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Why is the Australian stock market unable to rally?

May 3rd, 2011 · Greg Atkinson · 4 Comments

Despite the best efforts of many analysts to talk up a stock market rally the Australian share market continues to move sideways with the ASX All Ordinaries and S&P/ASX 200 both unable push clear of the 5000 level.  But should this worry investors or is the market now simply reverting back to the long term trend?  Also what factors might be at play that are preventing a major market rally?

Back in August 2009 I started to focus on where the logical bottom of the Australian stock market should be.  In other words I was trying to discount the level at which panicked selling had sent the market and focus on where I thought the All Ords & ASX 200 should be.

After analysing some charts and looking at past bear market corrections I estimated that the Australian stock market should have a bear market bottom of around 4800 – 5000 and that any level under that range meant the stocks were oversold.

For example back in August 2009 I made the following observation in A technical look at the S&P/ASX 200 Index (August 09)

“…my take on where we are now is that it seems likely the stock market will reach the 4800 level and maybe even nudge toward 5000, but at this point in time I cannot see stocks pushing higher much further than that. Some company earnings have been solid and reflect signs of a recovery, but plenty of other companies such as Qantas and Suncorp show that the economic downturn will still be felt for the rest of 2009 and probably well into 2010 also.”

At this point let’s have a look at a chart I was talking about back then.

S&P/ASX 200 Weekly Technical Chart – August 2009

asx-200-candlestick-chart-2-aug-09

What this chart showed us clearly in 2009 was how stocks had rallied strongly since 2003 and then come tumbling down as the global financial crisis did it’s damage.

Notice how I marked on the chart lines at 4800 and 5000 which at the time I figured is where the market would rally to.  I was right, but I am surprised that the Australian stock market has been unable by now to break through 5000 and close up near 5500.

But maybe I should not be surprised by where the market is today as a look at the long term chart for the ASX All Ordinaries indicates that basically the market has simply reverted to it’s long term mean trend.

Australian ASX All Ordinaries Chart 1988 – 2011

asx-all-ords-long-term-chart-may-2011

If we look at the chart above we can see how the Australian stock market essentially bounced off an oversold level during the GFC and rallied quickly back up near where I estimated the logical bottom of the market was.

But what is more interesting is that this chart shows that the market today is pretty much aligned with the overall trend between 1988  to 2011.  In other words, the market has now reverted to the mean and could be setting itself up to start climbing towards the highs of 2007  over the next few years.

The chart above also shows how a stock market bubble formed between 2003-2007, but of course these are always easy to spot in hindsight.  At the time, the China growth story was all the rage and plenty of market experts were predicting the next stop for the Australian stock market would be 7000!

So what is preventing the market from moving higher now? Well back in August 2008 I discussed what I thought was needed to get a sustained rally going in What we need for a sustained stock market rally and as of today I am still waiting for basically the same things to happen.

For example I don’t think we will see a sustained stock market rally while official interest rates in Australia are around 4.5% and the US Federal Reserve Bank is dishing out dollars and holding rates near 0%.

This has pushed our dollar too high against the USD and simply makes our stock market look expensive to overseas investors.  When the ASX All Ords rallies near 5000 it’s very tempting for overseas investors and fund managers etc to take profits and bring that money home while such a great AUD/USD exchange rate lasts.  This (along with local investors selling) has prevented the market holding above 5000 for very long.

Secondly the political situation in Australia is a mess and this is spooking investors both domestically and internationally with two major issues remaining in limbo – the mining tax and carbon trading scheme (tax).  In addition the much heralded Henry Taxation Review also seems to be gathering dust somewhere but parts of it could see the light of day again at any time if the government needs to plug budget holes.

In addition a minority government in alliance with a party openly hostile to business (i.e The Greens) is hardly going to encourage people to move out of a safe bank account into the unknown world of stocks at this point in time.  As long as the current political environment exists in Australia then I expect this to put a drag on the stock market.

Finally we need to see signs that the US recovery is gathering pace and can be sustained.  I know just about every market watcher in Australia thinks that the only economy that counts is China, but if the US economy does not get back its mojo then the current Chinese spending spree is going to run out of steam.  China alone will not power the global economy.

The chart below clearly shows how the ASX All Ords over the last few years has made a few runs towards (and even past 5000) but that these gains have been followed by a wave of selling

ASX All Ords XAO Weekly Chart over 2 Years (May 2011)

asx-all-ords-2-year-chart-may-2011

I have marked the major thrusts towards 5000  in green on the above chart to highlight just how many runs towards that level there has been over the last few years.  On just about each occasion the financial media has rushed to pump out headlines about how stocks have surged etc but the boring reality is, that the Australian stock market really isn’t doing much.

So at this stage I don’t expect to see a strong rally come along that will push the  share market (All Ords/ASX 200)  past 5000 and towards 5500.  In fact I am more inclined to brace myself for a correction back down below 4800 and a few more months at least, of a stock market essentially going nowhere.


4 responses so far ↓

  • 1 Ned S // May 12, 2011 at 8:17 pm

    ASX200 has closed below the 200 day moving average I’m told. Doesn’t mean much to me to I gather it could to stock market traders?

  • 2 Greg Atkinson // May 13, 2011 at 9:12 am

    Ned a moving average tells you a lot about what has happened in the past 😉 What I would say is the ASX has basically been moving sideways for a year or more and that it would be in a slump if it wasn’t for the mining stocks.

    My view is the ASX 200/ASX All Ords are telling us that the Australian economy is near recession like levels. Government spending and the resources sector are basically keep the GDP numbers for positive..for now, but for how much longer?

  • 3 Mladen Grujic // May 13, 2011 at 4:20 pm

    It is near recession-like levels. Quite simply, the trust in money and oversight isn’t there. The propping-up of the GDP is solely being controlled by our govt, but like Greg said, for how long?

  • 4 Greg Atkinson // Aug 6, 2011 at 11:03 pm

    Mladen I wonder if the government is thinking about another stimulus package? The latest stock market slump must be causing policy makers some grief?

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