Posted by Greg Atkinson on Nov 26th, 2008

One of the trends this year is that the Australian stock market has followed the lead from the U.S markets more directly than in previous years. Of course our stock market has always been influenced by the movement of the Dow Jones Index, but it is easy to forget that Australian stocks have often held up much better than those in the U.S. In particular, over the last 5 years our stock market has been a great place to invest largely due to the boost from the commodities boom and record profits in the financial sector.

If we have a look at the All Ordinaries (XAO) versus the Dow Jones Industrial Average (DJIA) over a ten year period there are a few interesting aspects to note. (click on the chart below to enlarge)

Firstly, you can see that post the 9/11 terrorist attacks in the U.S the Australian market fared better than the U.S market and our stocks were also less impacted by the bursting of the tech or dot.com bubble. (this is probably nothing to be proud of as it just means we did not/do not have a significant tech sector)

Secondly you can see very clearly the bull market run we had from mid 2003 up until the end of 2007. The All Ordinaries outperformed the Dow Jones from 2004 onwards as rising commodities prices kept things moving upwards nicely. By late 2007 however, financial stocks began to take a beating and unfortunately for Australia as 2008 progressed, commodities prices collapsed and that really started to weigh our market down.

Although the clowns at the RBA (Reserve Bank of Australia) and the traveling sideshow duo of Rudd and Swan have tried to convince us most of this year that Australia was somehow better positioned to ride out the global storm, the stock market charts show us that flow of money does not support their view. If you look at the All Ordinaries and Dow Jones over a two year period (see below) you can see that the correlation between these two market indicators has become almost intertwined this year. In other words, the market is not buying into the fortress Australia story and investors are selling out of Australian stocks at the same hectic pace as people are bailing out of stocks in the U.S. (and in all other major stock markets as well)

The lower part of this chart shows a momentum indicator which not surprisingly, indicates that 2008 has been a year where money has been moving out of equities and there has not been a great deal of money coming back in.

At this point let me be quite clear that stock market graphs are great for looking backwards but are unable to reliably tell us where the market will move next. We can make some assumptions, draw some trend lines and use technical charting etc. in an attempt to try and foresee the future, but we have just as much chance of being wrong as being right. Having said that, it is interesting to note that although the All Ords has closely followed the DJIA this year it has not risen nearly as much as DJIA over the last couple of days. Does this mean the close correlation between these indexes is about to break down or will the All Ords catch up at some point? Let’s hope the DJIA keeps trending up and the All Ords follows, so that some time in the future we may be able to look back at the graphs to see the bottom of the market was reached in November.