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What could be the next move for the ASX All Ordinaries Index?

March 27th, 2013 · Greg Atkinson · 12 Comments

Since mid last year, the Australian stock market has staged a fairly impressive rally with the ASX All Ordinaries Index moving from a decidedly bearish level of down near 4000 to a bull market level of just under 5200 points. But of late the market has slipped back which will worry some investors, while others see this a simply a pause before the rally upwards continues.

On the 1 year candlestick chart of the All Ords Index (XAO) below we can easily spot the rally from mid 2012 up until February/March 2013 that gave stock market investors plenty to cheer about.  But over the last couple of weeks, the rally appears to have run out of momentum with the All Ords slipping back below 5000.

ASX All Ordinaries Index 1 year  candlestick chart


To get a better view of what has happened over the last few weeks I will use technical or candlestick chart of the All Ords over the last 3 months.

ASX All Ordinaries Index 3 month candlestick chart


I don’t claim to be technical trader, but I do use candlestick charts because they help me get a feel for how the market is moving. For example looking at the chart above it’s pretty clear that up until the later part of February the market was trending upwards. But then, what I would describe as doubt, crept into the market due to a range of issues from economic data coming out of China to the banking woes in Cyprus.

At first the red days – when the market finished lower, were quickly countered by blue (or black) days – when the market finished higher. But from around the middle of March the All Ords started to slip back as investors began to take profits and buyers were less keen to jump in and prop up stock prices.

One major reason the All Ords (and the ASX 200) has fallen over the last week or so is because the outlook for commodities such as iron ore & coal suggests the big miners are in for a challenging year.  As a result, mining stocks have been under pressure recently but as we can see from the chart below, bank stocks may also be coming under pressure now.

ASX All Ords Index (XAO) vs CBA and BHP 1 year chart


The stock price graph above also shows how the banks not the miners, have been the main driver behind the Australian stock market rally since mid last year. Therefore by my reckoning, if the bank stocks remain under pressure then the All Ords will fall further since I don’t see a rally taking hold across the mining stocks any time soon.

Finally here is a chart which I believe will help investors get a grip of what is happening on a global economic level.

BHP Billiton vs AMEX Oil & Gas Index 10 year chart


The AMEX Oil & Gas Index is useful to watch as it gives us a feel for how the global economy is moving since in theory if demand is rising for oil and gas, then prices should also be creeping upwards. Likewise if demand for commodities like iron ore and coal is rising then a company like BHP should be doing well as prices for these should also rise. If demand for oil, gas, iron ore & coal is rising then BHP will do even better since it also has significant oil & gas operations.

So if we look at the chart above we can see a strong correlation between the BHP share price and the AMEX Oil & Gas Index – which makes sense.  Then during 2007 – 2008 the commodities bubble formed, the GFC hit and the correlation between the two basically fell apart.

Why? In one word – China; since in response to the GFC the Chinese launched a massive economic stimulus programme which shored up prices for iron ore & coal (and copper etc) but didn’t do that much for oil & gas. Why?  Because the U.S/E.U consume far more of these than China and their economies were (and still are) struggling.

Of course the situation is a lot more complicated than, that but if my simple overview is correct then we should see the correlation between the BHP share prices and AMEX Oil & Gas Index restored as the global economy begins to truly heal.

So at this point my view is the All Ordinaries Index is set to fall further but will regain ground later this year.  Therefore at this stage I will (perhaps foolishly) stick to my Australian stock market outlook & forecast for 2013 and expect that the All Ords/ASX 200 will finish the year between 4800 – 5200 points.

Greg Atkinson 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

12 responses so far ↓

  • 1 Stillgotshoeson // Mar 28, 2013 at 8:02 am

    “So at this point my view is the All Ordinaries Index is set to fall further but will regain ground later this year.”

    I think the index is set to fall this year and will stick with my 3800/4200 call.

  • 2 Greg Atkinson // Mar 30, 2013 at 1:12 pm

    It certainly seems the All Ords has lost some momentum of late and appears set to drift downwards. The big question is how far will in sink? I don’t expect it to go below 4400 and reckon the 4800 will provide a fairly string support level but a string of bad news would trigger a wave of selling so maybe 3800-4200 will turn out to be a good call.

  • 3 Stillgotshoeson // Apr 1, 2013 at 12:05 am

    With 9 months of the year still, we could see 4000 then 5000+ again before the years out.

    Europe still appears to have issues, China are about to implement more housing controls and the rise in house prices appears to stem from investment firms buying up housing stock for rentals, not a gain in prices from the “working class”. This indicates to me that all is not self sustaining growth we are seeing in the figures out of the US either.

    I am getting more and more convinced that this volatility and general feeling of “unsure” about the market will continue for a few more years (into 2017). Glimmers of hope giving a boost and then large negative news causing pull backs.

    I generally do not day trade but a day trader could do very well with this volatility.

    My view has not changed about a large pullback to the GFC lows for the DOW and ASX before this is all over. I am yet to see any real sustainability coming out of all this money printing.

    The eventual true recovery will be a great time to prosper in if one is wise with their money at this time.

  • 4 Lachlan // Apr 1, 2013 at 6:05 am

    Shoes, I have not sold a single gold stock even though they have been smashed. I bought at historic lows and now they are even lower. I believe now and the next few months or so is another good time to be scooping bargains on these once more. The bank stocks…well the banks are buying there own stock. They will correct at some stage and there will be some rearranging for them to do once more. The can kicking will continue…yes. The main players are using this perfect storm and their ZIRP power to rearrange things for a new political and financial paradigm ahead. Gold will be a part of it imo.

  • 5 Lachlan // Apr 1, 2013 at 6:23 am

    Check this out too.

    “Over the weekend, Australia appears to have come to the same conclusion, with the Australian reporting that the land down under is set to say goodbye to the world’s “reserve currency” in its trade dealings with the world’s biggest marginal economic power, China, and will enable the direct convertibility of the Australian dollar into Chinese yuan, without US Dollar intermediation, in the process “slashing costs for thousands of business” and also confirming speculation that China is fully intent on, little by little, chipping away at the dollar’s reserve currency status until one day it no longer is.”

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

    Interestingly one fact that didn’t seem to get much attention back in Australia was the fact that FDI into China has fallen for the first time since 2009.

    See: China FDI Shows Full-Year Decline as Economic Expansion Slows

    FDI has been one of the major drivers behind growth in China and if it keeps falling, then you can be almost certain this will hit the demand for commodities and therefore put a drag on ASX listed mining company related stocks.

    Why would FDI into China remain weak?

    1. The EU is China’s biggest trading partner and European companies have invested heavily in China in the past. However the continued economies woes across the EU have put the brakes on investment into China by many European companies.

    2. Last years riots in China targeting Japanese firms (and even Japanese people themselves) over a territorial dispute has made many Japanese companies rethink their plans to invest further in China. The so called China +1 approach taken in the past by many Japanese companies is leaning now more towards the +1..i.e. investments by Japanese companies appear to be increasingly heading towards countries such as Thailand, Vietnam and Indonesia. Recently Myanmar has also been getting a lot of attention.

    So I would add FDI into China as one of the indicators worth watching this year.

  • 7 Stillgotshoeson // Apr 1, 2013 at 11:22 am

    Likewise Lachlan, I have not sold down any of my portfolio and have in fact been adding to it over the last few months.

    It is interesting that you mention this Greg. I have a friend that works for a manufacturing company in Melbournes North that expanded into China a couple of years ago and was looking to shut shop shop here in Melbourne and he now says that the company has decided to remain in Melbourne and not expand operations in China any further.

    Reasons given are longer lead times, slow response to quality problems and further delays on re orders. Rising labour costs and nationalisation of equipment fears. They recently purchased a machine from Germany and the Germans were adamant that it could not be set up in China due to the likelyhood of theft of intellectual properties of the design of the machine.

  • 8 Greg Atkinson // Apr 1, 2013 at 1:21 pm

    By the way I also have not been very active with my portfolio apart from selling some CBA shares to lock in profits and selling out of News Corp (ASX:NWS) NWS shares will probably head much higher now that I have sold them, but a gain is still a gain and it’s nice to lock-in some profits from time to time.

  • 9 Lachlan // Apr 1, 2013 at 1:27 pm

    I was talking about the small caps in gold mainly as per historic lows but the large producers like NCM are also coming into a very good buy range for sure. There has been no real gold share mania fact the opposite. Every dog has it’s day but you have to have a little nerve buy such an unpopular and almost hated asset.

  • 10 Lachlan // Apr 1, 2013 at 1:32 pm

    I wont be bullish on China forever either. Its just that now they might have more going for them. They actually make something people want and their people aren’t so levered up as in the west. Their weakness might be seen in an ever growing age of robotics as I see it. Lots of jobs gone. Maybe some of these smashed up western economies will become places for industry again.
    I would like to travel to Asia just to see the spectacle.

  • 11 Biker // Apr 2, 2013 at 8:33 am

    ‘I have not sold down any of my portfolio and have in fact been adding to it over the last few months.”

    Peeking back into the archives 27/10/2010, it’s evident that your long-term perspective remains intact, Shoes:

    “@Christina, when the market crashes, I will continue to hold my positions and ride it out. When gold does rally, the shares in those gold mining companies will default.”

  • 12 Greg Atkinson // May 16, 2013 at 4:20 pm

    I wonder if May will be the month the ASX gets back down to 4800 again? For all the excitement in the mainstream media the ASX all Ords/ASX 200 is moving within a range now that I discussed more than two years ago.

    The trick now..will be to work out the range over the next few years.

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