I’ve wrote quite a bit recently about how Australia has been left behind in the current global stock market boom.
It’s been a post-mining boom hangover, masked by the Panadol of government deficits and increased consumer debt.
A strong property market has seen investors park cash into bricks and mortar, rather than the comparatively volatile — and pretty lacklustre — stock market.
If that’s what you’ve done, I don’t blame you in some ways…
I mean it’s hard to see where the growth for the Australian stock market as a whole is going to come from. To be clear I don’t mean individual stocks here; there’s always an exceptional opportunity to be found somewhere.
But for our heavily weighted mining and banking based stock market, there’s been no real tailwinds to really drive the general index along.
Thankfully this could be set to change…
In fact, you could be in for an early Christmas present.
That’s if the market can breach a key level soon, and reach the dizzy heights of a decade ago.
If this happens, then it’s an early sign investors expect bigger and better things in 2018.
And the boom times could be back.
Let me start with the charts…
I know some people think that charting is ‘mumbo jumbo.’
But that’s only if you think about them as some sort of prediction tool.
Charts are just another way of looking at fundamentals. They are both backwards looking tools that tell you what happened, not will happen.
But what they can do though is help you gauge the current market dynamics — and thus mood — at a particular point in time.
Key levels such as support and resistance lines, moving averages and trend lines therefore aren’t important in of themselves.
But they are important for how traders and investor react around them.
Take a look at this monthly chart of Australia’s All Ordinaries Index.
Source: Incredible Charts
You can see that although we are still below the 2007 mining boom highs of ten years ago, we are in a steady uptrend since 2009.
You can also note that as the market has touched the trend line support three times, it has then gone onto bounce to new highs.
In the past year, the market has tested the 6,000 level twice but hasn’t broken through.
Here’s why the next test is important…
A ‘third time lucky’ break would bring the 2007 highs of 6900 into play over 2018. That’s a potential 15% rise within the next year for the general market.
On the other hand a third rejection of the 6,000 line would indicate the market is still bearish on the global economy. And sees such high levels as a time to take some risk off the table.
That would bring that trend line back into play.
Like I said at the start, the level doesn’t tell you what will end up happening in the future. But it does tell you what the market thinks will happen.
And it’s at such levels where the battles between bulls and bears are won and lost.
Where to make the gains
In my opinion if this happens it will be due to rises in the mining sector. The gains could be explosive.
I don’t just mean in speccy juniors — though these will do well — but big names like BHP Billiton [ASX:BHP], too.
Globally there’s a lot of chatter about infrastructure spending.
The ruling party of China is in the midst of making its five year plans and infrastructure spending is front and centre. Trump’s US also has plans to rebuild the nation’s crumbling bridges and roads.
This is all good for resource companies.
It’s harder to see where growth will come from in the finance and banking sector. Property is already red hot. And interest rates are already at record lows.
A pick up in business activity may see banks move more into the commercial lending side of things. The margins are juicier there, but the risks are more substantial and harder to manage.
And of course opportunities in the growing field of fintech remain for both incumbents and challengers.
Companies lie Afterpay [ASX:APT] have shown that well executed innovation can result in startling share price growth.
Afterpay has almost doubled its share price since listing just four months ago.
The company has a strong relationship with National Australia Bank [ASX:NAB] and this could end up being the template for how the big four can leverage the innovation of their smaller rivals, whilst getting a slice of the massive upside potential.
A tale of two sectors
As the 6,000 level draws close, it will be the financial and mining sectors that will decide the outcome.
And at a deeper level, the infrastructure and financial innovation stories playing out on the global stage.
With a bit of luck, the lucky country could finally be set to join the world in a 2018 stock market boom.
Editor, Money Morning
PS: I just released crucial research yesterday on a major event that could result in huge gains over 2018. It’s a once in lifetime story of financial innovation. And it’s playing out before your eyes. But you need to act now as share prices are starting to move in anticipation. Click here for more information…