Since mid last year, the Australian stock market has staged a fairly impressive rally with the ASX All Ordinaries Index moving from a decidedly bearish level of down near 4000 to a bull market level of just under 5200 points. But of late the market has slipped back which will worry some investors, while others see this a simply a pause before the rally upwards continues.
On the 1 year candlestick chart of the All Ords Index (XAO) below we can easily spot the rally from mid 2012 up until February/March 2013 that gave stock market investors plenty to cheer about. But over the last couple of weeks, the rally appears to have run out of momentum with the All Ords slipping back below 5000.
ASX All Ordinaries Index 1 year candlestick chart
To get a better view of what has happened over the last few weeks I will use technical or candlestick chart of the All Ords over the last 3 months.
ASX All Ordinaries Index 3 month candlestick chart
I don’t claim to be technical trader, but I do use candlestick charts because they help me get a feel for how the market is moving. For example looking at the chart above it’s pretty clear that up until the later part of February the market was trending upwards. But then, what I would describe as doubt, crept into the market due to a range of issues from economic data coming out of China to the banking woes in Cyprus.
At first the red days – when the market finished lower, were quickly countered by blue (or black) days – when the market finished higher. But from around the middle of March the All Ords started to slip back as investors began to take profits and buyers were less keen to jump in and prop up stock prices.
One major reason the All Ords (and the ASX 200) has fallen over the last week or so is because the outlook for commodities such as iron ore & coal suggests the big miners are in for a challenging year. As a result, mining stocks have been under pressure recently but as we can see from the chart below, bank stocks may also be coming under pressure now.
ASX All Ords Index (XAO) vs CBA and BHP 1 year chart
The stock price graph above also shows how the banks not the miners, have been the main driver behind the Australian stock market rally since mid last year. Therefore by my reckoning, if the bank stocks remain under pressure then the All Ords will fall further since I don’t see a rally taking hold across the mining stocks any time soon.
Finally here is a chart which I believe will help investors get a grip of what is happening on a global economic level.
BHP Billiton vs AMEX Oil & Gas Index 10 year chart
The AMEX Oil & Gas Index is useful to watch as it gives us a feel for how the global economy is moving since in theory if demand is rising for oil and gas, then prices should also be creeping upwards. Likewise if demand for commodities like iron ore and coal is rising then a company like BHP should be doing well as prices for these should also rise. If demand for oil, gas, iron ore & coal is rising then BHP will do even better since it also has significant oil & gas operations.
So if we look at the chart above we can see a strong correlation between the BHP share price and the AMEX Oil & Gas Index – which makes sense. Then during 2007 – 2008 the commodities bubble formed, the GFC hit and the correlation between the two basically fell apart.
Why? In one word – China; since in response to the GFC the Chinese launched a massive economic stimulus programme which shored up prices for iron ore & coal (and copper etc) but didn’t do that much for oil & gas. Why? Because the U.S/E.U consume far more of these than China and their economies were (and still are) struggling.
Of course the situation is a lot more complicated than, that but if my simple overview is correct then we should see the correlation between the BHP share prices and AMEX Oil & Gas Index restored as the global economy begins to truly heal.
So at this point my view is the All Ordinaries Index is set to fall further but will regain ground later this year. Therefore at this stage I will (perhaps foolishly) stick to my Australian stock market outlook & forecast for 2013 and expect that the All Ords/ASX 200 will finish the year between 4800 – 5200 points.
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