Saturday, May 29, 2010

Into and out of Australian Bear Markets since 1984

Using data from Yahoo Finance I have constructed a series of charts which show the lead into the various bear markets in the Australian All Ordinaries and the recovery .

I have also constructed an average of the 5 major bear markets prior to the 2007 bear. This average has then been incorporated in each chart in an arbitrary manner to most closely, in my view, approximate the relevant bear market. The timing of the bottoms has been aligned, but not the actual lowest points. There is also a small amount of vertical compression or expansion in most charts. A green linear trend line for the average recovery is also shown.

This approach makes it easy to see an estimate of the dramatic out or underperformance during different periods. For example, look at the dramatic peaking of the market in 1987 compared to the general trend of the average market leading into a peak and trough.
All charts have the peak before the trough scaled to 1 (100%) so the amount of fall to the bottom can be read from the scale.

Please be aware that in some instances the end of the recovery in one chart may overlap with the period before the trough on another chart eg 1991 trough overlaps on 1992 chart and vice versa.

Click the chart images for a larger image. (Use right click > open in new tab.)


Dramatic bull rally to peak was clearly unsustainable.


The second trough is 1992.


First trough is 1991. 1992 trough is at centre. Note excessively fast recovery to new highs was not sustainable.


Very closely approximates the Average peak, trough and recovery.


The start of the unsustainable rally towards the 2007 peak can be seen towards the end of the recovery from the 2003 trough.


The scale of the fall from 2007 to 2009 makes it very arbitrary as to where the Average recovery is shown. I have chosen to align to the recovery side of the chart. I have also added the graph of the recovery from 1991, also adjusted to align to the recovery side of the chart. Last date is 1 June 2010, day 312, and the correction at the bottom was minus 14.9%. There has been a small rebound since to but is now only minus 11.85%.. The fall may well resume as most countries have broken below their 200 day simple moving average which in some markets is about 65% reliable as an indicator of a major change in trend. This possibility is supported by such fundamentals as:
* a possible second wave of real estate defaults in the US,
* the EUR crisis of sovereign debt owed by the PIIGS (Portugal, Ireland, Italy, Spain)
* the austerity being imposed on those countries
* the continuing possibility that default and withdrawal from the Euro by those countries will be more politically acceptable to voters
* the apparent end of a possible bubble and general slowing of the economy in China, a prime buyer of Australian resource exports.

If the 1992 trough is considered as a "double dip" of the 1991 trough, it started from the peak reached on 22 May 1992, day 341 of the 1991 recovery. In today's timing terms the equivalent high would be in about 6 weeks from now. As can be seen from the graphs, the recoveries vary widely in amount and duration so this is not a forecast.

See the recent post comparing recoveries for more information on the corrections that have occurred during the recovery phase.

Hat tip to Doug Short for his more sophisticated series of charts showing Dow falls and recoveries:

Thursday, May 27, 2010

Comparison of Australian Stockmarket Recoveries since 1984

Yahoo has Stockmarket data for the Australian All Ordinaries since 1984. I have used that data to compare stock market recoveries from market bottoms since the deep, short, dramatic crash of 1987.


On fundamentals Australia did not have a housing collapse or oversupply, had no or a very short shallow recession, has little in the way of unprovisioned bank credit losses and has relatively small unemployment, largely due to stimulus which flowed to the firms and workers in the construction industry. There is high private debt to GDP, but extremely low Government debt to GDP. The deficit is moderate compared to developed other countries. Australia issues its own currency. Some say Australia still has a housing bubble. In 2009 Australia had one of the best performing stock markets in the world in both USD and EUR terms.

Where we are - 310 of 350 days

First 350 days of Australian All Ordinaries Recoveries
- Click for large image

The current (bright blue) recovery was much faster for 160 days but is now back to average (bright orange) values. Only the recovery from 2003 was higher after 310 days, so this recovery is still ahead of 4 out of 5 other recoveries.

Where we are going - looking to 1200 days

Australian All Ordinaries Recoveries - First 1200 Days - Click for large image.

The Average recovery falls away from +38% at day 310 and does not recover to current levels of +40%) until about day 450. The Average recovery does not break up from +40% until about day 560.

The Average balances the 1987 recovery which fell back to only +4.6% at day 800 (the 1991 low) against the 2003 and 1991 recoveries which each reached +94% at day 780.
Other than 2003, all recoveries shown went to a significantly lower point by between day 350 and day 460.

In addition to the 1987 recovery major bottom at day 800 (1991 low) (described above):
* 1987 fell from +44% at day 186 to +24% at day 356 (14% fall) 1989 low)

* 1991 fell from +40% at day 210 to only +13% at day 468
(19.5% fall) (1992 low)
* 1992 fell from +71% at day 310 (same as where we are now) to +35% at day 529 ( 21% fall) (1995 low)

* 1995 had a correction from +26% at day 273 to +15% at day 364 (8.7% fall) (1996 low)
* 2003 eventually had a small correction from +58 at day 515 to plus +47 at day 554 (7% fall).

The outlook for the period out another 200 days to day 510 is for a real risk of a major (new or continuing) correction in the Australian broad indices.

The current downturn has been very sharp compared to other major downturns.

Short Term Action

I am, after considering all of the above, watching the 10 and 15 day simple moving averages for a buy signal as There may well be medium term (within the context of 2 to 6 year cycles) rallies before any new, if any, low is reached.

Other Major Markets

Most other major stock markets are below their 200 day simple moving averages. This is generally regarded as an indicator that a major downtrend has commenced, more so if it is on a month end or if it is held for say 5 to 10 trading days. However in a volatile mainly cross trending market it is unreliable, leading to expensive whipsawing as in the Australian All Ordinaries from 1998 to 2003.


* Doug Short for his similar charts on the US market
* John Hussman for his current newsletter about Aunt Minnie and the risks to the market in the near to medium term.

Multi national bond fund about 80%, mix of share funds about 20%; real estate
Currency exposure (not including real estate): 80% AUD, 20% other currency denominated.

Themes for seeking Alpha: Australia, Global markets Stocks: EWA, KROO

This article also published in part on Seeking Alpha:

Seeking Alpha articles on Australia: