As we approach the end of the year, the annual topic of a “Santa Rally” rears its head and although I don’t believe Santa can rally stocks, I do wonder if the current upwards trend of the Australian stock market can be sustained for much longer. Will the S&P/ASX 200 finish 2012 on a high, or will slide back and finish well below 4500.
At the beginning of this year my expectation was that the All Ords/ASX 200 would finish up around 5000 so you would expect me to be somewhat bullish about stocks, especially since the market has been on the rise for around six months.
But I believe the market is now in the overbought zone and the charts below make me feel that view is justified.
S&P/ASX 200, HVN, CBA and BHP 6 month chart
On the above chart of the S&P/ASX 200 (XJO) I have plotted the share prices for Harvey Norman Holdings (HVN), Commonwealth Bank (CBA) and BHP Billiton (BHP).
Clearly CBA shares have done well recently as have other banks as interest rates are cut & their dividend yields start to look very attractive. Since the ASX 200 is basically pushed along by the miners and banks, the rise in banks stocks has certainly nudged the index upwards.
Also helping the ASX 200 climb has been the major mining stocks, which have risen on the belief that the Chinese economy is rebounding strongly. I don’t think the rebound in China is a sign that the days of high growth are back but for now, many major mining related stocks are giving the Australian stock market a much needed boost.
But then we have a stock like Harvey Norman Holdings (HVN). Clearly shares in this company are not enjoying any Santa rally which for a retailer, is far from ideal. For me this suggests a bit of a disconnect between the stock market as a whole and what the underlying economy is doing.
Let’s have a look at some other retailers and see how they are performing.
S&P/ASX 200 JBH, DJS, TRS and MYR 6 month chart
The stand-out performer in the chart above is The Reject Shop (TRS) which reported better than expected results in August and appearers to be on a bit of a roll.
JB HiFi (JBH) and Myer Holdings Limited (MYR) are tracking higher than the ASX 200, which you would expect them to be doing in the lead up to Christmas t with David Jones Limited (DJS) shares showing some weakness. Overall however, I just don’t get the sense that the retailers are enjoying the the fruits of a robust economy.
S&P/ASX 200 XJO verus ETF:GOLD 6 month chart
Now just a quick look a the Exchange Traded Fund (ETF) GOLD. I know it’s popular to get excited about gold these days but the reality is ETF:GOLD has been under-performing the ASX 200 Index since the middle of the year.
S&P/ASX 200 (XJO) Candlestick Chart
This last chart is the 6 month candlestick or technical chart for the S&P/ASX 200. In simple terms the red bars show when the market closed lower, the blue bars show when the market closed higher or the other way around if you’re bullish about stocks 🙂
From mid November the ASX 200 has been on a fairly steady rise but it looks like it is now losing momentum and that 4600 might be just too high for it to hold onto for now. Taking that into account plus my view that the Chinese economy is probably not bouncing back as strong as many analysts think, then a correction seems to be more likely than a continued rally for Christmas this year.
This article was written by Greg Atkinson who 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