Why the Australian Stock Market Continues to Struggle

Why the Australian Stock Market Continues to Struggle

Despite all the hype about an improving economy — both here in Australia and globally — it’s worth keeping in mind that markets are struggling. In Australia, the ASX 200 made a marginal new high on March 6, hitting 5,446 points. It beat the previous closing high of 5,441 made on October 28 last year. In effect, the share market has gone nowhere in six months.

The failure to convincingly break through the late October high suggests that there’s not a great deal of conviction about this advance. In the US, investors have been far more bullish, with the S&P500 hitting consecutive highs recently. But after recent selling, the S&P500 is only flat for the year, while the Dow Jones Industrial Index and NASDAQ are in the red for 2014.

The bull market, which began back in March 2009, might be getting long in the tooth. That was certainly the vibe we got from listening to some of the keynote speakers at Australia’s best investment conference, held last week in Melbourne.

That is, historically, five years represents a pretty good bull run, and we’ve just passed the five year mark. After experiencing such strong returns, you should at least expect a decent correction. The big question though is whether the correction represents a pause in a secular bull market or whether this is the resumption of the secular bear market, as our own Vern Gowdie argued convincingly at the conference. More on Vern in a moment…

But for now, keep in mind that all indices remain in an uptrend, and the bears need to see more falls before starting to growl more forcefully. Take the Dow Jones Indices for example. These once famous indices are not as widely followed as they used to be. But there are still proponents of ‘Dow Theory’ (including the legendary Richard Russell), which tracks the Dow Jones Industrials and Dow Jones Transport indices.

The theory states that a new high in one index should follow a new high in the other index in order to confirm the bullish trend. That is, if the transports (reflecting economic distribution of goods and services) make a new high, you want to see a new high in the industrials (representing economic production) to reinforce the bullish trend. 

Non-confirmations, on the other hand, are warning flags, and we just got one. The Dow Transports made a new all-time high on December 31, followed by new highs in mid-January and early April. However, the Industrials didn’t confirm the subsequent highs of the transports. As you can see in the chart below, last week the industrials attempted, and failed, to confirm the new highs in the Transports index. It has since turned down, providing a non-confirmation of the bullish trend.

But that just brings us back to no-man’s land. For Dow Theory to throw off a bearish signal, the industrials would need to break back through the February lows and the transports would have to confirm by doing the same. We’re about 900 index points away from that, so it’s early days. And as you can see in the chart, the Industrials remain in an uptrend, currently above both the 50 and 200 day moving average (blue and red lines). 

Dow Theory says no to the bull

click to enlarge

The way we see it, this recent bout of volatility is simply the result of the prospect of tighter money. While the US Federal Reserve continues with its taper program, which removes about US$10 billion in liquidity from the market every Fed meeting (the next one occurs at the end of April) the market will find it increasingly tough to make new highs.

And in Australia the market peaked in late October with a marginal new high made in March. Is this simply the market struggling to move higher under the prospect of higher interest rates? You could make the argument that the market factored in the positive effects of the Reserve Bank of Australia’s considerable stimulus by late last year.

The lack of subsequent new sustained highs suggests investors are now fretting about higher interest rates…or at least factoring in no new easing in the months to come.

This is why we’ve made the argument that Australia’s economy, like the rest of the world, is addicted to easy money. We’ve got structural problems, resulting in an asset/financed based economy with extremely poor productivity. Lower interest rates stimulate the asset/financed based part of the economy, with little sustained flow through elsewhere. So when rates go back up, that activity diminishes pretty quickly.

Our only saving grace is that we have the good luck to have world class resource deposits, and a neighbour on a credit binge which drives uneconomic demand for these deposits.

Taken together, when the prospect of easy money recedes, we’re left with an economy held up by increasing iron ore exports to China’s bloated and unprofitable steel industry.


Greg Canavan+
for Markets and Money

Join Markets and Money on Google+

Claim your FREE Special Investor Report…

Why Australia is on the Verge of a Decade Long Property Boom

Markets & Money Free ReportImagine you could see — with clarity — what was going to happen in the Australian housing market over the next few years?

This man can.

Dubbed ‘Australia’s most controversial economist’, Philip J Anderson says Australia is headed for another ten years of surging property prices.

If you rent somewhere and want to buy… you’re planning to buy or build… you own a home with a mortgage… or are interested in real estate as an investment… you must get this report.

You’ll learn:

  • How to time your investments to the real estate ‘clock’: you’ll see how the economy moves over time — and why — and can use this to time your real estate investments. Not only will you know when property is cheapest, you’ll never be suckered into buying at the peak and becoming trapped in negative equity.
  • The Secret of The ‘Law of Rent’: Just as gravity is one of the laws of science, the law of rent drives the boom and bust of the property cycle. Learn the secret behind mastering the law of rent and how you can use this unique forecasting tool to create a mass of wealth from property.
  • Why the US property market holds the key to property profits in Australia: As an investor outside the US, you have a huge advantage. In this report you’ll discover why the Aussie property market is inextricably linked to the US. And you’ll learn why grasping the predictable movements of the US property market could make you rich.

To download your free report ‘The 18 Year Real Estate Cycle That Says Aussie Real Estate Will Boom’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

Latest posts by Greg Canavan (see all)

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au