I have said before that a week can be a long time in the share market, and I am sure that many investors are wishing that the events of the past week or so were over. Last Friday, billions of dollars were wiped off the Australian market as it plunged 352 points or 8.2 per cent in one of the biggest one day falls in history. On Monday and Tuesday of this week the market rallied strongly, clawing back part of the losses from the previous week, which we now know was a false rally given the market fell heavily again yesterday.

False rallies are common in bear markets and when they occur they trick the uneducated into thinking the market is rising, only for it to fall away again. The golden rule is to never attempt to pick the market bottom or buy into a share just because you think it is cheap, because you never know, it could become cheaper. For regular readers of my report, you will know that I strongly recommend waiting for confirmation before making a decision, and in this market that means a rally over several weeks not days. I suspect we may see a few more false rallies before the market finally bottoms, which I believe will occur very soon.

So what can we expect in the market?

In my previous report I indicated that the All Ordinaries was likely to continue down to around 4000 points by 4 November. However, last week the market fell for five consecutive days to trade just below this level to 3939 points. This move represents the largest decline we have seen in a single week since the crash in 1987.

An important point to note is that neither the All Ordinaries nor the Dow has ever fallen by more than 50% of its all time high (which for the All Ordinaries is around 3400) without rebounding strongly. Despite the recent falls I believe the market is likely to move up over the next few weeks to around 4300 points, before it falls away to retest last week’s low. That said it is possible that the market could fall to between 3500 and 3400 points, which if it does will most likely occur around 4 November. Given this, we need to continue to be patient and wait for confirmation that the market has bottomed before making any decisions to enter.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

I believe the one per cent interest rate cut by the reserve bank announced this week was a positive move as it will underpin the longer-term stability of the Australian economy. The decision by the major banks to pass on the majority of the rate cut to home lenders is also likely to relieve the mortgage stress experienced by many Australian in the short term. However, unless Australians cut back on the increased debt that the country is accumulating, I believe the financial relief will be short lived.

As a country we are now firmly in a negative savings pattern given that we borrow more than we earn. And with Christmas fast approaching it is highly likely that credit card debt will skyrocket, as many Australians use the surplus cash to squander on the festive season, which will further compound the problem. In my opinion, unless Australians begin to curtail their debt in the coming years, we may well find ourselves in a similar situation to that currently being experienced in the US.

So what can we expect in the market?

The All Ordinaries Index has continued its decline moving down to 4249 points before rising slightly to close just below my expected support level of 4300 points yesterday. Despite the fact the sentiment in the market is quite bearish I am confident that the market is searching for the bottom right now. Once it is confirmed, I believe the market will rise strongly to at least 5500 points over the coming months although it is possible it will rise to around 5800 points.

That said, we need to be cautious right now as it is possible the market could rally for two to three weeks before falling into a short term low around 4 November which may result in the market trading to a low of around 4000 points. Remember the US election occurs on 4 November, and leading up to this event we may experience uncertainty in the US market, which will most likely impact global markets. Irrespective, I believe we will see a change in the US government, which I believe will be a positive move and spur the US market back into positive territory.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

I have revisited a number of major events that have occurred on our market over the past decade including the tech wreck, the Asia crisis and Sep 11 to name a few. Interestingly, the headlines in the newspapers during these periods are no different to what is being published today. Take for example the article published in the Herald Sun on 21 July 2002, where the headline read “ Wall street plunges as panic replaces fear”. The content of the article could almost replicate the current events in the market today.

Why do I mention this?

Because all markets are cyclical and every 4 to 5 years markets will fall by at least 20%. The unfortunate side to this is that while ‘headlines’ sell papers, the uneducated investor is spooked by such movements in the market rather than understanding that these moves are to be expected as they are simply a normal process of market cycles. It is for this reason why I strongly recommend investors educate themselves to understand how markets unfold so they can be better prepared in the future.

So what can we expect in the market?

Over the past week the All Ordinaries Index has fallen heavily again following the rejection by the House of Representative in the US for the $700bn rescue package. While the rescue package is being reviewed again this week, and is expected to pass through the House, I strongly believe the US government is simply putting a bandaid on the titanic. In my opinion more needs to done to ensure that economic stability is restored in the US.

It is with uncanny regularity that when the worst news surfaces the market inevitably bottoms, and the news on Monday was certainly unpleasant. Given this, I am now more certain, than ever, that we are near the bottom of the cycle. That said if the rescue package is not passed in the House of Representatives this week, we may see one last move down to my second target of 4300 points. Following this I believe the market will rise to between 5500 and 5800 points over the next 4 to 6 months.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

Australia’s personal wealth has been hit hard over the past year, which in my opinion has been attributable, in part, to hedge funds forcing share prices lower through short selling. Last weekend ASIC announced a ban on naked and covered short-selling of all securities, managed investment products and stapled securities, which I believe is a good move as better policies need to be adopted to protect the integrity of the market.

That said I don’t believe the issue lies with the principle of short selling as this provides liquidity for the market, but I do have a problem with the lack of transparency in regard to short selling. Currently anyone who takes a large position is required to declare it to the market, but the same rules do not apply for short selling. Given this, large hedge funds have been able to continually force prices down anonymously without any recourse. The end result, as usual, is that the average Australian loses whilst the big end of town profits.

The good news, however, is that the government released draft legislation this week that will require the disclosure of covered sale transactions in the Australian market. If this legislation is passed, it will go a long way to reducing the extreme volatility that we have experienced over the past 12 months.

So what can we expect in the market?

Last week was one we would rather forget, with the All Ordinaries Index falling heavily to a low of 4575 points. The positive news is that following the announcement of the $700bn rescue package by the US government, the market moved up 4 per cent to regain some lost ground by last Friday.

The upward momentum continued on Monday with the market closing up another 4 per cent to 5050 points, which was possibly due to institutions covering their short positions.

For the market to continue to rise from here we need to see a real change in sentiment, although in the short term I believe the uncertainty is likely to remain. Given this, I expect the All ordinaries will most likely trade sideways during the next week or two while the market digests the impact of the US rescue package and the outcome of the ban on short selling.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au

There is an age old industry adage that implies the simplest way for mum and dad investors to build wealth when trading the share market is to dollar cost average. The methodology requires you to make regular investments regardless of the direction of the market or the stocks you are trading. However, in my opinion this strategy is fundamentally flawed as it ignores one of the most important principles of investing, which is to manage risk.

For example, had you invested $5,000 in shares every quarter from the beginning of the bull run in March 2003 to the present day, without consideration for the direction of the market, your investment would have generated an annualised return of around 6.6 per cent p.a. On the other hand, had you decided to exit the market at the end of January this year, in order to manage risk, you would have annualised a return of around 16 per cent p.a. It is for this reason why I advocate the importance of ‘timing the market’ as opposed to ‘time in the market’.

So what can we expect in the market?

The All Ordinaries has been extremely volatile over the last couple of months given that one week it appears as though the market will break above resistance at around 5200, while the next it looks like it will break through support at 4880. Last week I believed the sideways consolidation would hold to create base support for the next move up. However with the collapse of Lehman Brothers and the $85b capital injection by the US government to keep AIG afloat, my opinion has changed in the short term.

As a result of the US crisis the Australian market has experienced a sharp decline, which has broken the 4880 support level. As you will remember from previous reports the next level of support is around 4300 points, which is very strong and I am confident that the market will find support between its current level and this next strong support level. With the US election only weeks away, we can reasonably expect the US market to move into a holding pattern until there is certainty about who will control the country, which is likely to settle our market as well. As always, it pays to be patient and to only enter the market when it indicates that it is safe to do so; until then I urge all investors to sit tight.

Dale Gillham
Chief Analyst
Wealth Within

Dale Gillham, ‘one of the country’s most respected analysts’ (Wealth Creator Magazine, Nov/Dec 2004), sought after key note speaker and author of the best selling book ‘How to Beat the Managed Funds by 20%’, has assisted thousands of traders and investors to become confident and profitable in their direct share investments. Tired of an industry saturated by quick fix gimmicks and expensive short-courses, Dale co-founded Wealth Within to provide ‘ real education and ongoing personalised support’, as well as independent investment advice to traders and investors who have become disillusioned by the market for one reason or another. As testament to this, Wealth Within launched Australia’s first and only nationally accredited Diploma and Advanced Diploma of Share Trading and Investment.

For more information please visit www.wealthwithin.com.au