Australia, economically, is sitting in a pretty good space. Average weekly wages are slowly increasing; Unemployment is serviceable at 6.4%; Annual GDP growth rate might be mild at 3.5% but better than most developed nations; Inflation is within target at 3.0%; and Consumer Spending continues to improve following the 2008 Global Financial Crisis (GFC).
On the negative, Consumer Confidence has fallen to long-term lows with Retail Sales stagnating throughout 2014. While fear of a slowing global economy has investors questioning the ability of our Mining sector to support the local economy.
What is in the charts?
The ASX200 index, as per the below chart, represents the top 200 shares on the Australian stock exchange. This index is considered the benchmark for how the stock market is performing. This chart is a weekly interpretation of the leading index.
A base had formed in late 2011/early 2012 before a steady uptrending market formed. From the broad low base around 4,000 points, the ASX200 recently peaked at 5,650 points – a gain of 41.2% in 2-years.
This gain is in fact better than the long-term average. In a 2012 report produced by the Australian Stock Exchange (ASX), the average performance of Australian shares over a 20year period was 8.7% per annum. Of course this included boom times and stock market crashes, click here to see the report.
Reviewing the ASX200 index, the recent 2-year performance is yet to show sufficient signals that a change in trend has occurred. The long-term trend is deemed upwards, not just by traditional trend definition (higher lows and higher highs), but as indicated by the 40week moving average line represented by the blue line on the above chart (40 weeks equates to a 200-day long-term moving average). This indicator helps define trending movements.
What is evident, however, is that the Australian stock market is not performing at the same rate of change as it had been previously. Applying momentum analysis to this chart shows a slower trending movement over the last several months, compared to the second half of 2012 where a booming market triggered the start of this current long-term trend.
The ‘counter-trend’ movement
At time of writing, the ASX200 is in the midst of a short-term retracement. Something we refer to as a ‘counter-trend’ movement. There is scope that the markets might continue to retrace on the short-term, however, trend analysis also suggests that the long-term trend has potential to hold, which would result in the index meeting the blue moving average line, forming a reversal and then continuing to push into new long-term highs.
This counter-trend movement is normal market activity. As you look into the history of this chart, you will identify plenty of examples where the market pulled back over a few weeks, only to resume the broader long-term trend.
Fear versus Greed
Investors fear the smaller movements, but when the big market reactions occur, they sit on their hands and do nothing. Investors are reactionary, not action takers, as emotion takes control of their decision making instead of adhering to a well thought out action plan. Hindsight is a wonderful thing, but taking action is the difference between an investor taking it seriously, and someone taking a punt.
What to do?
Our course of action with regards to the current market conditions is to continue evaluating the trending movement. Signals of a changing long-term trend will influence our strategy approach. That includes breaking the long-term moving average (blue line on the above chart), or a break of the medium-term lows/support around 5,360.
For as long as the broader uptrend continues to hold, we will be adopting Bullish strategies. Should a change in trend occur, then it will be a whole new ballgame.