Wealth Within - Market Report 4 November 2009
Over the past few months there has been an increase in the number of companies floating on the stock exchange with the most prominent being Myer, which listed on Monday. Some people tend to invest in these floats believing they will get a bargain, but is this really the case?
The reality for the majority of companies that float is that more than 50 per cent are trading at price levels below their initial float price by the end of the first year of trading with some trading significantly below this price. Why is this? Because more than 50 per cent of the companies who float have a market cap of less than $50 million, which in my opinion is a speculative share at best.
I don’t even begin to consider analysing a company to invest in unless it has a market capitalisation of at least a $100 million, and this criterion is shared by most, if not all, fund managers. Given this, there is very little support for these small companies, which is why the share price tends to fall away and become very volatile in nature.
I suspect the Myer float may do well short term given the quality of its name and long history of trading, although while it does have a large market cap it is quite possible it will be trading below its listing price in 12 months time. Consequently, I believe floats tend to favour the owners listing the company rather than the investor buying the stock.
So what can we expect in the market?
The extreme emotions evident in the world markets over the past two years has made it very challenging to predict the market; in fact during this period it has been the hardest I have ever experienced. That said, what is important is not where the market is headed but rather what you intend to do regardless of whether it rises or falls. Having a plan ensures you protect your capital and minimise any losses, which is far more prudent than trying to pick the next big winner.
I don’t believe we have been too far off the mark with our predictions in recent times, as previous reports have indicated that the market would fall by 5 to 10 per cent into November. Yesterday, the market fell to 4520.70 points, with the total move down since 15 October being consistent with the 5 to 10 per cent fall I have been expecting. That said it has occurred earlier than I anticipated, which again shows that the timing of market highs and lows is still challenging to predict with a high level of accuracy. It is possible we have seen the last of the down move at least for now, although we need to expect that the market could fall slightly further in the next one to two weeks before starting to rise again.
If the market has finished its down move some 2 to 4 weeks earlier than I expected, then this is a positive sign. If this is correct, the next move up could very well be longer in time and price. If this occurs, the market could rise to around 5200 into January 2010 and possibly higher into February before moving into its yearly low at the end of the first quarter of 2010.
Until next time
Good luck and profitable trading.
Dale Gillham
Chief Analyst