Wealth Within - Market Report 20 October 2009
In an effort to make sense of the share market and how it is likely to unfold, we are continually confronted with information about market valuations and whether or not a share, or the market is over or undervalued. The strong rise we have experienced over the past few months would imply that our market was undervalued, and whilst this may have been true back in March I believe the story is vastly different now.
Currently the All Ordinaries Index is valued at pre-sub prime meltdown levels with many of the top shares in the same boat. However, it is important to acknowledge that the revenue for many companies’ has been reduced by more than 20 per cent in the past two years and there is uncertainty about interest rates and the economic future. Given this, and the fact our economy was booming prior to the 2007 sub-prime meltdown, was the market high risk in 2007, or is it more high risk now? For the share market to continue to rise, companies will need to increase their earnings growth and do so prior to the next reporting season in March 2010. Failure to achieve this will result in an increased gap between a companies share price and their perceived fair value. In my opinion, I don’t believe many companies will be able to achieve this.
So what can we expect in the market?
Little has changed in the Australian share market over the past two weeks and the general investing public are still blindly rushing into the market believing they are missing out on the current bull-run. Whilst that in itself is a concern, what is even more concerning is the level of borrowing some investors are proposing to undertake in order to profit from the current rise. Most of you would remember that since early 2006 the market has fallen several times and each time there have been record levels of margin calls. Unless people learn from past mistakes, the same will happen again in the not too distant future.
In my last report I indicated that while the market could rise for another one to four weeks to between 5000 and 5200 points, my preference was for it fall by 5 to 10 per cent. However, the market has continued to rise and over the past few months it has risen at a speed far greater than what was evident in the run up to both the 1987 crash and the sub-prime meltdown. In fact it is rising at double the speed and it is hard to identify anywhere in history where the market has risen in price so hard for so long. While there is nothing conclusive as to what is actually causing this unusual situation, it could just be a sign of modern times where information is readily accessible and anyone can freely enter and exit a market.
I expect the market will rise up for 1 to 3 more weeks to between 5000 and 5200 points and whilst there is a chance it will reach 5500 points, I think this is being a bit too optimistic. The market will then fall away into a low sometime after mid-November or early December.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst