Dollar cost averaging seems to be a hot topic within the industry of late. For those of you who may not understand this concept, it basically means that you continue to buy more shares in companies that you already own as they fall away in price in order to achieve a lower average purchase price. Now I don’t know about you, but I struggle to understand why anyone would want to buy shares in an asset that is falling.

If you dollar cost averaged Centro and ABC Centres in the past 6 months you would most  certainly be questioning whether this was wise given both that shares had already fallen significantly prior to the recent falls. I am sure those who employed the dollar cost averaging strategy to Telstra as it fell 62% over 6 years from $9.20 to $3.43 would still be regretting their decision as they could have made far more money in many other shares during this time.

In my opinion dollar cost averaging or buying shares as they fall away because they seem cheap is not smart investing for the simple reason that most investors do not know where the bottom is and to buy without knowing is speculating.

So what can we expect in the market?

Just when I thought our market was settling and would confirm a direction soon, it has once again behaved erratically, and fallen away over the past week. This erratic behaviour makes it very difficult to determine the short term moves in the market, although as I mentioned last week I believe the medium to longer term will be bullish. The only question that remains is when this will occur.

There is a high probability that the next bull-run will commence before the end of June and when it does it will produce some great gains in many top shares. In the short term we need to be patient as it is possible the market will pull back to the low of 5222 that occurred in January although there is a small possibility that it could also fall to around 4800 points. That said I believe the market will start to rise over the next one to two weeks, which if correct could be the start of the new bull-run. Again it pays to be patient because right now is the perfect time to ready yourself to enter the market when it does confirm a direction.     

I have said it before and I will say it again, it seems that we fail to learn from our past mistakes. One of the biggest issues I find continually perpetuated in our industry is the use or overuse of leveraging to invest. In January of this year the market experienced record levels of margin lending calls, which was also prevalent 6 months earlier in August 2007 and again 12 months prior in June 2006. 

This week the share price of ABC learning centres was decimated as a result of the company’s over use of debt, and the share holders are paying dearly. While borrowing to invest is a valuable tool for investors and businesses alike, it needs to be made very clear about the downside of using this facility. In my opinion, investors should not be allowed to borrow up to their limit and there should always be room for fluctuations in the market in case the worst occurs. If this were to happen, then margin calls could become a thing of the past.         

So what can we expect in the market?

Last week I mentioned that I was expecting some direction in the market very soon, and it appears as though it may be rising given that during three of the last four days the market has closed higher, with the All Ordinaries Index reaching its highest level since earlier this month. That said, the market fell away yesterday and it is quite possible it will continue down today although I don’t expect this down move to be strong or to last too long.

For the market to prove it is bullish, at least in the short term, we need to see it rise above 6057 points in the next week, which is a strong possibility given what has occurred this week. If it does rise to this price level, it may indicate we are starting the next bull-run.

While my bias is beginning to swing from being bearish to bullish in the short term, investors still need to be patient and to be sure of the market direction before making any investment decisions. Given the erratic nature of our market over the past few months, in which anything could and did happen, we need to be prepared in case the market does fall away.

Australian Capital Reserve (ACR) is yet another property group to collapse within the last year. ACR targeted small investors promising above average returns to raise money via unsecured deposit notes to fund property developments. While on the surface it appears as though this is a good investment, there are at least two issues of concern; firstly, the fact that the investment was unsecured and secondly, the investment is only as good as the company backing it. If funds had been invested in well established and well run companies like Westfield or Lend Lease, then the investment could have been considered low risk, given their long track record in property. While the lure of higher than average returns is attractive, investors should have been warned that ACR was a high risk investment given the money was unsecured. That said higher than average returns doesn’t always mean high risk; it just means the investor needs to understand the investment vehicle and who they are dealing with, what is securing the investment and how liquid it is in case they need to exit.     

So what is happening on the market?

Last week I stated that it was still too early to confirm that the market was falling into its yearly cycle low as it had traded sideways over the previous three weeks. And this indecision has continued in the last week resulting in the All Ordinaries trading roughly within a 2% range throughout May. Given that the market has continued to trade sideways following the rise of around 10% from early March to mid April indicates that the current bull market is definitely slowing.

Although there haven’t been many instances where the market has traded sideways in the past few years, it is a very normal occurrence and, once disequilibrium occurs between the buyers and sellers the market will find its direction. As you know I have been expecting the market to move down into its yearly low, therefore I believe the sellers will take hold and the All ordinaries will fall away. That said it could still rise up strongly to break above the all time high of 6390.3 set on 22 May, although I believe the probability of this occurring in the near future is low. Right now, I think investors should take a wait and see attitude until the market settles on a direction.

The collapse of Fincorp two weeks ago and Westpoint late last year highlights the fact that the financial planning industry needs to be more responsible for the type of investments they recommend while investors need to be more realistic in regards to the returns they expect. Unfortunately the lure of high commissions will entice some financial advisors to overstep the line and while the majority of advisors do look after their clients, many investors are seeking higher returns, placing increased pressure on advisors to recommend high growth products in the hope of delivering better returns.  It is interesting to note, however, that while clients want high returns they are not necessarily prepared to accept responsibility for the risks that often present themselves with these demands. While I believe portfolio managers should be responsible for the returns they deliver, I also believe that investors should be responsible, in part, for the decisions they make in regards to their investments. 

 So what is happening on the market?  

Whilst the market has traded higher over the last week it has not been without its fair share of indecision. As I have mentioned in my previous reports, I expected the market to find resistance around 6160 points, which has occurred as the All Ordinaries has struggled to close above this level on any week. I also indicated that there was a high probability that the market would peak by April 18, which was confirmed when it fell on Thursday 19 April. Whether this peak is the actual yearly high I have been predicting is yet to be confirmed as we would need to see the market continue to fall away for at least 2 to 4 weeks. If it is the yearly high, then I expect the market will fall to around 5800 points.

Regardless of whether the Macquarie lead buyout of Qantas receives the support of the government, the question that remains is whether Qantas is a good investment? From a technical perspective Qantas is a volatile stock that has erratic moves in price. You only have to look at the fact that after achieving an all time high of $5.40 in August 1999 the share fell by more than 50% in price before trading sideways for many years. Shareholders had to wait until June 2006 before the stock eventually gained momentum, rising around 84% in price over the last 6 months to trade back up to $5.40. Given this, anyone holding this stock during this period would have only received dividends, which in my opinion is not a good investment. Even if you held the stock since it floated in 1995, you would have only achieved a return in capital growth of approximately what Macquarie Bank pay on their cash management account. If the buyout goes through, hopefully Macquarie will be able create better share holder value. 

  
So what’s happening on the market this week?

As expected the market has risen strongly making new all time highs and my expectation is that this trend will continue at least in the next week. That said, given that reporting season is upon us, we may see some real volatility in the market over the next week.

As a technical analyst I study chart patterns, price movements and many other factors when assessing a share and it is interesting to see many of the large companies have been trading below their major highs over the past few weeks, while others have been doing this for quite some time. The reason this interests me is because the larger companies are often a leading indicator of the market, which means if we see them pull back it indicates that the prevailing trend may end soon. A good example of this was Newscorp, when it fell from February 1987 into the crash in October. 

For now the market is bullish, and we need assume it will continue to be so until it indicates otherwise. That said we need to be cognisant of the signposts that are becoming more evident which indicate the bull market may be ending.