The Australian stock market is still a long way below the last market high reached in 2007 and so I can’t help wondering when we might see the ASX All Ordinaries reach a new market high. Perhaps it will just be a few years time before the market recovers lost ground, or maybe it’s going to be a long wait before share market investors see stocks once again post gains year after year.
To try and estimate when the market might once again be at or near the high of 2007 let’s look at the long term chart of the ASX All Ords (XAO) and see how the bull markets played out.
ASX All Ordinaries Index: 1988 – 2011
To keep things simple I am going to round off numbers and start off by using 6500 as market high in 2007. (although the All Ords did in fact peak at 6779) The precise numbers are not important since I am going to be looking at approximate long trends only.
The last bull market ran from 2002/3 until 2007 and in that time the All Ords Index moved from around 3000 up to 6500. This means on average the All Ords rose an impressive 700 points every year and it’s easy to spot how steep that rise was by looking at the red line I have drawn on the chart above.
At the time the consensus view was that the Australian stock market (and indeed most major global markets) were rising because of an unprecedented expansion of the world economy. The only way is up baby was the consensus view at the time and although a few people were warning of a bubble, the fact is that there are always people warning of economic or market bubbles so you can’t blame investors for sticking with the trend.
With the benefit of hindsight the Australian stock market bubble is easy to spot. We also got warning about the impending slump when the market fell back in early 2007 but as they say, nobody rings a bell at the top of a bull market so investors big and small were caught out when the stock market rout struck.
On the chart I have also drawn a couple of very rough long term trend-lines. The blue line is the conservative long term trend and the green line represents a more optimistic view of the long term trend of the All Ords. As you can see the Australian stock market for better or for worse is now simply trading pretty much in-line with the long term trend so perhaps we should not be surprised.
ASX All Ordinaries Technical Chart: 1988 -2011
The long term candlestick chart for the All Ords shows two pretty distinct trends. The one between 1991 and 2001 is pretty closely aligned with the overall long term trend whereas the last bull market trend between 2002/3-2007 was something we had not see before.
So the question is..which trend will the market follow when it (hopefully) makes a move back towards 6500?
If the market continues to move upwards as per the long term trend then we have quite some years to go before we see the 6500 level breached. My guesstimate is that if the long term trend were to continue then we will not be near the 2007 high again until around 2020. (i.e based on the All Ords climbing on average 200 points a year)
Of course the market may rally more strongly than the long term trend suggests or may even fall back again, so we need to appreciate that looking at charts and drawing lines on them is not a reliable way to forecast what will happen in the future.
If the Australian stock market finds it’s mojo again and was able to gain 700 points or so a year then we could pass the 2007 high in 2013-2014. Either way it would appear likely that we will have to wait years before we can crawl our way back to where we were in 2007.
Finally let’s quickly have a look at the All Ords chart over the last 10 years.
ASX All Ordinaries Index 10 year chart
On this chart I have drawn a line at the 5000 level as this seems to be above which the stock market bubble formed and which now acts like ceiling on the market.
From around the start of 2003 until the start if 2011 the All Ords moved from around 3000 up to around 5000 which on average is a gain of around 250 points a year. If this trend were to continue it would be another 6 years before we were near 6500 again give or take a year or so.
Of course none of this chart gazing provides us with any certainty regarding how the Australian stock market will perform over the next few years or even next decade. But I will be foolish enough to draw a few conclusions.
Firstly I think the chances of the market surging up past 6500 over the next few years are very slim and I seriously doubt it will happen. Secondly I doubt that we will see another 2002/3-2007 surge during the next bull market and finally, I think as share market investors we should prepare ourselves that when the market does enter a steady climb upwards again, that is likely to be at best a touch above the long term trend but not spectacularly above that trend.
So in summary my view at the moment is we will not be near the 2007 stock market high again until around 2014-2016 and that is the best crystal ball gazing I can do for now. I would not call this a forecast as such, but simply a mental note to prevent myself being carried away by any short term rallies.
Greg Atkinson is the editor of Shareswatch Australia, the Managing Director of Ohori Capital and a Director of Eco Marine Power. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp