Australian Stock Market – it’s the index direction that matters

asx 9 Sept 20159 Sept 2015 – By Philip Baker  AFR

Since the Coalition government was voted into power on September 7, 2013, the S&P ASX 200 index has never closed below 5000.

Indeed, over the past two years it’s only traded below that so-called “key level” three times, and each one of those sessions has been since August 24 this year.

Although levels like 5000 don’t really mean very much, there is always some sort of fascination around them and they do seem to bring out the factoids like the one above.

The other talking point of late has been that since May 5, when Treasurer Joe Hockey told everyone to “have a go”, the major index has fallen to around 5000 from 5692.

It’s true that a raft of buyers and sellers in the market tend to hover around these numbers, and the clever operators place orders just above or just below in the hope of making money as everyone tries to work out if it’s the start of another major move.

But there’s no doubt that hitting a round number on an index does represent a milestone, and it’s often a trigger point for people to reassess their portfolios.

It’s obviously better when the index goes up through these sorts of levels and everyone is making money.

But it’s still a good time to look at the portfolio and plot the next move now that it is close to falling back through 5000.

So have we fallen back too far? Stockbrokers and analysts are always fond of talking about “fair value”.

Fund managers always seem to talk about buying when everyone else is selling, and yet what happens if the sharemarket keeps falling?

Like beauty, fair value is in the eye of the beholder. If investors are feeling a lot more confident, a slightly lower current dividend yield may not worry them, and P/Es of around long-term averages won’t be regarded as daunting.

The problem is that valuations depend on sentiment, and what looks reasonable can quickly look overpriced in times of real gloom.

At the moment the dividend is still generous at around 5 per cent and the PE is close to long-term averages, so not cheap.

Sharemarkets are cyclical beasts and can change direction abruptly. China has been the real driver of the latest sell-off, along with the prospect of higher interest rates in the United States.

On Monday, China said its economy grew at 7.3 per cent in 2014, the lowest rate in decades and below the 7.4 per cent previously recorded.

China has set a growth target of about 7 per cent for 2015, but not many investors think that can happen. The 2014 figure could also be revised again.

But worries over China’s growth rate are hardly new. What’s really bothering some professional investors has been the large falls in our sharemarket over the past month or so for no apparent reason.

Another poor sign has been the disruption the capital raisings from ANZ, Commonwealth Bank and National Australia Bank have caused.

Fund managers point out they’re not large by historical standards and despite being well flagged they haven’t been digested that well.

The bottom line is that very few investors pick major turning points and they should know that the market could move sharply in either direction without much warning.

In reality, most long-term investors will buy shares too early in the market cycle and when it goes back up will probably also sell to early.

For many investors, 5000 hasn’t been a number to celebrate at all.

It was back in March 2006 when the benchmark index cracked that level for the first time, but since then it’s been a struggle.

Although the first time it just raced through 5000 and kept going, apart from a little tantrum in the middle of 2007, to a record 6828.7 later that year.

It then fell back to 5000 in July 2008 and didn’t get back there until February 2013 .

Even then it didn’t last long, and it fell back below 5000 in May 2013 before really working up a head of steam.

It then breached the level with some conviction in July 2013.

That sparked a march towards 6000 earlier this year – but since April it’s been a slippery slope back down again.

Original article here

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