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Australian stocks rally but risks remain high

October 25th, 2013 · Greg Atkinson · 20 Comments

Today the ASX All Ordinaries Index is up near the 5400 level with few signs that the current rally which started in July is about to fade. For market bulls this is a joyous occasion and for long term investors such as myself, it is a welcome change from years of the market edging sideways. However I will not be breaking out the champagne just yet as there are risks out there which seem to be getting over-looked.

But first the good news. Since July the ASX All Ords has risen by 15% which is a good run no matter how you look at it. But this follows a correction that took the All Ords to down near 4600 after it had previously hit 5200 – so the gain from the pre-correction peak to now has only been around 4%.

Needless to say that the mainstream finance media, market analysts and uber-market bulls are currently focused on the 15% figure which to me is bit misleading. Let’s be honest with ourselves and realise that to have benefited from the recent rally fully we would have had to take positions just as the market hit a short term bottom and then have sold these positions within the last few days. Anything else is just theory.

Many people will look at the chart below of the All Ords in different ways and come to different conclusions. My view is that it shows a market that has probably rallied too far too quickly on the back of fairly weak fundamentals.

ASX All Ordinaries Index 6 Month Chart


I don’t see many signs that the global economy is doing much else but reacting to vast amounts of stimulus money & central banks maintaining low interest rates. Yes there have been stock market gains in most major markets and property prices have been on the rise too, but I struggle to see how these gains can be justified on fundamentals alone.

If and when the U.S. Federal Reserve starts easing back on Quantitative Easing (QE) (also called “Tapering”) there will be a high risk in my view that U.S. stock market will undergo a sharp correction along with markets in Europe & Asia including Australia. It’s a big risk that just stays in the background since scaling back QE seems to be as issue too hot to handle.

Other risks out there include the Chinese economy which is still growing but probably not in a sustainable way and the European Union, where most economies are still struggling.

In Australia the economy is still showing signs of weakness despite low interest rates which have no doubt helped move up home prices and given stocks a boost as well. But just as the RBA were too slow to cut rates I will now go out on a limb and say they have left rates too low for two long. I am not suggesting a big rate hike, just a small tweak upwards to cool things down a little.

But we are where we are as far as the Australian stock market is concerned, so let’s have a quick look at few stock charts to see the current rally in some different ways.

First up Flight Centre Travel which has been on a roll for quite a while.

Flight Centre Travel (ASX:FLT) 6 month stock price chart


Clearly FLT has had a good run and I suspect the strong AUD has helped entice people to head overseas for holidays. But FLT has been on a roll for a long time and it almost makes me weep to think it was below $5 a share back in 2009. Clearly it would have been wiser for me to take a position in this stock than Babcock & Brown!

Next a quick look at Newcrest Mining (NCM) which has been in the news for all the wrong reasons.

Newcrest Mining Limited (ASX:NCM) 6 month stock price chart


As readers may recall I disclosed a while back that I picked up a few NCM shares when they were under $10 and then lost my nerve and sold when they were just over $13. Personally I don’t see gold or gold mining stocks as being the place to be for now but if NCM drops below $10 again I will be tempted. I may even be tempted to move into gold via an ETF if prices drop say another 5-10%.

Finally a quick look at an example of a stock I have moved into recently. As always I am not offering any financial advice so please do your own research before making any investment decisions and seek professional advice if needed.

Metcash Limited (ASX:MTS) 6 month stock price chart


I started buying into Metcash at around $3.25 because it appears to be a stock that may have been over-looked and/or unloved.  It pays a very respectable fully-franked divided, has a ROE of around 16%  and a P/E Ratio of around 11. As you can see it has basically gone nowhere and the trend is not my friend, but hopefully the stock price will not fall much further and the dividends will keep flowing.

Once again I stress I am not suggesting anyone buy this stock, I am just using it as an example of the type of stock that catches my interest at the moment. In this market I am not tempted to buy stocks near multi-year highs as I feel a correction is looming (and over-due). On the other hand stocks which has not rallied & may have been over-looked attract my attention. This may or may not be a good thing though!

So in summary the Australian stock market has recently rallied nicely, but in my opinion we need to keep that in perspective and not ignore the risks out there!

Greg Atkinson is the editor of Shareswatch Australia and Managing Director of Ohori Capital. He currently works & resides in Japan. He can be followed on twitter via Follow @GregAtkinson_jp

20 responses so far ↓

  • 1 Greg Atkinson // Nov 6, 2013 at 8:46 am

    I am now wondering if the All Ords/ASX 200 will break though 5400 and head much higher or if the upswing since the middle of the year is coming to an end? Could it be mostly downhill for the rest of 2013 for stocks?

  • 2 Lachlan Scanlan // Nov 7, 2013 at 4:42 am

    Gold breaking down to $1050 of thereabouts is fair good odds from a technical viewpoint Greg. As for my small cap gold gambles, boy oh boy I still own them but they’ll cease to exist if they go any lower. I’ll just keep ignoring them.

  • 3 Stillgotshoeson // Nov 11, 2013 at 12:57 pm

    I’m not ignoring mine Lachlan, still continue to add to holdings. Dollar cost averaging makes them look a little better than they otherwise could have been.

    Precious metals look to be range bound until Yellen takes over the helm of the Fed I think.

  • 4 Greg Atkinson // Nov 12, 2013 at 4:31 pm

    Everything to do with gold has me stumped at the moment. I still have an eye on Newcrest mining though. Also seems the 5400 level for the All Ords/ASX 200 is providing quite a bit of resistance.

  • 5 Lachlan Scanlan // Nov 18, 2013 at 4:59 am

    Shoes, my gold is a very important investment to me. It’s just a personal situation I am in presently. I can’t invest more…but on the other hand what I have is staying put. I am investing more in my business. Although mining is very quiet the rehabilitation of sites continues unabated. Just very lucky for me.
    As for PM prices I am sure they are still to have their BIG day in the sun. When is anyones guess. I am sure we are all astounded by the now obvious ability of authorities/CB’s etc to kick this can. Crumbs I met a young fella yesterday who was living in an 8 room complex at $1200/week. They just put the rent up to $1500.

  • 6 Greg Atkinson // Nov 21, 2013 at 5:51 am

    We might be at the start of a sell-off for stocks and gold. Maybe we will have a Christmas rout instead of a Christmas rally this year? The U.S. Fed’s “Taper Tango” is making many investors nervous.

  • 7 Lachlan Scanlan // Nov 23, 2013 at 5:45 am

    Just had a quick look at the charts Greg. My favoured short to intermediate term, technical outlook is bearish for gold and bullish for ASX200. I might actually by a little metal if the price gets to another new low. If I hurt myself it’s all I have to fall back on since I am not big on insurance. Well that and some land which I am doing up.
    XJO will have some resistance around 5500 unless the last pull back was it. Otherwise might climb to 6000 target.

  • 8 Greg Atkinson // Nov 25, 2013 at 3:40 pm

    Lachlan I am bearish on both the XJO & gold. I think the outlook for the Oz economy over the next few years does not really justify pushing stocks higher unless of course the RBA cuts again. By the way Newcrest Mining (NCM) is below $8.50. Quiet amazing considering it was near $26 a year ago.

  • 9 Biker // Nov 26, 2013 at 1:10 pm

    Certainly quiet these daze… 😉

  • 10 Stillgotshoeson // Mar 11, 2014 at 9:36 pm

    Well, Iron Ore has copped a bit of a flogging lately. You would not know it though by the dollar and the All Ords.

    Going to watch this a bit more from the sidelines to see how it pans out.

  • 11 Greg Atkinson // Mar 14, 2014 at 8:51 am

    Yes the sidelines are a good spot to be for now. As I have mentioned a few times for some weeks, I reckon the All Ords/ASX 200 has rallied too far and that a significant correction was brewing. We may be at the start of that correction now.

  • 12 Plornt // Mar 16, 2014 at 10:52 pm

    Still: the supply, demand dynamics have been in imbalance for some time, leading to an oversupply, and thus a lower market equilibrium clearing price. Iron ore price will continue to be under pressure until production is lowered from margin contraction above cash costs etc.
    Re: XAO / XAO, you have a massive issue re: intermarket analysis on the DJIA, SPX right now making all time highs, whilst concomitantly many indicies are structurally diverging.
    We are @ historically low interest rates on the 10-year treasuries, and these interest rates are driving the models investors are using to gauge risk premia, are giving a liquidity driven, artificial margin of safety.

    Gold, and Silver do look very underpriced. We are around cash costs for Gold, and below all-in cost for silver, marginal costs etc. More than 3 standard deviations on a regression analysis, for a 5 year time series, however that is assuming a normal distribution, kurtosis etc. Ned Davis Research has mentioned, with the precious metals equities rally in the US, sentiment has reversed to bullish, and statistically that leads to short-term price under performance.

    I guess we have no idea where the market will go, so business risk – variability of projected cash flows – need to look at companies with defensive business models, such as Walmart, or companies with high returns on equity, and incremental equity, low beta (below .6), and of course sustainable competitive advantages, either through economies of scale (Walmart), or high customer captivity (e.g. IBM).

    I’m a bit pissed off I missed this rally, but alas, I will not make that mistake again. That said volatility expansion, in late stage of the business cycle will widen spreads, and provide opportunities for merger arbitrage re: increased merger and acquisition activity, to diversify correlative risk (VAR – variance, co-variance).

  • 13 Plornt // Mar 16, 2014 at 11:20 pm

    Greg: I agree, I have no intention of wading in atm to chase this market – escalation of committment is not part of my toolkit. Irrational exhuberance at its finest. I think it’s 23 years without a recession now ? lol Going to be interesting to see what happens, to the Australian economy — wonder what happens IF mean reversion occurs ? An outlier.
    In the US we have lowering unemployment, which according to the phillips curve, increases the likelihood of higher inflation. Higher inflation drags equity prices lower (CAPM).
    Diversifying a portfolio to 20 stocks may substantially reduce unsystemic risk, but not ignorance and systemic risk. Some of these portfolio models are bonkers, and drive institutional herding.

  • 14 Plornt // Mar 16, 2014 at 11:27 pm

    Still: Dollar cost averaging is ok, it will reduce your drawdown, but lower your CAGR. There were some studies done on this, mentioning the lump-sum strategy produced higher returns. Just be careful running stops – avoid round numbers, with the High Frequency strategies running around, I might ignite some momentum, and your stops lol.

  • 15 Lachlan Scanlan // Mar 18, 2014 at 5:47 am

    Hmmm copper eh…and Soc Gen (link above … ) calling me a fool this year Greg…how rude 🙂

    quote cnbc
    “Investors who believe copper’s recent price decline is limited to China are on the “path to ruin”, warned Albert Edwards, Societe Generale’s uber-bearish strategist.
    “The creaks and groans in the copper price reflect the sound of the tunnel supports giving way,” he wrote in his latest research note on Thursday.
    Edwards went on to warn that central bank liquidity won’t come to the rescue of any foolhardy equity bulls.”

  • 16 Stillgotshoeson // Mar 19, 2014 at 3:15 pm

    Lump sum strategy can produce far better returns than dollar cost averaging, there is no doubt on that.

    The problem is timing and failing to act. Many sit on the side lines with a lump sum ready to pounce but don’t, fearing it the stock they like might be 2 cents cheaper tomorrow and it goes up so they hold off waiting till the next dip, rinse and repeat.

    Gold and Silver imo had a healthy correction on a long upward trajectory and are likely to resume that upward trend. Volatility aside.

  • 17 Plornt // Mar 19, 2014 at 3:34 pm

    “The problem is timing and failing to act. Many sit on the side lines with a lump sum ready to pounce but don’t, fearing it the stock they like might be 2 cents cheaper tomorrow and it goes up so they hold off waiting till the next dip, rinse and repeat.”

    This is true – timing is important when expected returns are very low – in fact if your expected returns are below the projected inflation rate, you could do serious damage to your net worth. I have incorporated transaction level statistics so I can optimize my strategies more effectively, and importantly, I have set minimum risk levels, so I don’t ever become under invested again @ the bottom of the cycle, and raise risk levels when I am trading well. I am also being taught by several managers now, which I am thankful for, and helps immeasurably. I was learning from a lot of idiots previously, which doesn’t help things. At least I am readily able to discern the difference now.

    For me, the portfolio I selected, smashed the market, but I listened to too many “helpers” with not enough skill, that corroded my framework. My framework is pretty rock solid now, and i’ll continue to reinforce it. My execution was poor.

    I will not have this happen again, and i’ve raised my education levels to match most managers now, so I can properly see what they are looking at.
    Look forward to flattening some of these guys in the coming years, now that the advantages are much less. Not easy to learn this game, but i’m slowly working my way through the garbage, and what you actually need to know. I know most hedge fund strategies now (but obviously not mastered), which allows me to lower standard deviation and thus provide performance in line with targeted sustainable sharpe.

    Probably wont post too much, but will occasionally will come by, and discuss. Want to concentrate on performance, not talk. Talk is useless.

  • 18 Greg Atkinson // Mar 20, 2014 at 6:32 pm

    Well today the market ended where it was when I wrote the post above in October 2013. That makes me wonder if the rally that started in June 2013 has come to an end and if so, will the next major move be the start of a new rally towards 6000 or a major correction down towards 5000?

  • 19 Biker // Mar 23, 2014 at 9:48 pm

    Plornt: “I am also being taught by several managers now, which I am thankful for, and helps immeasurably. I was learning from a lot of idiots previously, which doesn’t help things. At least I am readily able to discern the difference now… I’ve raised my education levels to match most managers now, so I can properly see what they are looking at. Look forward to flattening some of these guys in the coming years… .”

    Remarkable. You’ve managed this so quickly, too. Now the real trick is reporting what you’re doing _before_ the chickens hatch, as Shoes has. You’d be wise not to _count them_ yet, as some here have done. 😉

  • 20 Lachlan Scanlan // Mar 24, 2014 at 5:31 am

    Just looking around the blogs it is very bearish at present. I think all the argument over global military developments and geopolitical moves is part of the reason. A lot of press regarding financial system problems in China too. Anyhow these things can just go on and on and while they (and other factors)will certainly coalesce into trouble one day it seems that nobody can study these events and then consistently predict much. In the long term inflation keeps on inflating however so buy something on a dip/discount and just be happy I guess.

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