Posted by Greg Atkinson on Oct 30th, 2008

For quite some time I have been using the QBE and ASX All Ordinaries (All Ords) charts to give me some idea of what the market mood is like and to try and spot any trends. The reason I use these charts is because the QBE stock price tends to move in sync with the All Ordinaries Index, but with greater volatility.

To see what I mean let’s look at the 10 year chart for QBE and the All Ords as shown below. (click on the chart to see a larger version)

QBE vs ASX All Ordinaries - 10 Year Chart

What you can see from this chart is the QBE share price over a 10 year period has basically been moving and trending much the same as the All Ords Index. But note how the QBE price movement tends to be more volatile, for example you can clearly see even on this ten year chart the drop in the QBE stock price after the September 11 attacks in 2001. You can also see quite clearly the sharp fall we had in 2007 due to the so called “Chinese whispers” and the major hit we had in 2008 leading to a bottom in the market in March 2008. However from March 2008 the close relationship between two charts started to get out of sync. You can see this relationship breaking down in the 10 year chart during 2008, but for a better view let’s have a look at the one year chart. (again click on the chart for a larger view)

QBE vs ASX All Ordinaries - 1 Year Chart

What this chart clearly shows is that the relationship between the All Ords and QBE started to fall apart in a big way in September and from my look back over the last 10 years, this has not happened before except after a major shock (like the terrorist attacks in New York) Sadly for me, I started to buy small parcels of shares in various companies from March, thinking the market was near a bottom. However if it was not for a major unforeseen event, the QBE and All Ords relationship would probably have been maintained and my guess that the bottom of the market was around 4800 - 5200 might have been correct.

So what happened? Well it is quite clear that things fell apart when Lehman Brothers failed in the U.S, and in the future we will all want to know why Hank Paulson (U.S Treasury Secretary) allowed Lehman Brothers to fail when he bailed out other Wall Street banks. Several market experts have already stated that allowing Lehman Brothers to fail was a serious blunder and we all know now that this started a major fall in markets around the world. I am pretty convinced that if Lehman Brothers was saved, that I would be looking at charts today where the relationship between the All Ords and QBE would the same as it has been for the last 10 years. (and the All Ords would be a lot higher than 4000!)

I did not of course anticipate that Lehman’s would fail and I doubt many people did. (even George Soros lost money when Lehman’s failed) But I did keep in the back of my mind that at anytime, unexpected things can happen.Therefore I did not dive head first into the market and although most of the stocks I picked up from March onwards have fallen around 10%, perhaps in a few years these stocks will reward me many times over. In any case, I figure it is better to be a buyer this year than last year!

So where to from here? Well in regards to QBE and the All Ords two things could happen:

1. The relationship between the QBE stock price and the All Ordinaries Index is restored. In other words the Lehman Brothers failure was a unexpected shock to the financial system similar to the financial shock of the September 11 attacks, but once the impact of these shocks dissipates, things get pretty much back to normal. As a result, at some point we should see both the QBE stock price and the All Ords Index start to trend together. (not necessarily upwards however) Unless there is another major shock to the system or another government blunder either here or in the U.S, then this is what I expect to happen. (a big decline in the growth of the Chinese economy would give the markets a shock)

2. The relationship between the QBE stock price and the All Ordinaries is broken forever. This would be the view of people who believe we have entered a new world economic order or are headed for a worldwide financial meltdown. I am not in this camp and believe that eventually, the current chaos in the markets will end and we will see the beginning of another bull market.

Only time will tell if I am right, but I am hoping that we will be able to look back in a few months time and see that the market from this point onwards, had begun a slow upwards trend.