority!

  • 7 Stillgotshoeson // Aug 15, 2011 at 4:42 pm

    Jimbo Jones // Aug 15, 2011 at 2:39 pm

    “Most believe world heading for 2nd GFC” August 15, 2011 – 3:29PM SMH

    Do i need to say anymore!!!! Again contrarians in the minority!

    I do not think we got out of the first one 🙂

  • 8 Greg Atkinson // Aug 15, 2011 at 11:36 pm

    Ned you are right that if we were to factor in the AUD/USD exchange rate that some of the gloss comes off the performance of the S&P 500. But even taking into account I was surprised by how much the U.S. stock market has outperformed the ASX 200 over the last few years.

    P.S. The chart does not take into account exchanges rates.

  • 9 Ned S // Aug 16, 2011 at 1:00 am

    Cheers Greg – I can see that third graph now as well – Ta!

    Truth be told, I think there’s been something just fundamentally ‘wrong’ about the post March 2009 rally??? – In that the Asian (including Oz) markets have underperformed – Though don’t take that as gospel – I’m not invested so don’t track the markets in the way that one would if they were. And it’s just my general impression rather than something I’d attest to as fact?

    But if it is true, it just doesn’t seem either sensible or logical (to me) when the developing nations are the ones that are supposed to be driving global growth?

    Though a Brit trader I keep a bit of an eye on reckons we are in a bull market – Albeit one just cooked up by QE. (It’s all just basically too strange for me – Though I surely DO remain a very interested observer.)

  • 10 Mr Editor // Aug 16, 2011 at 6:25 am

    Great article, although I’m still undecided whether this rout is over. I just think that there are so many cheap stocks right now!

  • 11 Greg Atkinson // Aug 17, 2011 at 9:53 pm

    Mr Editor, it’s starting to look like the ASX All Ords/ASX 200 are bouncing back. We might see them both close above 4400 this week.

  • 12 Greg Atkinson // Aug 23, 2011 at 9:02 am

    Well the run towards 4400 was cut short by a one-day slump of around 3% last week. I should know better than try and make any short term calls!

    However I am still expecting to see the ASX All Ords & S&P/ASX 200 up around 4600 within a few weeks. The economic outlook is not good, but stocks appear oversold at these levels.

    Ned I reckon compared to Europe and the U.S. Australia must almost look like an economic paradise!

  • 13 JasonD // Aug 23, 2011 at 9:12 am

    hmmm optimism got to love it… I doubt it will get that high in a few weeks the volatility is still going to suck the momentum from any upward movement

  • 14 Greg Atkinson // Aug 23, 2011 at 9:58 am

    I am not optimistic as such, but rather I don’t think the sky is falling in. Anyway all will be revealed over the next few weeks 🙂

  • 15 Ned S // Aug 23, 2011 at 2:24 pm

    Our inflation fighting RBA is now more concerned about the effect stock market volatilty might have on the economy than on fighting inflation.

    PS: If you blinked and you missed it, gold is now over USD 1,900 per oz!!! (AUD 1,820)

  • 16 JasonD // Aug 23, 2011 at 3:29 pm

    I think there bigger concern now is the splitting of the economy the so called two speed thing appears to be getting bigger, and could cause them more problems than inflation control, as they have very little tools in the belt to deal effectively with such an event.

  • 17 Ned S // Aug 23, 2011 at 8:26 pm

    The biggest issue is Europe now.

    As to Bernanke, he can say what he wants on Friday. But unless he comes up with a way to get higher and genuinely useful and productive and competitive employment, anything else he says that moves the markets will be artificial.

  • 18 Greg Atkinson // Aug 23, 2011 at 9:23 pm

    It all looks messy to me. Europe is China’s major trading partner and they need each other just as China and the U.S. need each other. If the consumers in the Europe/U.S, spend less on what China makes then it’s going to cause headaches for the Chinese economy. (and already has) That means trouble for the Australian economy as well.

    I don’t see any way out of this apart from some years of getting debt under control.

    I don’t expect major stock markets to implode, but I don’t think we are likely to see them surge back up to the 2007 highs for some years.

  • 19 Ned S // Aug 24, 2011 at 4:50 pm

    Bluescope Steel (BSL) was worth a tad over $9 at its peaks in 2007 and 2008. It’s now worth a tad under 90c. Wonder how much more of that we are going to see in our two speed economy going forward?

    http://hfgapps.hubb.com/asxtools/Charts.aspx?asxCode=BSL&compare=comp_index&indicies=0&pma1=0&pma2=0&volumeInd=9&vma=0&TimeFrame=M10

  • 20 Lachlan // Aug 26, 2011 at 11:18 pm

    No QE3!!!!!!!! …………for now

    Risk, you may fully tank now. Run for the hills everyone. Or was some of this was already priced in? We’ll know soon enough.

    huh, Dow already off a hundred, Aussie off about 50

  • 21 Lachlan // Aug 27, 2011 at 6:33 am

    After that the markets are up this morning. This has to be further conformation that some type of volatile, bottoming process is in progress last couple weeks. Last night was a good opportunity to make short sellers pay for some of the upward progress ie market ramping. This type of action was persistent in the bottoming progress after the 2010 May flash crash. Market news encourages new shorts. Mysteriously market refuses to budge….shorts lose resolve and a covering rally begins. If the money has to decided to move the market up then shorting is futile and we can expect more QE/printing sooner or later one way or another. Probably the market news is going to remain bearish until the bottom is fully in.

  • 22 Lachlan // Aug 27, 2011 at 6:47 am

    At this point one very interesting possibility is that we could see a head and shoulders top formation on US gold which will attempt to resolve downwards while some type of rally takes off in stocks. Not that I’m bearish on PM’s in any particular time frame. Depends how it all shapes up next week or so. Would be interesting though if gold is allowed to break a new high right here after the margin hikes recently and the stock markets working hard to pull up.

  • 23 Greg Atkinson // Aug 27, 2011 at 8:55 am

    Hard to spot many trends at the moment. It’s like the markets are in a holding patter and just bounce around within a range waiting for something to happen. The Australian stock market is starting to look as direction-less as the Government and all jokes aside, I think the political turmoil is seriously spooking investors.

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