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Will the S&P/ASX 200 continue to rally in 2012?

December 17th, 2012 · Greg Atkinson · 16 Comments

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

xjo_bhp_cba_hvn_6_month_chart_dec_2012

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

xjo_djs_jbh_myr_trs_chart_dec_2012

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

xjo_gold_6_month_chart_dec_2012
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

asx200_6_month_candlestick_chart_dec_2012

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


16 responses so far ↓

  • 1 Stillgotshoeson // Dec 19, 2012 at 8:55 am

    I am surprised we broke through the 4500 level with out any reasonable sort of pull back Greg. Can not speak for other places but there is definitely a feeling of caution and concern in Melbourne. More infrastructure spending annoinced in Japan and an intention to drive the Yen lower may mean we get a little more out of this rally and more pressure on our dollar. More pressure on our dollar could spell even more trouble for manufacturing here.

    Looks like your 5000ish call won’t be too far out for the end of the year Greg. I think it will hold or even go a bit higher before end of year. Late Q1 or into Q2 we could well see the expected pull back.

    I still can not see any sustainable fundamentals for the ASX to continue its rise for much longer. The curve ball from Japan I was certainly not expecting. Remains to be seen just how much impact it has on our economy.

  • 2 Greg Atkinson // Dec 19, 2012 at 2:53 pm

    Well there will be some extra spending here in Japan and the Nikkei 225 is on a bit of a roll. But any benefits to Australia from the stimulus spending in Japan will be pretty offset from the drop in thermal coal experts once some more nuclear reactors go back online.

    I guess if the ASX All Ords/ASX 200 did get up near 5000 it would make my call at the start of the year look good, but when I look at the Baltic Dry Index which is near the GFC lows it makes me convinced that indeed a correction is brewing.

    Maybe I can have a win-win situation with the All Ords getting near 5000 and then a correction coming in the new year? 😉

  • 3 Lachlan // Dec 19, 2012 at 3:22 pm

    As far as i can see, away from Aussie mine towns money has contracted acutely. It has been looking like a recession for the last year at least. It does not surprise me though in an era of bailouts that stock markets can rally during a poor economic period.
    I’m just hanging tough on gold. The metal price looks fine. It looks though like the share market is going smash nearly every weak hand on goldies before it ever turns up. That’s good if you have some long term investment dollars in a climate where most assets are not cheap.

  • 4 Frank // Dec 19, 2012 at 3:31 pm

    Hey Lauchlan “I still can not see any sustainable fundamentals for the ASX to continue its rise for much longer”

    Banks and major mining stocks reporting record profits, CSL, MND, TLS and other large caps announcing earnings upgrades and so on tells me that fundamentally the ASX is undervalued. It is probably a result of the lack of depth in our stock market but if you stay away from speculative shares then there is good growth to be had.

    I mean people are talking the mining industry down, but FGE and MND as ECPM contractors to the mining industry have both already announced earnings upgrades this year so it isnt all doom and destruction. The big loser appears to be UGL who havent won anything of significance since Pluto some 4 years ago.

    I will postulate (or speculate but I avoid that word because it is tossed around too freely by some clueless bears out there…) that we will crawl toward 5,000 points and hover either side of that barrier for a couple of months before pushing through and staying there. There are some very good stocks in our market with only good news ahead.

  • 5 Lachlan // Dec 19, 2012 at 8:58 pm

    I would not deny your postulation Frank because it may well turn out correct. I don’t see the market as cheap however it can’t be too expensive now either considering none of us knows when and where price inflation will exert itself. The correct play is to have some investment but not all in for mine. I think many of your better quality plays, yielding shares have further upside yet. TLS might extend more but I believe it will retrace lower than the current price…as part of a normal process of consolidating gains. Granted I have said this before. Not keen to chase anything.

  • 6 Frank // Dec 19, 2012 at 9:43 pm

    Hi Lachlan,

    My advice is get into blue chips and get close to industry leaders in this market. One of my biggest regrets is not getting into Boart Longyear when they were in the cents at the height of the GFC because I was scared off by their debt ratios and closing Adelaide manufacturing.

    OK, it has been savaged again of late but there was 500% upswing that I dipped out on.

    FGE and MND are the dominant EPCM contractors at the moment and worthy of accumulation. Clough also not bad given their shareholding in FGE if nothing else. Avoid UGL at this stage, though I hear that they have a couple of very handy announcements in hand that their employees and suppliers are well aware of, but as they dont announce every win like LEI do is not widespread.

    I still really like TFC as a share. The more I research it the more I buy. Harvest this year will add the last string of the vertical integration bow, and if Frank Wilson can settle his board then good times will be ahead. Basically it has been savaged because of the Gunns and Southern Cross MIS debacles and delistings but this is a sound asset to hold IMO.

    CSL outstanding capital growth, junk dividend yield. I am going to exit my position I think and hunt NAB

  • 7 Matthew // Dec 19, 2012 at 11:30 pm

    Silence is indeed golden!

    Greg please let me thank you for my late year entertainment. The cue is in the rack for me professionally this year and I look forward to a quality 3 weeks off with my family time on the river and in Mandurah with my boys chasing crabs and at Ascot with my friends chasing returns that the ASX won’t provide.

    To all bar one of Your readers and posters I wish you all a very Merry Christmas and safe and happy new year full of good things that deliver all that you could hope for.

    To the other guy, well as far as I am concerned he and all his personalities can rot on a stick being picked apart by crows. Don’t tolerate gutless fools or cowards as a general rule and won’t make an exception here.

    My 2013 tips – ASX to close at 5,275 points, Australian Property to rise 3.5% dominated by Perth (city not state), Northern Territory and Queensland. Liberal to be returned with a clear majority and Turnbull to Costello Abbotts Howard. Gold to soften to the same extent that Iron Ore strengthens, and wage growth to sit at about 5.5%. Interest rates to be cut 0.75% with just 0.5 passed onto consumers and business and the RBA cutting 1 too far as is historical form.

    Good things will happen next year people, take the right attitude and there is money to be made out there, I am sure not to be one who misses out!

  • 8 Greg Atkinson // Dec 20, 2012 at 8:09 am

    Well today the market will be tested by the drop on Wall Street overnight. If the ASX All Ords/ASX 200 rally is sustainable and built on fundamentals then it should be able to shake off a few bad trading sessions in the U.S. If however the rally is being driven by a lot of speculation & wishful thinking, then we will see investors sell & take profits at the first signs of trouble.

    It could be an interesting couple of days!

  • 9 Frank // Dec 20, 2012 at 9:41 am

    Steady as she goes so far captain

  • 10 Frank // Dec 20, 2012 at 2:55 pm

    Closed a hair up, probably drop 100 points tomorrow

  • 11 Biker Pete // Dec 21, 2012 at 12:20 pm

    Rare admission from Sayce, over at MMA:

    “At the end of last year we said the stock market would go up and down but that by the end of the year we wouldn’t be surprised if it was back where it started.

    With two weeks to go until the end of the year, it looks as though we’ve got that wrong.”

    I see the Comments Section is still automatically closed. 😉

  • 12 Lachlan // Dec 21, 2012 at 2:13 pm

    PM’s have been knocked hard down to deeper support levels now. I would have to favour a continued rally on stocks since PM’s will very likely bounce. The dow had its little shakeout.

  • 13 Greg Atkinson // Dec 28, 2012 at 2:23 pm

    Well the rally remains in place with the All Ords & ASX 200 both above 4600 now. I have to say I am a surprised that stocks have done reactively well recently. Maybe lower interest rates are tempting investors back into margin lending again?

  • 14 Lachlan // Dec 28, 2012 at 6:48 pm

    Greg it is starting to develop into a more interesting scenario bit by bit… as this rally continues higher and esp if the currency goes higher too I will start to get bearish. Gold stocks are interesting too. Even NCM is threatening further downside although it’s definitely not one to short here imo. In fact I am cashed up and will be looking to add soon on any breakdown. But with goldies having sold down so far and with quality stocks (divi payers etc) having rallied a lot(divergence) I can feel that a general market event so to speak is getting close now….but not just yet imo. We can stretch further out according to my price tech view.

    I decided not to buy any PM’s or PM shares on the last dip. I believe we could have some more volatility here and a slightly lower low. Or I hope so because otherwise I have missed out.

    The chances of the dow going down to say 12700 or so are higher now imo after the last move down although some relief bounce may happen first. The markets there and here have started to retrace the divergence they had. We are on the up now and they are on the down. I thought that was a good reason to suspect the rally here too. Another reason too I think we can get more upside yet.

    (Comments combined into one entry – GA)

  • 15 Greg Atkinson // Dec 29, 2012 at 8:42 am

    Well Lachlan I thought the rally would have been broken by now but I am still expecting a correction and expect this will take the ASX 200/All Ords below 4400. I have been a seller into this current rally and not a buyer simply because I don’t think it will be sustained. Where is the good news or data?

    NCM as you point out is down again..back near $20 but I am one of those in the minority who think gold is in bubble territory still. Having said that if NCM went under $20 I would definitely be tempted to give the stock a good look over again.

    Anyway the Dow was down -1.21% overnight so it will be interesting to see how the Australian stock market reacts to this.

  • 16 Matthew // Dec 29, 2012 at 10:48 pm

    Greg I will support you on gold. If you look at the actual production costs of individual mines you will realise how vulnerable this sector is. Look at Apex’s issues in Wiluna. Unless you are one of the big guys like Barrick, diversified in your countries of operation to take advantage of lower production costs or both this sector to me is heavy risk territory. A “reasonable” swing in price could see many listed companies in this sector place their mines into Care & Maintenance”

    I would be hard pressed to take a punt on a $20 stock.

    As for the wider market, in, out, up down, side to side, I still think that we are trading 10% light and any fall or “profit taking” will be met with an upswing to counter it.

    The diamonds are becoming harder to find in the rough, but there are still plenty to be mined!!

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