Bad news for Tony Abbott- good news for the markets?

Australia has a new Prime Minister after experiencing its third leadership spill in just over five years. All political comments aside (and there are a lot), it leaves me wondering what does this mean for the markets? Is there a pattern emerging? Let’s have a look at how the markets reacted to the last two leadership takeovers.

Gillard topples Rudd - 24th June 2010

Gillard v Rudd

Prior to the change in leader, we experienced a 15% drop in the market in a month. Globally things were looking grim. Experts predicted this to be the end of the bull rally from the 2009 low (sound familiar?). This was big news and ended a lot of distracting speculation. It’s interesting the yearly low was put in on the 5th of July 2010 and the market didn’t trade lower until August 2011.

 

Rudd topples Gillard - 26th June 2013

Rudd v Gillard

Again, a 10% drop leading into the change of leader. That was the biggest pull-back for the market in a year. This time the market took no time to factor in the news and resumed the march upwards immediately.

Note while in the first case the S&P500 was down a similar amount, in this 2013 case the S&P was only down 4% at the same time. Whether these are coincidences or a pattern to follow is hard to know with only two data points to look at.

 

Turnbull topples Abbott - 14th September 2015

Turnbull v Abbott

As in the first case, the market has been down just over 15% from its April highs. There’s ongoing speculation and general negativity about the markets. Business has been taking a wait and see approach to investment with so much uncertainty. Would there be an early election? Is there going to be a leadership challenge?

There is undoubtedly a sense of relief amongst many that change has happened. We can get on with our lives for the next 12 months.

Even without the leadership change, from a TA point of view, this chart is already showing a wedge pattern forming (lower highs but higher lows). Wedges are a sign of wait and see - with no real clue to direction. All we know is the longer we stay in a wedge, the bigger the move out usually is.

Wedge

We’re also sitting at some significant Fibonacci points:

  • 50% of the move up from 2011 to 2015
  • Just above 38.2% of the move up from 2009 to 2015
  • 50% of the move down from 2007 to 2009

A cluster of levels like this always proves difficult (but not impossible) for the market to get through. A move up here would be an incredible sign of strength for the next couple of years.

One of my favourite tools, but one that I was not watching recently, is Gann Squares. This chart needs no explanation. We should have seen that top coming in by squaring the price of the XJO low into time.

gann sq

You can read more about Gann Squares on our education site here.

I’ll be watching for any close outside the wedge. Based on the recent examples and the fact that we are already at two year lows, I am encouraged to think it will be on the upside.

Change in leadership should bring some certainty - at least until the next election.

 

Mathew Verdouw, CMT, CFTe

Market Analyst International