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The “sucker’s rally” continues!

August 10th, 2009 · Greg Atkinson · No Comments

As of today the Australian stock market has rallied just over 30% since bottoming out in March and so it is looking likely that the worst is over as far as 2008-2009 stock market rout is concerned. However the market is still well below the highs of 2007 and so a full stock market recovery is still a long way off.

In a few earlier blogs I have rambled on about the logical bottom of the Australian stock market being around 4800 on the S&P/ASX 200 and All Ordinaries Indices. This is because at around this level the market seemed to settle for some weeks back in 2008 and also because it represents around a 30% fall from the market high reached in late 2007.

A 30% drop is about the average fall seen during a bear market correction and since Australian banks were holding up well last year I figured a market correction of that magnitude was about as bad as things would get. Unfortunately the Lehman Brothers failure sent global stock markets plunging and S&P/ASX 200 fell another approximately 1700 points. That hurt.

But as investors we need to put the past into context and not let it overly affect our future investment strategies. Bear markets, even very nasty ones, throw up opportunities and so although I was worried when the stock market headed towards 3000 I kept buying small parcels of stocks because I believed that the market would climb back to around 4800….at some point.

Only the people with fairly extreme bearish views are still calling the current rally in stock prices a “sucker’s rally”. This has never been my view and I wrote earlier this year in this earlier blog on May 5th::

“…. we have seen the lows of this bear market and although we will see further corrections (as we always do every year) we are now in the early stages of another bull market.”

At this point I would suggest readers have a look at my earlier article about Bull markets, bear markets and stock market rallies because I am not suggesting that the market is about to rocket towards 7000. A bull market can run for years and it may takes on long time to recover the ground lost during the global financial crisis.

All I am suggesting is that the outlook for stocks is at present is looking fairly positive and we can clearly see a strong upwards trend if we look at some technical charts of the S&P/ASX 200.

S&P/ASX 200 (ASX:XJO) Weekly Candlestick Chart (Aug 2009)

sp-asx-200-12-months-technical-chart-1-aug-09

I have marked on the chart a level around 4800 because it highlights how that the stock market appears to be reaching for the level again.  If there are no more nasty shocks to the global financial system then I would expect we will see the 4800 level reached again this year. But I am not confident we will power through the 5000 level as the global economy is still not in great shape.

If we look the monthly range of levels for the ASX 200 we can see the fall from September and rally from March much more clearly.

S&P/ASX 200 (ASX:XJO) Monthly Candlestick Chart (Aug 2009)

sp-asx-200-12-months-technical-chart-2-aug-09

I have drawn a very crude trend line on this graph just to show how the stock market is most definitely trending upwards. If we were to see the market rise in August by an amount similar to July then  it is possible we could breach 4500 within weeks.

But the more the market rallies the more likely it becomes that there will be a profit taking induced correction which is a good thing. Corrections caused by profit taking are one sign that we are in a bull market again.

Finally if look at the levels the ASX All Ordinaries Index has closed at over the last 6 months we get a slightly different view of what has been happening.

ASX All Ordinaries (ASX:XAO) Closing Levels over 6 Months (Aug 2009)

sp-asx-200-6-months-closing-levels-aug-09

What this chart highlights is that even though the overall trend has been upwards there were  still a series of pullbacks or small corrections…this is normal, the market never moves in a nice smooth line up or down.  Some bears will leap onto every correction as a sign that stocks will slide back near 3000 again, but I feel this is very unlikely (though not impossible) and that we are indeed in another long term bull market.


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