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All Ords at 4500 again – where to from here?
The Australian All Ords is testing 4500 again. The last time it touched this level was in February 2010 and the consensus by stock experts was “Hold your nerve, its time to jump in“. That article quoted market heavyweights like CommSec chief economist Craig James, AMP Capital Investors head of investment strategy Shane Oliver and Austock senior client adviser Michael Heffernan who all agreed that
1. Recent falls mean shares are attractively priced.
2. Sovereign debt issues in Greece, Portugal and Spain are unlikely to cause contagion.
3. The US economy is on a recovery path.
4. Local profit results have been better than expected.
5. It’s not unusual to get a 10 to 15 per cent correction in a bull market.
From my own research, I disagreed with point 2 so I wrote “Should Australians be concerned about the European debt crisis?” where I highlighted views of other economists like Niall Ferguson and Simon Johnson who think the Greek debt crisis is something we should be very concerned about globally. After the crisis rocked global stock markets again last week, I think it is quite obvious who was right in their analysis of the Greek debt crisis. I wonder if our stock experts are still giving the same advice to their clients this time, now that the market has had another “normal” 10% correction and stocks are “attractively priced” again. After last week’s rather frightening correction, one columnist did write “Cash best bet as markets shudder” which is basically what I have been saying since November 2009 in posts like “High interest cash accounts for SMSFs“. From reading books like “This Time is Different”, I believe that the Global Financial Crisis is far from over. We had a banking crisis in 2007 and this is always followed by a sovereign debt crisis. These types of crises are not easily fixed and the authors have said that it can take ten years or more to recover to pre-crisis levels. I believe that the Greek crisis would have an impact on Australian markets which is why I have been covering this crisis closely on this blog in the past few months. I wanted to provide readers with information about the developing crisis that was not readily available from the local business news. The crisis has finally got the attention of the mainstream media so I won’t need to focus as much on it anymore. This crisis is not going to end with the US$143 billion bailout for Greece that was announced yesterday. The European Union and the International Monetary Fund have just pledged nearly US$1 trillion to defend the embattled euro so stay tuned for more trouble and more bailouts.
So the next question on every investor’s mind is of course – where will the market go from here? I will start with my own simple technical analysis using a chart of the All Ordinaries as shown below. Although we are re-testing the same price levels as in February 2007, this time prices have broken below the 200 day moving average (the red line on the chart). In a healthy bull market, this line should provide support and prices should bounce once they touch it as shown during the correction in July 2009. The chart below definitely looks bearish and prices should fall much further in the next few months.
As to how far it could fall, I would defer to market forecast experts from Elliott Wave International who have been right on the money so far. In the last issue of their flagship publication The Elliott Wave Theorist which was published on 16 April 2010, they called for a market top sometime between 15 April and 7 May 2010. As we all know, the DOW and S&P 500 topped on April 26 and went into free fall after that. Based on their analysis, we are in for a long bear market which will only end in 2016. You can read their analysis yourself as the April issue of the Elliot Wave Theorist is now available free for a limited period.
Many people have also noticed that the stock market behaviour to date has closely mirrored what happened in the 1930s bear market. The markets topped in August 1929 and then fell sharply. This was followed by an equally sharp rally in 1930 as described in my March 2010 post “One Year Later“. The May issue of the Elliott Wave Theorist was published yesterday and it provides a detailed comparison of the 1929-1932 bear market with the current bear market. They have called for a scary 92% decline from the October 2007 top. For the DOW which topped at 14,000, we are talking about a fall to a triple digit DOW. The prediction may seem outlandish but in 1929 the DOW topped at 380 and it finally bottomed at 44 in 1932. This is an 89% fall so a 92% fall is not that far fetched. Even if it falls just 89% again, the DOW should bottom at around 1500, which is still a long way down from the current level of 10,000+. If we apply a 90% fall to the All Ordinaries index which topped at 6750 in 2007, we would expect a bottom at around 675, a long way down from 4500 today. It will take another six years to reach the bottom and there will be plenty of small rallies along the way.
I subscribe to many investment newsletters but Elliott Wave International is the only paid investment publication that I subscribe to. Unlike most other investment publications, they actually make detailed forecasts of events BEFORE they happen. Frequently, their bold forecasts are so contrary to current realities at the time that they are hard to believe. In February 2009 when the markets were still falling, they predicted that there would be a sharp rally soon that would take the DOW back up to at least 10,000. The DOW bottomed at 6500 a month later and went up to over 11,000. They made similar bullish predictions about the US dollar in August 2009 when it was still falling and we have also seen this prediction come true. At $20 per month, it is easily the best value investment tool I have used. I have not hesitation in recommending you to take up a risk free trial subscription.
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