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 are confused about where the economy is heading and whether you should fix the interest rate on your housing loan, or what you should do with your investments, you are not alone. The past year has been one of contradictions given that we were told interest rates were likely to fall further and now they are rising, to use the government handout to buy imported goods because the Australian dollar would continue to fall and prices would rise, that property prices would fall which has certainly not been the case and that unemployment would rise above 7 per cent. Given this, it’s no wonder many Australians are confused about what they should be doing.

The Productivity Commission’s draft report on executive pay and the potential influence that minority shareholders will have raises some interesting questions. The main one is whether so few shareholders should be able to effectively sack the board of a company. I am all for more accountability from companies and their boards as I believe many executives are paid too much especially when you consider that quite a few have received significant pay rises in the past few years whilst shareholder value has decreased. 

It is well known that voting on issues at Annual General Meetings (AGM) are generally considered a forgone conclusion, given that deals are often struck before an AGM with the majority shareholders who are usually the institutions. This makes AGM’s merely a token gesture to at least look like the board is interested in what ordinary shareholders want. It’s no wonder that average Australian shareholders are calling for more transparency and accountability. The challenge for the commission now is how to balance the needs of the minority along with the need for boards to act effectively.

So what can we expect in the market?

The market has continued to defy logic over the past week by refusing to fall away in price, instead it has really only traded sideways as the bulls have been unable to push the market higher. Since 17 September the All Ordinaries Index has closed lower on 7 occasions and has also made a lower low and a higher high, all of which are signs of indecision and in this case bearish indecision.

With the Dow falling 2 per cent overnight, the Australian market will travel down today, and should break below the low of 4646.30 that occurred on 25 September. If this happens it will signal that the market is finally moving into the short term low that I have been expecting. If I am correct we could see a short sharp move down of one or possibly two weeks, with the market likely to fall by at least 5 to 10 per cent with a price target for the fall of between 4300 and 4500 points. I expect it will more likely be the latter and then following this the market will move up again for a few weeks in late October before experiencing a larger fall in late November or even December.  

I read with interest an article in the September Choice magazine on option educators and their wealth creation seminars. The article states that options╒ trading is primarily promoted by educators as a ╘high profit low risk╒ strategy to make money in rising and falling share markets. Options educators have been renowned for making promises of the riches you can make trading these highly leverage instruments for decades and the streets are littered with thousands of unsuspecting customers who believed these over inflated and misleading statements and paid the price. 

This practice is not just restricted to options trading but also CFDs, foreign exchange trading and horse racing software with the same marketing spin and hard-core sales. Whilst these promoters tell the unsuspecting attendees╒ that returns in the hundreds and even thousands of percent are easily obtainable in a few short months with little or no knowledge, highly qualified options brokers suggest profits of 1.5 per cent per month or even double digit figures in a year, would be a phenomenal return. In reality, the only people getting rich are those who promote these seminars - anyone attending a seminar that promises returns that sound too good to be true should just walk away. 

So what can we expect in the market?

Over the past week the market has continued to rise instead of fall as I expected. Right now many investors would be thinking that the market is highly bullish and that the bull-run is likely to go on forever. However, one thing I have learnt about the share market is that it tests your psychology because just when you think the bull-run will continue it stops, catching many unsuspecting investors out.

If we look at the reality of the market, since the high on 15 August the All Ordinaries Index has risen only 1.48 per cent to yesterdays close. However, if we look at Wednesday’s (9 September) close, it has only risen 0.45%. So is the market really bullish? Or is it slowing down and about to turn?

I believe it is the latter as there is at least a 90% probability the market will fall in September for at least two weeks. Therefore, given that we are now nearing the middle of the month, it is likely that the market will start to fall any day. Following this, I expect the market to rise into October to between 4600 and 4950 points, which I believe will be the high for the year, before it falls again in November to below 3800 points. 

Only time will tell if I am correct, but as always protect capital by setting stop losses, and do not think you are missing out if you are not buying right now as probability suggests we will get better and safer buying opportunities in the not to distant future.