What’s so special about 6000?
It’s just a number on the ASX benchmark index, but it has proven time and again to be a major hurdle for the local sharemarket, which despite coming close didn’t manage to touch the level in 2015, and is only drawing close to it again this month.
The impacts of momentum investing are helping overcome the psychological barriers around key index hurdles. Photo: Google
However, many expect the market’s momentum to carry it through the 6000 mark some time this year – a level it hasn’t touched since January 2008 – as high-speed trading strategies combine with highly technical analysis of investment decision-making to leave far less room for trading on sentiment.
“I always think there’s a little bit of resistance when you break out into a new high,” said Armytage Private director and portfolio manager Bradley King. “It’s like a car yard trying to sell you a car at $19,990 – it always sounds cheaper than $20,000.”
Profit-taking, an outburst of pessimism or a lack of convincing economic news have all played a part in keeping the S&P/ASX 200 Index from trading at or above the 6000 level in the past.
More broadly, the ASX’s unusually high reliance on big banks and miners has stopped it trading at the pre-GFC levels reached by most global indices – post mining boom, neither sector has seen outsized revenue growth, which has helped keep the index relatively subdued.
But it’s not far off the 6828.70 reached in November 2007, closing at 5934 on Wednesday. As for the psychological barrier of the 6000 level, Mr King, like others, believes it is lowering.
“Investors are still emotional – there’s no question of that,” Mr King said. “But now, with all the high-frequency trading going on, momentum strategies and short selling, that psychological hurdle is less of a deterrent. There’s plenty of access to information in real time and this means decisions are made more quickly, leaving the investor less time to dwell on these hurdles.”
For most fund managers, the total index level matters very little, says Atlas Funds Management’s chief investment officer Hugh Dive.
“Psychologically, numbers can be important,” he concedes. “But for me, what I’m thinking about is underlying stocks. We are aware of what the index level is. But you’re looking at individual companies and your weightings, not the number of the index per se.”
Time of euphoria
Overseas, indices reaching key benchmarks have usually been accompanied by a day or two of “euphoria”, says portfolio manager ST Wong, from Prime Value Asset Management. “But it fades.
“There might be psychological impacts on retail investors – in that it reflects confidence in the sharemarket, you might see a short-term inflow of funds. But for institutional investors, 6000 is just a figure, and I think most will look beyond that.”
The “wealth effect” to retail investors could flow more broadly, said IG Markets’ chief market strategist Chris Weston. With an eye to superannuation balances and other investments, small investors may feel wealthier if the sharemarket is rising, prompting some level of broader spending in the economy.
“We always work in milestones,” he said. “But whether there’s a 6000 or 5000 handle means not much. Fund managers make money by outperforming a benchmark, while traders make money between the opening and closing prices. It makes no difference what the index is.
“It’s nice to have it. But does the ASX 6000 represent a situation where the Australian economy is doing better? I don’t think it does.”