Beware running with the bulls and stumbling

Published in The Sunday Times March 2007

Dale Gillham

While I was expecting the market to fall about 9 per cent over two to four weeks from the all-time high set on April 18, as we now know, it fell only 1.77 per cent to May 1.

Some investors may be thinking that is good because it signifies that the market is still bullish. While in essence this is correct, we really want to see this sort of bullishness at the start of a bull run, not at the end.

Let me explain.

Price travels at a certain speed in percentage terms over a period of time and since March this year, the market has travelled at twice the speed for more than twice as long as it did after the March 2003 low.

This indicates that the market is more bullish now than it was when it rose out of the last four-year low in March 2003, or it is in a state of euphoria similar to that just before the tech wreck in 2000.

In my opinion, it is the latter, hence my concern. While I am certainly not suggesting the market will fall as heavily as it did during the tech wreck, I do believe we need to be very conscious of where it is right now and what may occur in the future.

It is likely that the market will keep rising to about 6500 points before we see a much larger fall than my original expectation possibly into June or July.

We need to be aware it could fall in the next few weeks.