Will the Australian Stock Market Rally Continue?
Greg Atkinson | Jan 11, 2018 10:35
Late in 2017 I was prepared for a significant market correction and not only did this not happen, but instead the market finished the year strongly. Rather than the S&P/ASX 200 Index falling back towards 5500 it actually pushed and held above 6000 for reasons I’m not sure are based on market fundamentals. So what happens from here? Will the market rally keep pushing the ASX 200 higher over the next few months or will a correction bring it below 6000 again? Of course there is no way to be sure what will happen, but let me lay out some thoughts on what might happen.
Firstly let’s look at what the Australian stock market has done during the past 10 years.
S&P/ASX 200 (XJO) Index 10 Year Chart with Trend-lines
On the chart above I have added a simple trend-line (in green) from the point when the ASX 200 bounced back from its Global Financial Crisis (GFC) plunge to where it is today. I did not plot the trend line from the market bottom since this was when the S&P/ASX 200 was oversold. It’s now been a decade since the GFC-related market chaos and some investors might have forgotten that at that time, there was talk about the global economy collapsing hence the reason for much panic inspired selling. As the above chart shows it hasn’t been a smooth ride upwards since then (it rarely is) but the Australian stock market might this year finally reach the market high posted back in late 2007. That’s the good news.
The bad news is that it seems to me that the painful lessons of mispricing risk have been forgotten. Various governments and central banks have done their best to prop up growth via various means including racking up debt, quantitative easing (QE) and low interest rates. These measures were taken in response to the damage done by the corporate sector's eagerness to embrace an apparently clever strategy of financial engineering that resulted in risk being mispriced. Of course a housing bubble in the USA and other countries also helped make a very big bad stew that most of us got a taste of in some form or another.
This leads me back to where we are now and once again risk is being mispriced, the housing market in some parts of Australia appears bubble-like, there are fairly high debts levels in most of the top ten economies and there’s also a general complacency creeping into the minds of many investors. These factors can keep the stock market moving upwards for months or maybe even for years but is it sustainable? I don’t think so.
I am not suggesting there is going to be another GFC-type market meltdown, but it certainly appears that the Australian stock market is for the short term at least, somewhat over priced. By short term I mean 12-18 months and to help illustrate my point I will focus on a 12 month candlestick chart of the ASX 200.
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S&P/ASX 200 Index (XJO) 1 Year Candlestick Chart
The above candlestick chart for the ASX 200 provides an overview of what the market mood was during last year. Early in 2017 the market moved within a 200 – 300 point range before settling down into a very tight range around the the middle of the year. This was then followed by a strong move upwards with the market closing higher (green bars) on many days whereas there were fewer down days (red bars). It has been a good run and one that caught me by surprise, however I don’t think this rally has much further to go.
There are profits to be taken out of stocks after a rally like the one the ASX 200 has been on since late last year and I don’t suspect it will take much to get investors to sell out of some positions if there are any signs of trouble on the horizon.
So at the moment I am inclined to be a seller and not a buyer. I reckon there will be another opportunity to get into the market below 6000 during 2018 and maybe even near 5500. Within the ASX 200 range of stocks both resources and the financials related stocks appear to have run up a little too far although over the longer term I am positive on stocks that have exposure to oil and soft commodities (such as wheat, soy beans, sugar, beef). But I was certainly wrong late last year – so it’s very possible I am misreading the market again now!
This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. He can be followed on twitter via GregAtkinson_jp
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