Alan Hull reviews the global market charts
This is an analysis of key stockmarket index charts from around the world, but I start with a discussion on macroeconomics, for two reasons. First, the need to establish the backdrop for my analysis and, second, I don’t want to be too predictable.
From a macroeconomic standpoint I feel like a guinea pig in a global economic experiment of record low interest rates and central-bank money printing. You’ll note that central bankers have changed their rhetoric in recent times from facilitating economic growth to creating it.
But banks do not control the productive output of a nation beyond their ability to regulate the supply of working capital. They do this by lending money and controlling interest rates and the amount of money in circulation. They do not make motor cars, manufacture televisions or build houses. They encourage and finance others to do these things.
However, in recent times this process has been turbocharged (read: distorted) through aggressive stimulus programs (read: cheap money) to drive not only increased productivity but also increased consumerism.
But any financial growth achieved through increased consumerism based on borrowed money is only short term because when the money has to be repaid, the growth will be reversed. Thus stimulus is only ever a temporary fix…like an adrenalin boost.
Central bankers believe increased consumption will boost productivity to a point where it will reach critical mass and take off under its own steam. Consumption drives productivity, which drives jobs, which drives more consumption. And it is working…well, sort of. American consumption, driven by borrowed money at low interest rates, is driving Chinese productivity.
So there’s a slight disconnect here and the reason why the US is the largest debtor nation and China the largest creditor.
But alas, the process goes on (obviously in the hope of reaching critical mass) and the world economy continues to swim in cheap money. The problem with this is that when you cheapen your money you cause asset inflation, and that’s why everything from shares to property to bonds is going up in price at the same time – which is why I can’t find any undervalued shares right now.
This has a lot to do with investors buying stocks based on dividend yield. You simply ask yourself if the yield is attractive (which isn’t hard given our record low interest rates) and the share safe? Not whether it represents good value…simply, is it safe?
This is called the ‘lemmings phase’, where markets depart from fundamentals and continue to rise for other reasons. So fundamental analysis takes a back seat to technical analysis and we have to simply trade what we see. This brings me to the charts.
What the charts say
Now, when looking at financial markets from a charting perspective, you should always start with the big picture and work your way in.
And what I see are rising markets, so my general outlook over the medium term (read: next 12 months plus) is bullish.
I say this in spite of some other commentators suggesting the recent decline is the start of a downtrend or even a precursor to a major correction. I firmly believe it is most likely a pullback (albeit a deep one) and nothing more.
Chartists can make a few statements without fear of contradiction. One is; the trend is your friend.
Another is; sharemarkets always go ‘exponential’ before they crash. Exponential is another way of saying a trend is accelerating and can’t be defined as linear, that is, conforming to trend lines on the chart. See it for yourself by looking at the Dow Jones charts of 1929, our All Ords in 1987, the NASDAQ in 2000, the Shanghai Composite in 2007, etc.
So now let’s look at some major world equity markets and see whether they are linear or exponential over the medium term.
Below are long-term sharemarket charts from around the world where the broken blue lines are the longer-term trading channels these indices have now broken out of.
Of course, the simple fact that these global indices have broken out of their longer-term channels means they are accelerating. However, they remain effectively linear over the medium term (as show by the index trading between the blue channel lines).
Chart 1. All Ordinaries Index (Australia)
Chart 2: DAX index (Germany)
Chart 3: Dow Jones Industrial Index (US)
Our All Ordinaries, the German DAX and the Dow Jones indexes are in the mature phase of their bull runs, but their progression is still linear over a two- to three-year span. This means they are not going exponential at this stage, so a crash (a sudden correction of 20 per cent or more) is unlikely.
Now to the more conservative question of this being the start of a down cycle. And whilst this is not an unreasonable proposition, if these markets were going to roll over into a major downtrend then it would probably have occurred before their broke out of their long term channels (broken blue lines). Now to the other extreme of the Shanghai Composite index where its been rising exponentially since August of last year. So it’s no great surprise that it’s crashed.
Chart 4: Shanghai Composite Index
The second largest stockmarket in the world has fallen over 25% from its recent highs but interestingly there’s been little impact on other world markets. I suspect the reason for this lack of concern is that Chinese financial markets are experiencing a one off adjustment from capital inflows as foreign money can now access them. And so I’m not overly concerned about it either and given time (and some volatility) I believe that these markets will find a new equilibrium.
We are in a period of change where global equity markets are collectively rising, but without the backing of sound fundamentals. In my opinion this is due to asset inflation brought about by cheap money being injected into the world economy by central banks. But as an investor I need to trade what I see and regardless of the reasons, stockmarkets are rising and therefore I am a bull.
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