You may hear the term “decouple” bandied about in investment circles when discussing global markets. It simply refers to one market’s ability to move irrespective of other global markets. In recent years, unlike emerging markets, developed markets have tended to move more or less in a correlated fashion, i.e. they have not decoupled. This has been especially true this year as emerging markets have had a rough go of it while most developed markets have hung in pretty well, even if they haven’t made much headway.
One subtle change in this dynamic occurred last week. Most developed markets have weathered the recent volatility without breaking any key support levels. The Australian stock market is an exception, however, having now broken, er, down under a key support area.
- The 23.6% Fibonacci Retracement of the 2011-2015 Rally ~5459
- The 38.2% Fibonacci Retracement of the 2013-2015 Rally ~5447
- The 61.8% Fibonacci Retracement of the 2014-2015 Rally ~5443
- The Post-2012 UP Trendline
Given the lack of decoupling – again, most developed markets have been highly correlated – an expectation has developed that these markets will trade in lockstep. Therefore, with the rest of the developed world exhibiting impressive resilience, the possibility of any type of meaningful price breakdown has been considered remote. Perhaps this breakdown in the Australian market at least cracks the door open a bit more to that possibility.
Certainly the dynamics of the Australian market, e.g., heavily influenced by commodities and China, render it unique among the developed world. Thus, it is possible that it truly has decoupled and that the recent price breakdown is simply a one-off. Then again, perhaps it is a warning that the major global indices are not as bullet-proof as they are thought to be.
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