Reading the tea leaves is no substitute for proper, fundamental analysis, says Ron Bewley.
As April drew to a close I wondered why our market seemed to be falling behind the US and UK markets. I was seemingly being bombarded on TV by “Fibonacci retracement levels” and the like, from technical devotees – but I, personally, have no time for such analyses.
My volatility forecasts show a clear fall in volatility levels, to return to those that dominated most of the two decades before the GFC. My exuberance or mis-pricing tool is showing fair pricing – and my market fear indexes are all looking good.
Everything in my world is looking great – so why do we look so bad in Chart 1 when we scale the S&P/ ASX200 and S&P500 to each be 100 on the first day of 2008?
Our market fell by about as much as the US in the bear market and rose just as quickly, until the dip at the start of this year. Of course we did fail to track up with the US in the second quarter of 2008 – but the US rejoined us after the Lehman collapse. Stretching that chart back until the start of the millennium – and adding the UK just for fun – a seemingly different picture emerges in Chart 2.
Up until the start of the 2003 bull run, our market had trodden water while the US and UK fell in lock step. After all, we, unlike the US and UK, avoided the “tech wreck”, 9/11 and SARS. We rose faster in the 2003-2007 bull run, due to the commodity boom and China. But I get a clearer story when we rescale the three markets to be 100 on April Fools’ Day 2003 in Chart 3 – the start of the bull run.
Of course the data are the same, but the visuals show the impact of the 2005-2007 commodity boom for what it was. Resource stocks are more volatile than many others and Australia gets the ups and downs for better and for worse.
In this picture, $100 in each market in 2003 gave us a wilder ride over the next seven years. An investor from 1st April 2003 in Australia took a big hit in 2008-2009 but remained above water ($100), except for a few days in March 2009. Long-term investors in Australia have been much better off than those in the US and UK; and the much predicted second wave of the commodity boom is only just getting going. Imagine how the chart would look if we started the horse race earlier in the millennium – off the scale – notwithstanding new resources taxes!
The problem with analysing data such as those I have studied here is that for short runs they seem to be very highly correlated. “Spurious regressions” is the term coined by the late Nobel Laureate, Sir Clive Granger, for these illusions. Some series genuinely do move together – and the US and UK are a possible candidate pair – but Australia clearly goes its own way in the long run.
I still stand by my optimistic forecasts for the Australian market – a “High Five” for the end of the year. I prefer to follow a scientific basis to my thought process rather than calculating retracement levels and the like. There is room for more than one point of view. Charts can all too readily deceive, as I hope I have shown. We are not falling behind; we are maintaining our long-run performance. To me, charts prove nothing – they just add a dash of colour – when the real analysis is over.
Ron Bewley is adjunct professor, finance and economics, at the University of Technology, Sydney
