As this is my last report for 2007, I thought it appropriate to review what has transpired in the share market over the past 12 months. In my opinion, this year has been difficult for those managing a portfolio of direct shares.

Shares that have performed well this year include BHP, RIO, CSL, WOW and LEI, and unless you held these select shares, it is unlikely you would have achieved a good return. These stocks have dominated the market; however, in more normal market conditions you tend to find the stocks that perform well are spread across various indices and sectors.

This year, while the top 20 achieved 32% better growth in comparison to last year, only a few stocks in this index actually contributed to the growth. For example, 11 of the companies in the top 20 are in the financial services sector, yet this sector only rose by 4.77%. The materials sector, on the other hand, only has two stocks in the top 20 including BHP and RIO, yet it achieved phenomenal growth of 48.01%. This was double the performance of the next best performing sector which was Healthcare at 24.64%.

The good news is that we are unlikely to see a repeat of this next year, therefore my recommendation to all investors and traders is to stick with your plan as it will work over the medium to long term.
    
So what can we expect in the market?

Last week I indicated that I needed to see the market rise this week to change my opinion from bearish to bullish. While the market has technically traded higher this week given that the All Ordinaries Index rose above the high of last week, it only did so for one day while for the remaining days it traded down to close lower. Given this, it is still not possible to confirm the short term direction of the market, although it is showing some bullish signs given that the market has not traded below last weeks low of 6543.2 points.

If the market is bullish it will trade up next week and in doing so confirm that it will potentially rise through until mid-January to between 7250 and 7500 points. If the market falls next week, it will confirm it is bearish and likely to fall until mid-January to around 6200 points. Right now is the time to sit back and be patient because when the market confirms it is bullish there will be some great buying opportunities.

While the recent sub-prime mortgage market meltdown has created significant volatility in the share market, it has also brought with it the graphic realisation of the close relationship that exists between the share and cash markets. One such relationship is the currency carry trade between the Australian dollar and Japanese Yen, which involves borrowing Japanese Yen at low interest rates to invest in high growth investments in the Australian markets.  While the Australian dollar was rising against the Japanese Yen, which it did by slightly under 14% to the end of October, this strategy was proving to be very profitable. However, in November the Australian dollar fell away against the Yen to around 4% eroding any gains and in turn reducing the inflows of cash into the Australian markets. Obviously many investors would be considering whether they would continue with this strategy or if they should pull their money out. If this occurs we may see some downward pressure on the Australian cash and share markets. That said I expect the Australian dollar to strengthen in the not to distant future, therefore I do not believe there is cause for concern right now.    

 So what can we expect in the market? 

As expected the market has risen this week and is looking surprisingly strong given that we have now experienced a 5 per cent rise in the past two weeks, with more than half of the rise occurring this week. Even though the market looks bullish right now there is still a high probability of it turning to fall away in late December or January, which may just result in the current rise becoming what is known as a ‘suckers’ rally. If the market does continue to rise throughout next week, my opinion may change to being more bullish as there is still a small probability that the market may rise through to late December or into mid January and make a new all time high. As I have said previously, right now it pays to be conservative. While there a number of stocks looking quite bullish, it may benefit the inexperienced to wait for the market to decide on a direction before investing.             

The ASX launched its CFD platform on 5 November with 16 listed ASX equities and in less than a month it now has 50 listed equities, foreign exchange, indices and gold CFDs. While the ASX brand adds creditability to this product, I am concerned that it may give the retail market a false sense of security believing CFDs are low risk simply because more and more individuals are being attracted to trade this highly leveraged market when in my opinion they lack the knowledge and skill to do so.

Over the past month, the overall market has fallen, yet the volume of trading on CFDS on the day following a market rise increases substantially, while the opposite occurs on days when the market has fallen away. This indicates that those trading CFDs are very emotional and uncertain of the market direction, which in my opinion is a recipe for disaster. Remember, there is a saying in the share market that trading is the transference of money from the ignorant to the well informed and right now, it appears this is certainly the case in the CFD market.
    
So what can we expect in the market?

During five of the last six weeks, the All Ordinaries Index has closed lower with the market falling 7.27%. While the volatility has continued this week, the market has found some support and is rising which may see it close higher in only the second time in seven weeks. In my report last week I indicated that I expected the market to find support and rise briefly over one or possibly two weeks before falling away to between 6200 points and 6020 points by late December or January, and I still believe this is likely. That said given the erratic and unpredictable way in which the market has behaved in the last few months, anything is possible. Right now I recommend investors take a conservative approach until the market decides on a direction.  

We have now entered the last week of the election campaign, and I believe no matter who wins there are two things that will occur for sure. One is that inflation will rise and the other is that interest rates will continue to rise.

Up until now the rising Australian dollar has protected the economy from any significant inflationary increases given that it has risen 20% against the US dollar since the start of this year.

The strong Aussie dollar has also kept petrol prices down despite oil rising around 50% this year.  Over the two last weeks the Australian dollar has fallen over 6% against the USD, and whilst this fall my be short term my concern is the effect it will have on inflation, interest rates and the overall Australian economy if it continues to fall for a prolonged period. 
    
So what can we expect in the market?

The All Ordinaries Index fell into a low of 6503.80 points last Tuesday, before rising strongly on Wednesday. It then rose early in the day on Thursday before falling away and it continued to trade down on Friday.

As you know, I am expecting the market to be bullish until around Christmas and given that it has already traded down for two weeks I am expecting it to rise this week. To confirm that the market will be bullish, it needs to stay above the low of 6503 from last Tuesday.

If the market falls through the low and continues down this week, it is possible that the market will fall until Christmas. Right now only time will tell but if I am correct and the market does rise, it will rise quite fast and present some great opportunities.

While there have been rumours that BHP has been contemplating a merger with RIO, the rumour is now official following the announcement last week by BHP that it had written to the board of RIO outlining its plans, RIO has rejected the offer, but are open to sell at the right price.  Irrespective, the question that has to be asked is whether a merger between these two entities is really good for Australia and for investors.   BHP is already the biggest mining company in the world, and a merger with RIO would decrease competition and in turn cause potential concerns for steel prices not only for Asian steel producers but the rest of the world.  I also don’t foresee any significant benefits for investors if the merger goes ahead. While it will mean there will be one less mining company in the top 20 shares on the Australian market, it also means that investors will potentially miss out on the individual opportunities presented by these companies. Let me explain…   BHP has risen 860% since December 1998 while RIO has risen 532%. This year to 31 October 2007, BHP has risen 81.93% while RIO has risen 47.85%. What this highlights is that if I invest in each of these companies separately, it is highly likely I would make much more money than if I invested in a single merged entity.  

So what can we expect in the market? 

In the past month I have stated that the market would display signs of volatility and unpredictability up until 1 November, and that during these times we could expect a number of false triggers.   In my report on 26 October, I also stated it was possible that the current fall may continue for another week to around 1 November with the market falling to between 6480 and 6300 points. However, what actually occurred is that rather than continuing to fall the All Ordinaries Index rose on 26 October and continued to rise until 1 November achieving a new all time high of 6873 points.   It was not until last Thursday when the market fell below the low of 22 October to 6537 points that we could confirm the move up to 1 November was a false trigger. The market now needs to fall for one to two weeks into a short term low from the all time high achieved on 1 November, and given that it has already been falling for 6 trading days up until last Friday, the current fall should be over soon.  The good news is that I still believe the market will be bullish until Christmas. There is also a high probability that the market will move up very fast from the low and present some great buying opportunities.