The ASX All Ordinaries Index, ETF GOLD, BHP and QBE

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It may not appear to some investors that the stock market is functioning normally again, but the manner by which the  recent correction was quickly reversed indicates that in fact things are getting back to normal. Certainly there is a long way to go before the ASX All Ordinaries crawls back up to 2007 levels, but at least now a correction is just a correction and not the start of a massive wave of panicked selling.

Since that the worst of this bear market appears to be behind us it is sometimes easy to forget how far backwards stocks have gone over the last few years. Yes the market rallied strongly in 2009 but  as of today the ASX All Ords is at a level seen back in late 2005 as we can see from the chart below.

ASX All Ordinaries (XJO) 10 year chart



That means that if you owned a basket of widely held Australian stocks that there is a good chance that this basket is now worth what it was around 4 years ago.

For long term investors however, the chances are you would still be ahead if you entered the market before that time and of course most people would have also been paid some healthy dividends over the years.

So yes the bear market has been painful, but very survivable and not quite the end of the world as we know it.

The really good news however is that the stock market has stopped being dysfunctional as it was during 2008-2009 when massive waves of frenzied selling gripped the markets and there was no way of telling when this selling would stop.

Now at least a correction is somewhat orderly and although panic does creep into the minds of investors, they are not overcome by it as they were during the worst of the global financial crisis. As I have mentioned many times before, stock market corrections are common and actually good for the health of the market.

To prove my point let’s look at some charts and see how the stock market is sorting itself out. Firstly let’s have a look at what the gold price and BHP shares have been doing over the last 5 years. Once again I will use the ETF:GOLD to track gold prices since this makes charting it against stocks easier.

ETF GOLD vs BHP Billiton 5 years chart



According to many people gold has been the best investment for years but in fact it hasn’t and if you had been in BHP shares over the last 5 years then you would have done better than investing in something like the Exchange Trade Fund (ETF) GOLD.

Yes the ETF:GOLD is slightly ahead of the BHP share price now and pulled well ahead after the Lehman Brothers collapse but it pays no dividends. If you factor in dividends then  BHP has been a better investment than GOLD unless of course you timed things perfectly and cashed in your GOLD holding in late 2009/early 2010.

Personally I would rather hold BHP stocks than gold in any form.  Maybe gold is a good store of value but so are productive mines, and BHP owns and operates some of the best mines in the world.

However the real value of the chart above is that it shows how the BHP share price took a hit during the panicked selling of late 2009 but has since recovered as fear of a global economic meltdown subsided. On the other hand gold prices surged in late 2009 and although prices have come back a little in $AUD terms , gold still looks pricey to me.

The GOLD versus BHP chart suggests to me that investors are still nervous (as indicated by the high gold price) but are also starting to buy into the global recovery story. (as indicated by the recovery of the BHP share price)

When gold drops below $1000 USD I will start to become comfortable that the global economic recovery is taking hold. So I reckon watching gold prices and the BHP stock price is a wise thing to do.

Another interesting chart to watch is QBE versus the ASX All Ords Index.

QBE Insurance versus ASX All Ordinaries Index 5 year chart



I have been watching the relationship between the QBE share price and the ASX All Ords Index since 2007 and first wrote about it on this blog in 2008 since I believe that the QBE share price acts as a very good indicator of investor appetite for stocks. (see: QBE and the All Ordinaries – do the charts tell us something?

Now I did get some comments to the effect that I was crazy to suggest that this relationship was worth watching but history has proven me correct, and QBE is once again giving us a hint of where the wider market will head.

The chart above tells me two things. One is that the relationship between the All Ords and QBE is working again after it fell apart in 2009 and two, is that the next major move on the Australian stock market will be upwards and to be more specific; into the 4800 – 5200 range again.  (probably above 5000)

All in all, most charts I look at now seem to be showing signs of normalcy. I am not saying a recovery is in full swing, what I am simply saying is that the recovery has started and that stocks are getting back to being traded on their own merits, and not simply because of fear and rumours. This is a good thing for investors.

But that is my reading of the charts…what do others think? Is this perhaps the quiet before the storm and could it be that we are simply enjoying a moment of stability before the markets take another major plunge?