Since the 15th October the Australian share market has fallen nearly 8 per cent as part of the normal market cycle. What is interesting is that the longer the market moved down in time, the more fear has arisen in ordinary Australians concerned that they were about to see a repeat of what occurred into March of this year. It seems that Australians are becoming more myopic in their outlook, which is to their detriment, rather than looking at the bigger picture of where the market is heading. This attitude has stemmed from a fear of loosing, and is causing many to not only loose sleep but make poor investment choices 

Markets will always move from low to high and then make a new low before rising again because price always conforms to the averages. For example, the All Ordinaries index long term average growth is around 2.5 points per day, although at times it will rise at a faster rate. Therefore we need to expect that the market will peak and fall back to the historical average. This is also true in a falling market. Knowing this, investors would be better off stepping back and taking a broader approach to the market rather than hanging onto every move that the Dow or our market makes.  

So what can we expect in the market? 

Over the past week the market has fallen away slightly to achieve a low of 4515.3 points yesterday, which represents a fall of just less than 8 per cent. Last week I mentioned it was possible we had seen the last of the down move, although we needed to expect that the market could fall for a further one to two weeks to around 4500 points before starting to rise again. 

Given the move down this week has only been minor, and it is likely that the market will rise strongly today, it is possible that the market will close higher for the week. This would indicate that the down move is most likely over, although over the last two years the market has trained us to expect the unexpected. Given this, it is possible the market could fall slightly into next week.

That said, once the low occurs I believe the market will 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.      

I have said it before and I will say it again, for the life of me I cannot understand why anyone would want to own Telstra, it just does not make good investment sense. The government doesn’t want it, that‘s why they sold it, and recently the Future Fund sold out its holdings in this company.

So why do investors continue to hold onto Telstra? Many say because it pays a good dividend, but this is simply an excuse to justify why they didn‘t sell out earlier. There are many other good stocks on our market that pay solid dividends, and contrary to Telstra have actually risen in price over the years. It takes a lot of dividends to recoup from a fall of over 60 per cent, which Telstra has suffered over the past tens years. If you look at the real return investors received by holding onto this stock in the past 10 years, you would find most, if not all, would have been better off investing their money in a bank account.

The announcement this week that the government is forcing Telstra to break up its operations has compounded the fall in the share price, although in my opinion it is a good idea and one which may see the share price actually start to rise. That said you would have to wonder if those in charge of the Future Fund were aware of the government‘s intentions given that it is less than a month since the Future Fund dumped their holdings. It seems like perfect timing if you ask me.

So what can we expect in the market?

The All Ordinaries has continued to defy logic and over the past two days has risen strongly to now be trading near its highest levels in a year. Whilst the rising market is good for investors, what I am seeing is a false sense of security emerging from the general investing public. Many investors are now rushing into the market thinking that they are missing out on this current bull run. Some are even borrowing money in an effort to make up for the losses they experienced over the past two years.

In my opinion these investors are taking too higher risk because as the old saying goes ╘the amateurs buy at the top while the professionals buy at the bottom. Right now the amateurs are taking a boots and all approach to the market, while the professionals are being more cautious, which is evidenced by the low volumes being traded on our market over the past few weeks. 

I still believe the market will fall for at least two weeks, which should start to occur any time now. I am also convinced that the market will fall into November to below 3800 points. Only time will tell if I am correct, but as always protect capital by setting stop losses. Finally be patient because those who are will reap the rewards.

When talking to people about investing in the share market, I often get asked how much should I invest? This question usually stems from the person’s perception of the return they will make on their capital. But they may as well ask me how long is a piece of string as there are so many variables that determine the return on a portfolio, the least of which is how much capital to invest.

An alarming trend that I am now seeing is an increase in the number of people with small amounts of capital who believe they have to invest in highly leveraged investments such as CFDs, Options, Foreign exchange in an attempt to make investing ‘worthwhile’. Unfortunately, the reality is that most of these people do not have the knowledge to manage these investment vehicles and end up loosing what little capital they do have because, in essence, they are gambling with their money.

There is a well known children’s fable of the race between the Tortoise and the Hare and we all know the Tortoise wins. The lesson here is that what seems quick is often not the case, particularly in the share market. In reality those who venture down the road of attempting to get rich quick end up achieving the opposite.

So what can we expect in the market?

Predicting the market is not an exact science, and given the market is a living breathing organism, it sometimes does the opposite of what we anticipate. By now I was expecting the market to be falling for around 4 weeks from early August into September, however, as this has not unfolded I need to re-asses my position.

Whilst I am still confident September will have a low, the move down may now only be for one or two weeks, with the fall unlikely to be as large as I originally expected. It now looks as though the market will rise in October, which I expect will be the high for the year, before it falls again in November. That said I still believe the market will struggle to move through 4600 points in the short term although there is a possibility it could trade to 4950 points before the move down into the November low.

When the market does move down, I believe price will fall below 4000 points and most likely trade to around 3800 points into November. Given this, we can assume that we are now near the top of the current bullish move, therefore investing heavily in the market right should be avoided unless a low risk opportunity with good potential for profit arises. 

Dale Gillham

Wealth Within

This article was published in the ASX newsletter this month and proved to be very popular, so again I thought I would share the link with everyone.  Just follow the link below to the ASX website.http://www.asx.com.au/resources/newsletters/investor_update/20090811_so_you_want_to_be_a_full_time_trader.htmGood luck and good trading.Dale

I was looking around and remembered I wrote this article for the ASX newsletter, and thought it worthwhile putting it into this blog.Just follow the link to the ASX website.http://www.asx.com.au/resources/newsletters/investor_update/20090512_10_tips_to_make_more_money.htmGood luck and good trading.