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.

2007 has started off with a bang as the proposed merger of AGL and Origin energy attracts attention and Alinta executives propose a management buyout. Given this, it looks likely that we will see the spate of mergers and takeovers continue on from last year’s high number. Whilst the prospect of owning a share in a company with a proposed takeover is exciting because of the positive short term benefits if the merger goes ahead, investors still need to be careful.  Throughout history, certain market conditions unfold prior to the completion of a bull market including rising interest rates, low unemployment, high levels of consumer borrowing, rising commodity prices, abnormal high rates of takeover bids and acquisitions, and rampant speculation all of which are occurring now. While I don’t believe that rampant speculation has hit the levels of pre October 1987, we are still seeing a form of this with record numbers of mum and dad investors trading highly speculative instruments such as CFDs Warrants and Options.  Sadly there are many alarming stories of investors losing significant amounts of money when trading these instruments with the current life span of new options and CFD traders calculated in weeks not months. Remember bull markets come and go, but it is often costly for the uneducated investor if they fail to recognise the warning signs of when a bull market is ending. Investors need to be conservative right now and leave the high risk markets to the experienced so that they can live to play another day.   

 So what’s happening on the market this week?  

In my last report for 2006 I stated that I expected the market to continue rising, which it has done, rising to a high of 5671.10 on 3 January. From late last week to 8 January the market briefly fell away before continuing to rise. Now that the holiday season is over we are starting to see more volume on the market and as such we should see it rise up to make a new all time high in the short term.  This next rise should last around four to six weeks before we see any downside. On the bigger picture our last yearly low was June 2006 with the peak for the year occurring in May 2006. I believe this year will be almost a repeat of this given that am I expecting the market to peak in April or May; however, as we are also due for a 4 year low the market may peak earlier. As always only time will tell, but what I do know is that the run down into the yearly and 4 yearly low this year will be longer in time and further in price than the fall in 2006.      

This week has seen increased volatility in the market with the All Ords falling 88.5 points on Monday only to rise back once again over the last few days. So, is this something we should be concerned with? Not really, because I believe the volatility is being driven by Telstra with the float of T3 and the takeover announcement of Qantas.

Given that Telstra and Qantas are two of the biggest companies on our exchange, they tend to influence the movements in the All Ords. Following the T3 listing on Monday Telstra fell by 3.2% whilst the All Ords fell 1.63%. Since then Telstra has risen 3.5% whilst the All Ords has only risen 2.32% with 1.5% of that rise occurring on Wednesday. Qantas rose 14.94% following the takeover announcement on Wednesday and Telstra rose 2.47%. That said, once the dust settles on these two shares, which should be any day now, the All Ordinaries index will return to more normal trading as I have been expecting.  

So what’s happening on the market?

In previous reports I indicated that the market should peak between the 15th and 20th of October and then fall for 4 weeks into a low between the 15th and 20th of November. However, because the market peaked later than expected the time period for the low needs to be extended.

We have just entered week 23 in the current move, and I don’t believe the rise this week signals an end to the down move I have been expecting given that the market hasn’t fallen enough in either price or time to confirm the low. Normally the market will fall for 3 to 5 weeks into a low and we are currently only in week 2 of the current fall, therefore we need to be prepared that the market may continue to fall for at least another 1 to 3 weeks with my target for the fall likely to occur between 5200 and 5000 points.