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
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
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
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
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_jpSearch terms: Australia post shares, worst all ords crash