I always get excited to see Richard Branson in Australia, as he continually takes on the big end of town to give the average man on the street a better deal. This week he announced that Australia’s big four banks are in his sights, and I think it’s about time that someone took them on. For the regular readers, you will know I have been saying for years that the banks have been getting it too good for too long and in the wake of the GFC their hold over the mortgage market is even stronger than it was before the crisis hit. If NAB takes over AXA the ‘Big Four’ will also have a lion’s share of Superannuation and Managed Funds.

Branson with his Virgin brand intends to take on the biggest money spinners for the banks being superannuation, mortgages and credit cards. I believe he has an opportunity here as Australians continually complain about the banks, just as much as they seem to hate dealing with Telstra. For too long we have been paying way too much for the service we get, but what other choice is there? Perhaps Virgin can offer a better service at a better price to encourage Australians to embrace this new venture in droves. My only hope is that enough numbers make the move to really get the banks thinking about why they exist.     

So what do we expect in the market?

Market volumes throughout July are still low, and they tend to be lower at this time of year than any other month, except for January when the country is on holidays. Therefore, we could consider this as normal and nothing to worry about. However, the difference between this month and activity in July last year is that lower volume last year was accompanied by a strong price rise. Currently we are seeing inconsistent movements in the market with only a handful of days that are rising strongly. Given this, it would not surprise me to see our market fall away over the next one to four weeks.

For the market to be bullish any downward movement needs to last only a few days before a rise follows, and if this occurs there is good reason to believe that it will rise through 4,650 points in the coming weeks. Sectors to look at for opportunities in the coming months are energy and materials, and sectors to avoid include banking and insurance.   

The view that investing in the share market is complicated, mysterious and best left to the so-called experts who supposedly know what they are doing is a fallacy, perpetuated in part by those in the industry who stand to gain from your anxiety and ignorance. For example, positive returns always make for a good sales pitch and superannuation fund managers are currently coming out with their yearly returns.

Now depending on market conditions, fund managers will direct your attention to whatever makes them look best and so justify their existence. When the market is strong, it is usually the short term performance of the fund that is emphasised; when the market isn’t so strong however, you are often directed to look at the long term performance. Although the performance of the past 12 months by many funds may look positive, we need to remember that fund values are still way below what they were in 2007. Always remember, those in the industry are trying to sell you a product and they will use whatever marketing tactics they can to lure you in.

So what do we expect in the market?

You could be excused for thinking that the share market is like a roller coaster at the moment. Every time the market rises we then see a corresponding fall that wipes out the recent gains. This ‘ground hog day’ type performance has seen our market go nowhere in over two months, even though there have been some large moves both up and down. Eventually the direction of the market will be confirmed and a sustained move will result, and like most people I would like to see it move up. However, as mentioned last week, the market has been trading on significantly lower than normal volume, which is often a sign that the current move is unsustainable. As volumes continue to be low this week, the evidence suggests that uncertainty still reins. Given this, I still maintain that until we can determine direction it is wise to sit back and wait before buying further. 

Contracts for Difference or CFDs are still firmly in ASIC’s sights after the recent demise of one provider. ASIC states on its FIDO website that, “you might think from the advertisements that CFDs are a mainstream financial product. Would you be surprised if FIDO told you they’re complex and very high risk?” ASIC goes on to say “it’s much riskier than a flutter on the horses or a night at the casino”. Whilst I think that ASIC’s stance is a little over the top, unfortunately most people who attempt to trade CFDs don’t understand what they are doing or how to manage risk and therefore, in essence prove ASIC’s statement to be true. 

What astounds me is that people ignore ASIC’s warning, believing that they are either intelligent enough or skilled enough to be successful at making money by trading CFDs. Its human nature for people to think this way, but in my experience if someone trading CFDs holds this view, then probability suggests that they will eventually become a statistic and re-enforce ASIC’s point. Where I strongly agree with ASIC, is that CFDs are only suitable for those who have extensive trading experience, knowledge, risk control and financial capacity. Sadly most people who attempt to trade CFDs would fail to qualify in these four areas. The latest move by ASIC to further regulate this area will require providers to put more disclaimers into their documentation, but what will that achieve when people have proven they don’t read them. I believe better education is the key to success.   

So what do we expect in the market?

The past week has seen our market move up by just over 1 percent, whereas the rise over the past ten trading days has been slightly over 6 percent. In essence, most of this rise occurred on only two of the past ten days, and on significantly lower than normal volume. Generally this is a sign that the current move is unsustainable, as we would normally like to see volume increasing with the trend. Given this, it is important to not jump into the market too early, thinking it is bullish and trying to grab a bargain. In the next week I expect to see our market fall over one to four days, with the length and severity of the decline indicating the likely direction for the coming month. To prove it is more likely to be bullish, at least in the short term, any downward move needs to hold above recent lows, followed by a rise above 4500 points. Therefore, until we can determine direction it is wise to sit back and wait before buying further. 

Over recent decades we have become much more reliant on technology in our everyday lives. Today we can have information delivered instantly to our desktop computer or to a mobile phone. In my opinion not only does all this instant access waste a lot of time, it leads investors in the share market to become focussed on short term outcomes, believing they can achieve financial independence in a matter of months or a few short years, which is not realistic.

I have found that investors who continue to focus on the short term actually take much longer to build wealth. Often investors that have technology at their finger tips feel compelled to look at their shares and the share market during the day, and sometimes all day. Whilst I encourage people to take an interest in the market, there is a point where too much information and a lack of knowledge to interpret what is really important will lead people to become over emotional and confused. This is when investors become impatient and start to chase the market and returns, with disastrous effect. What it highlights to me is that ‘less really is more’ and that investors need to focus on the big picture and not the daily fluctuations of the market. 

So what do we expect in the market?

Over the past three days our market has almost recovered the lost ground from the prior week, with most of the rise occurring on Thursday 8 July. Whilst on the surface this is a positive sign, it is too early to get excited just yet, as one day does not make a bull market. Until the market proves that it will be bullish, which won’t happen until it rises above the previous short term high of 4641 points achieved in late June, we need to assume it is bearish. 

Given this, it we must consider the possibility that the market may now fall away for a further four to six weeks to 4,000 points or below. If the market does continue to fall away I would expect the next low to occur in late July or early August and therefore, I believe now is the time to get ready for the next rise.  If you are looking to enter the market I strongly suggest you focus your buying on quality shares rather than speculate on the lower end of the market.

If you owned ANZ and CBA throughout the financial year your capital gain would be 31.5 and 24.72 percent respectively, however, these shares were down -5.55 and -11.3 percent since January 2010. Had you selected NAB and WBC instead, your capital gain for the financial year would be just above break even, whereas, in 2010 both are in loss by 15.04 and 12.63 percent. In considering the big miners, RIO had a financial year gain of 27.7 percent, against BHP at 8.44 percent, but they were both down by at least 11.0 percent in 2010.

This sort of volatility in returns can be seen right through our market over the past financial year and therefore portfolio performance could easily vary from being positive to negative. Given this, investor portfolio returns over the past year were very much dependant not only on what they bought and sold, but when they did it.   

So what do we expect in the market?

Again this week the Australian market has been far from impressive, with the past two weeks literally wiping out the gains since the May 2010 low. This suggests that the psychology of our market is now much more bearish than it is bullish, and therefore we need to re-asses our thinking.

You will recall how last week I explained that in a normal market prices will generally rise over four to six weeks and then fall for one or two weeks before rising again. In a bullish market this fall will generally only be a few percent, whereas, over the past eight days our market has fallen over 8.5 percent, with no real sign it is about to stop. Given this, we need to look at the possibility that the market may now fall away for a further four to six weeks to 4,000 points or below. This further highlights why I have been strongly suggesting that it is wise to set stop losses on your shares to protect capital. I am not discounting the fact that our market may find support and rise again over the next few weeks, as anything is possible in the current market conditions, but the likelihood of that occurring is now less than it was two weeks ago.  

Dale Gillham

Chief Analyst

Wealth Within