Wealth Within - Market Report 30 June 2009
It is common in the share market for investors to buy a stock simply because it is falling in value and considered cheap. Cheap implies that you will get a bargain, which maybe the case when you shop at the supermarket but this mindset is not the best strategy to adopt when investing in the share market. You want to buy quality not quantity simply because this is where you will generally find the greatest gains.
Many people buy stocks because they perceive them as cheap, but just what do we mean by cheap? Is a stock that is falling in value cheap? Maybe, provided it doesn’t continue to fall once you purchase it. Is a stock trading under $5.00 cheap? Cheap in comparison to what? Is a stock that is trading under a $1.00 good value? Possibly although many of these stocks are referred to as ‘penny dreadful’ stocks and for good reason.
It is not how many shares you own that counts - owning a $0.10 share means you will hold more shares than if you bought a good quality blue chip share at $10.00. But the blue chip stock has more potential to make a 10 per cent gain than the $0.10 stock and is far less likely to fall dramatically in price or do nothing. Either way a 10 per cent rise in either stock will net the same result.
While the price of a share may be considered ‘cheap’, in my experience, when investors buy cheap stocks trying to get a ‘good buy’, they usually end up saying ‘good bye’ to their money.
So what can we expect in the market?
I indicated in my last report that the All Ordinaries would experience a small pull back between 18 June and early July, however, the fall started a little earlier than expected on 15 June, falling 7.39% in price to 24 June. While this is probably the full extent of the fall, only time will tell.
Over the past few days the All Ordinaries has risen for three out the last four days, which is in contrast to the Dow that until last night had only traded sideways. This display of resilience and strength on our market may signal an end to the current weakness in the All Ordinaries Index that we have experienced since 15 June.
If this is correct, I expect prices will continue to rise for the next 3 to 5 weeks to reach the yearly high I have been expecting. While I believe the yearly high will occur in the last week of July, we need to be aware that it could occur at any time, with the possibility that it may also occur in early August. I still believe the market will rise to between 4200 and 4600 by late July, however, given that the recent move down was longer than expected in price, it is more likely that the lower end of my target will be achieved.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst