The Australian pullback proved slight despite an Italian catalyst for doom. It points to more shallow dips ahead.

I thought it was time to step back and have a look at where the market is in terms of recent price action. The last time I did this we were on the verge of a pullback and I wrote that it would probably be somewhere in the vicinity of 3 to 5 per cent.

Well I was wrong. As you can see in the chart below, from high to low it was only 2.6 per cent.

I’ve long been writing that the dips will be shallow simply due to the fact that there are so many buyers waiting on the sidelines for an opportunity to jump in. And this is exactly what has happened; the blue chip, high yielding stocks simply met a wall of buying on every sell-off. There were numerous mornings when the banks would open down 0.5 to 1 per cent and rally significantly within the first 15 minutes as buyers ‘bought the dip’.

So while the dip was shallow and the market has now broken up above the consolidation zone, it’s not looking 100 per cent convincing in terms of steaming higher. It looks a little bit tired, to be honest, with participants looking weary of chasing prices higher for the time being. Nonetheless, it’s going to remain very well supported on the dips.

The most recent pullback coincided with the election issues in Italy. I think the reaction to the Italian election and how quickly the market seems to have moved on from it tells volumes about the underlying psychology of the market. Put simply, if the market was going to fall over and get really worried about eurozone issues this would have been the perfect time to do so. Yet the reaction hardly lasted more than a week and now everyone seems to have moved on. To me it looks like people are now looking forward, rather than in the rear view mirror, and realising that although there are problems things are improving and that the markets simply want to go higher.

The same can be said about the sequester in the US; if the market wanted to fall over and go down, this was the perfect catalyst. Put simply, demand is firmly outweighing supply.

With the Dow Jones Industrial Average at record highs and the S&P 500 only a matter of points away, there has been plenty of talk about how far the Australian market is from its 2007 peak. The usual number that gets thrown around is around the 25 per cent figure.

However, this figure only takes into account pure price appreciation rather than total return. Given the Australian market is one of the highest yielding in terms of dividends, I think it’s prudent to look at it on a total return basis. The results are dramatically different, as can be seen in the chart below. The S&P/ASX 200 Total Return index is right at its 2007 peak, give or take a few points.

Taking it a step further in the chart below, we can see that since the S&P 500 formed its all-time high in mid-October 2007, it has managed a total return of 12.4 per cent (in US dollars) compared to -3.8 per cent for the Australian total return index. However, on a constant currency basis, we can see that suddenly the S&P 500 total return is only 2.6 per cent better than the Australian market. So Australia’s not doing so bad after all.

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