Upfront Investor Australian Share Market Report 2/7/10

We have come to the end of another financial year, one that proved to be among the toughest in decades for investors to pick the best performing stocks. Of the top 20 shares on the Australian market, sixteen returned a positive capital gain for the financial year, but only two have a positive return so far in 2010. What is clearly evident is that your portfolio return was severely affected by the specific selection you made. Let me explain…

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

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