The election is now over but we are still none the wiser as to the future direction of our country. Even when we do find out the result, it is certain we will have a minority government which could spell disaster for our short term economic growth. For the economy to grow business must grow, however, businesses need certainty before taking on the risks associated with expanding. We are now seeing many companies putting off expansion plans and this has a flow on effect for business borrowings, employment, and spending on infrastructure and other services. Added to this, we have seen government projects such as the NBN put on hold, and as each day goes by where nothing happens the negative flow on effect into our economy increases.

Despite the recent economic conditions, we have had some good results in the current reporting season. That said, if we are faced with a minority government over the next four years which may have its hands tied or its policies watered down, I would suggest that we could be see a different picture in the years ahead. Whilst I believe the possibility of Australia falling into a recession is low this is not something we can ignore, especially since the US is looking more and more like a basket case. Given this, we need strong leadership and a strong government that can make decisions swiftly for the benefit of all Australians. Maybe we should go back to the polls? But with the absence of any real strong leader would it be worth it?    

So what do we expect in the market?

The All Ordinaries Index has fallen away this week as expected, with the market down by around two percent from the open on Monday. Apart from Thursday’s rise, the market has looked bearish this week, highlighted by strong falls on Tuesday and Wednesday. As mentioned last week, I believe the forthcoming decline will be in the order of 10 to 15 per cent, which is consistent with what has occurred over the past 12 months. If this is correct, our market should trade down to around 4,000 points in the next few weeks.

Looking at the Dow, I believe it is also falling with my forecast being that the low will be between 8,900 to 9,400 points in mid to late October. This is unlike the All Ordinaries index which I suspect is currently out of sync with the US, as the low for our market is more likely to occur between 13 and 20 September. The further our market moves down in the next few weeks the better the buying opportunities that will present over the coming months.

All too often we get caught up in short term thinking rather than focussing on the bigger picture, and this is especially so when it comes to investing. To illustrate, let’s consider what can be achieved with good shares and a little time. Put simply, had you invested one dollar in BHP shares at the start of January 1999 by 31 Jul 2010 your investment would have increased 592 per cent. During the same period other top 20 shares like CSL grew 599 per cent, Woodside Petroleum 473 per cent and Woolworths experienced a gain of 386 per cent. These figures are only for capital growth, and therefore dividends received or re-invested would have increased these returns. Of course not all shares are suited to a buy and hold over the longer term. The same dollar invested in Telstra experienced a loss of 57 percent, and 60 percent with AMP, not including dividends.

The key to investing or trading the share market is not to look for the next big thing or to find a new way of trading or even trying to pick the short term moves. With over four hundred years of world share market history to guide us, one thing we know with certainty is that nothing has changed in terms of the mechanics of markets. People continue to react to information and therefore the market will always do what it does. Regardless of how smart we think we are or how much new technology we have the other thing we can learn from the 400 years of market history is that we do not learn from mistakes.     

So what do we expect in the market?

You could be forgiven if you are thinking that the movements in our market are very much like driving your car with the handbrake on. You know something is wrong but you just can’t figure out what. Our market is trading at just below 4,600 points, which is the same level it was three months ago despite having two strong moves of 10 per cent plus and two nine per cent plus moves. The problem is that only half of those moves were up. Whilst this is exciting for short term traders, the same cannot be said for medium to longer term investors.

The longer this volatility goes on the more likely it is for the Australian share market to move down over the next few weeks. If the market fails to continue the current rise we could see it fall to below 4,200 points and possibly to 4,000 points. I would expect that a move down would be short and sharp with the eventual low occurring between 20 August and mid September 2010. Given this, it might be wise to take a cautious approach to investing until we can confirm which way the market is moving.      

I always get excited to see Richard Branson in Australia, as he continually takes on the big end of town to give the average man on the street a better deal. This week he announced that Australia’s big four banks are in his sights, and I think it’s about time that someone took them on. For the regular readers, you will know I have been saying for years that the banks have been getting it too good for too long and in the wake of the GFC their hold over the mortgage market is even stronger than it was before the crisis hit. If NAB takes over AXA the ‘Big Four’ will also have a lion’s share of Superannuation and Managed Funds.

Branson with his Virgin brand intends to take on the biggest money spinners for the banks being superannuation, mortgages and credit cards. I believe he has an opportunity here as Australians continually complain about the banks, just as much as they seem to hate dealing with Telstra. For too long we have been paying way too much for the service we get, but what other choice is there? Perhaps Virgin can offer a better service at a better price to encourage Australians to embrace this new venture in droves. My only hope is that enough numbers make the move to really get the banks thinking about why they exist.     

So what do we expect in the market?

Market volumes throughout July are still low, and they tend to be lower at this time of year than any other month, except for January when the country is on holidays. Therefore, we could consider this as normal and nothing to worry about. However, the difference between this month and activity in July last year is that lower volume last year was accompanied by a strong price rise. Currently we are seeing inconsistent movements in the market with only a handful of days that are rising strongly. Given this, it would not surprise me to see our market fall away over the next one to four weeks.

For the market to be bullish any downward movement needs to last only a few days before a rise follows, and if this occurs there is good reason to believe that it will rise through 4,650 points in the coming weeks. Sectors to look at for opportunities in the coming months are energy and materials, and sectors to avoid include banking and insurance.   

The view that investing in the share market is complicated, mysterious and best left to the so-called experts who supposedly know what they are doing is a fallacy, perpetuated in part by those in the industry who stand to gain from your anxiety and ignorance. For example, positive returns always make for a good sales pitch and superannuation fund managers are currently coming out with their yearly returns.

Now depending on market conditions, fund managers will direct your attention to whatever makes them look best and so justify their existence. When the market is strong, it is usually the short term performance of the fund that is emphasised; when the market isn’t so strong however, you are often directed to look at the long term performance. Although the performance of the past 12 months by many funds may look positive, we need to remember that fund values are still way below what they were in 2007. Always remember, those in the industry are trying to sell you a product and they will use whatever marketing tactics they can to lure you in.

So what do we expect in the market?

You could be excused for thinking that the share market is like a roller coaster at the moment. Every time the market rises we then see a corresponding fall that wipes out the recent gains. This ‘ground hog day’ type performance has seen our market go nowhere in over two months, even though there have been some large moves both up and down. Eventually the direction of the market will be confirmed and a sustained move will result, and like most people I would like to see it move up. However, as mentioned last week, the market has been trading on significantly lower than normal volume, which is often a sign that the current move is unsustainable. As volumes continue to be low this week, the evidence suggests that uncertainty still reins. Given this, I still maintain that until we can determine direction it is wise to sit back and wait before buying further. 

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.