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.

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

We now have a new Prime Minister, but is the change akin to shuffling the deck chairs on the Titanic, or is it likely to be good for Australia? I’m all for having a female in the nation’s top job, but it seems to me that politics is more about getting re-elected and making compromises to suit the big end of town, rather than serving the Australian public. From what I see the mining industry with all their power and money have used their considerable influence to decide what should or should not occur.

I am not biased towards Kevin Rudd or Julia Gillard, but Australia needs a leader that does what is right for the country rather than just what will help them win the popularity stakes. The big issue that has rocked the boat is the proposed Resource Rent Tax, which appears to be the right thing for this county if you look past the rhetoric coming from the miners.

From what I can see, the events of this week will not benefit the Australian people as it only increases our distrust of politicians and a political system. It also does nothing in the immediate future to calm the Australian share market.

So what do we expect in the market?

This week the Australian market has been far from impressive, as falls during the past few days have literally wiped out recent gains with our market trading at September 2009 levels. Whilst on the surface this may look give cause for concern, it is quite possible that after trading up for the past four weeks the market is now doing what is actually quite normal.

Let me explain. In a normal market, prices will generally rise over four to six weeks and then fall for one or two weeks before rising again. If this is unfolding we should see the All Ordinaries Index rise over the coming weeks to my target levels. In saying that, whilst activity this week can be considered normal, we know the market has been far from normal over the past two years, and therefore we need to consider the possibility that it may fall away for a further four to six weeks to around 4,000 points. Given this, again I suggest it is wise to set stop losses on your shares to protect capital. 

Over the years I have met thousands of share market traders, and the one thing that stands out is how more money can be made by trading less and over longer periods, rather than from day trading. This is why it never ceases to amaze me that when people find out I am a trader they automatically assume I am a ‘day trader’. Now I can hardly blame them for making this mistake when share trading is often talked about in the media as day trading. What is never talked about is how unprofitable this approach really is, yet so many attempt to go down this path only to find they were doomed to failure. 

But why are so many who attempt to trade the share market unprofitable when there is so much information available? I put it down to human psychology and a lack of knowledge. The minute you put your hard earned cash into the market you are likely to be affected by price movements, and the more you look at the market the more emotional you are likely to become. This is ultimately why mistakes are made that cost money. The most important thing I teach traders is to trade less by considering the bigger picture, rather than being focussed on short term price action. This requires less time to manage your investments and you’ll make more money. Now that has to be a better way. 

So what do we expect in the market?

Despite the general upward movement of the market over the past week, the rise hasn’t been convincing. We are now at the end of the third week of June and the All Ordinaries Index has only risen 2 percent for the month. Further to this, the rise occurred on slightly lower volume which indicates there is still uncertainty about the likelihood for the market to move forward.

 Whilst I still believe the market will continue to rise over the next month through 5000 points and up to my target of around 5200 points, I would prefer to see it gather more momentum as it moves up. The longer the market stays subdued the more the rise will become unsustainable, and therefore if this continues probability suggests it could turn and fall away again. Given this, as I often suggest, it is wise to set stop losses on your shares to protect capital.