Australian Share Market Outlook March 2013 and Onward

Our last Australian share market forecast back in December pointed to a strong start for 2013. Indeed year to date the ASX 200 has put in a 10.4% rally and the key question on investors minds is ‘will this upward trend continue?’ The fundamentals paint a mixed picture while the charts point to a possible near term correction.

Fundamentals

Reasons to be bullish

At it’s most basic level equity prices represent a function of expected earnings. From this perspective the bullish argument for shares could be made for the remainder of 2013.

Chinese economic growth rebounded in the fourth quarter signalling a stabilizing economy and gave less weight to the ‘hard landing’ story. This bodes well for the Australian equities as China is Australia’s largest trading partner and a large beneficiary of the Chinese growth story.

The Australian economy itself has also shown continued signs of strength most notably resilience in the labour market with unemployment remaining below 5.6%. Commodity prices and iron ore in particular have staged a comeback from distressing declines towards the end of 2012.

Overseas the US has also seen considerable improvements in the labour market with unemployment falling to 7.7% in February. While in Europe the acute stage of the European debt crisis appears to have past with sovereign bond yields falling acceptable rates. Against this backdrop the Australian sharemarket would be expected to rise.

Reasons to be bearish

Again as we noted back in December one of the key drivers for risk appetite in 2013 would be central bank monetary easing. This is supportive for the global equity markets as investors seek higher returns against a backdrop of very cheap financing.

However the possible withdrawal of stimulus from the Fed has prompted concern amongst investors that the gravy train to asset price growth from cheap money may be derailed. Of further concern is the fiscal drag from the sequester coming into effect. This is expected to remove 0.5% of growth from US GDP for 2013.

In addition while credit markets are functioning more normally in Europe there is still considerable weakness in the Eurozone economy as a whole. Record high unemployment (Greece announcing 26%! recently), a continued recession and political deadlocks in Italy as well as a looming election in Germany all point to strong headwinds for investor risk appetite.

So while the run up in prices may look rosey the cracks in many ways have only been papered over. Moreover as risks from easy money continue to mount there is a rising probability that the Fed will pull some of it’s fuel away from the fire. This creates a strong case for a reasonable correction throughout the year. However it may be months until these concerns are fully realised by markets.

Technical Outlook

The near term outlook from a technical standpoint is for a correction with targets offered by support levels outlined below. A daily close above 5,150 where the market failed to hold above previously would offer a bullish bias and signal a continuation of the uptrend and a target of 5,300.


SPI (ASX200 futures contract), Created with Trader Workstation from Interactive Brokers

Key Signals

  • bearish signal = divergence on RSI and crossover back into neutral signal
  • bearish signal = break of rising trend line that had held since mid Nov 2012
  • bearish signal = failure at key resistance of 5,150 which held as resistance in July and August of 2008
  • bearish signal from PSAR
  • bearish signal = ‘bearish engulfing’ candlestick pattern on test and decline from 5,150

Key levels

R = Resistance, S = Support

  • R1 @ 5,150
  • R2 @ 5,300 (key resistance from start of July ‘08)
  • S1 @ 5,035
  • S2 @ 4,985
  • S3 @ 4,870