Global trading conditions are changing, largely driven by the shifting attitudes of central banks. Changing market behaviour is a clear indication of a changed investment environment. While 2014 was an unusual year, 2015 displayed signs of a return to more “normal” trading, and the trends are likely to continue into 2016.
The Australian share market serves a country with a Western heritage sitting on the rim of Asia. This means it is often used as a proxy exposure by larger investors. Over the past decade, international fund managers have used Australian stocks to gain exposure to commodities, and by extension, growth in China. Market conditions in the Australia 200 index may therefore not only offer potential trading opportunities, but information about how the largest global investors are thinking.
The weekly chart shows the action over the previous three years:
Source: CMC Markets - December 2015
- 2014 was a “flat” year. Note the uptrend through 2012/13 ended in 2014. Volatility dropped away, gains were muted and the yearly range was low. These factors are all consistent with the dampening impact of a trade-off between a highly liquid global monetary system and shares trading at higher valuations.
- Volatility surged in 2015. The greater size of the daily ranges and the higher day to day swings offer visual clues to the sharply increased volatility in 2015. Measures such as the Historical Volatility and Average True Range confirm the impression many investors have of a more difficult year.
- Highs and lows both increased in 2015 from 2014. The magnitude of these swings increased. In 2014, the high to low range was 633 index points. In 2015, the difference between high and low almost doubled to 1,241 points.
- Both years traded broadly sideways, (likely) finishing within 5% of the previous year’s close. The market is sitting in the lower half of the two year trading range. This is in direct contrast to the strong uptrend that dominated 2012/13.
The overall picture is consistent with a low growth environment. The performance over two years is flat to slightly down, although a dividend yield of around 7% (with franking) means even buy and hold investors are slightly ahead over the period.
The remarkable pick up in volatility in 2015 could be due to the changed tune from the US Federal Reserve. As the Fed moves into a rising interest rate environment other central banks such as the People’s Bank of China (PBoC), the Bank of Japan (BoJ) and the European Central Bank (ECB) are all increasing their stimulus efforts. This creates cross currents in global investment flows, and contributes to higher volatility as investors respond to potentially market and central bank moving news.
The pickup in sensitivity to data means markets are also more vulnerable to shifts in sentiment. A string of strong or weak numbers may see analysts extrapolating, and re-pricing the outlook. While a stronger US economy is likely to drive a modest improvement in the global economy over 2016, share market sentiment could again fluctuate wildly around this central premise.
In short, there is a higher potential for the market to repeat its 2015 path, swinging between support around 4,800 and resistance at 6,000. A significant breach of either of these extremes would point to a new outlook, but the market is broadly sideways until then.
This could mean the Australia 200 index is a useful indicator of the sentiment that drives global markets over 2016. Traders may see the mid-point of the trading range at 5,400 as the line in the sand. Trading over this level may mean global industrial sentiment is positive, with supportive implications for global risk appetites. Below 5,400 the outlook for industry and commodity prices is poorer.
Similarly, the current direction of the index may act as a proxy for the direction of sentiment – improving or weakening. A rising Australia 200 index could be positive, a falling index may mean a severe souring of sentiment. These movements could speak directly to oil and copper, the AUD, NOK and CAD, as well as developed countries’ share market indices.
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