Last week the ATO announced that it was relaxing the rules for SMSF in regards to leveraging, and whilst the industry is still grasping with exactly what these new rules will mean for Australians, on the surface it looks to be a positive move.  However, if the new rules mean that investors will be able to borrow to purchase property in their SMSF, this may well have a significant impact on both the share and property market.  Currently SMSF’s invest heavily in cash and shares therefore if money is shifted into the property market it could cause a major decline in the share market. On the flip side, increased demand for property will force prices even higher making it harder for first home buyers to break into the market.   Whilst leveraging can magnify returns, the opposite is also true and while the economy is booming there is usually little to worry about. However, economists are predicting a worldwide recession in the next decade which may cause problems for many baby boomers particularly if they are over leveraged in the property and share markets because they may well struggle to cash up for retirement. 

  So what can we expect in the market? 

Over the last month I have been indicating that the market needed to fall for one to two weeks into a short term low, which it did falling to 6559.6 points on Monday 22 October.  Since that time the market has been very volatile and displaying signs of indecision with a number of stocks swinging strongly in both directions. This made it difficult to confirm the low, however, late last week the market moved up to make a new all time high of 6873 points on Thursday, signalling that the market will most likely be bullish until around Christmas. That said the DOW fell heavily Thursday night and in a reaction to that the All Ordinaries fell heavily on Friday. Right now I do not believe our market will fall below the low achieved on 22 October and that the fall on Friday is nothing to worry about.  While I indicated that the market would display signs of volatility and unpredictability up until 1 Nov, I believe it should settle over the next few days. Once this occurs we should see some great opportunities in the market.

New research conducted by Standard and Poor’s highlights that financial services professionals are ignoring SMSF investors, and failing to provide them with the necessary education and tools to adequately manage their investments. No doubt, this stems from the fact that there is no long term gain in providing services to the DIY market. Yet SMSFs have experienced record growth, accounting for around 25% of the nation’s total superannuation pool and this growth is expected to continue.

While the research indicated that the education needs specifically related to investment fundamentals, risk and return, risk management and the importance of diversification, I would argue whether financial professionals such as advisors are the best people to be educating the DIY investor.

Furthermore, while the current bull market has made it easy for investors to profit, I believe mistakes are being hidden by the strength of the market in recent years. This raises major concerns, particularly when the market changes, which it will invariably do, as to how SMSFs will cope if they do not have the required knowledge and skill to manage their own investments.   
 
So what can we expect in the market?

The strong move up on our market last Thursday (18 Oct) potentially indicated the down move was over, however, it proved to be a false signal given that the market moved down on Friday and then again on Monday of this week falling 131 points in one day. As I have previously indicated, the market is currently in the time period for both increased volatility and unpredictability, and this is certainly the case right now.

During these times, investors need to be cautious as false triggers often arise, which was evident by the move last Thursday. I am expecting the volatility to ease around 1 November, at which point the market will settle into its normal rhythm.

While my medium term view is that the market will generally be bullish through to late December or possibly early January, it is possible that the current fall may continue for another week to around 1 November with the market falling to between 6480 and 6300 points. Following this, the market will present an opportunity to purchase some great shares at lower prices and with more certainty.  

With the ASX launching its new listed CFD product in November, there has been an influx of attention in the media with many suggesting that the demand for this product will be strong. Not surprisingly there has also been an increase in advertising from other providers, no doubt, in an effort to maintain market share. But the question that has to be asked is this product really suitable for retail investors?  Trading CFDs is very high risk and should only be contemplated by those with the required knowledge and skill in trading and in handling highly leveraged instruments. Some of the providers promote they offer education but you have to question how good is it when the average CFD trader only lasts a matter of weeks in the market. In my opinion, the education is used as a lure to attract clients, rather than to genuinely educate them. This was prevalent when options and warrants were introduced into the market, and we may just see a repeat of the providers coming out on top and the mum and dad investors left wondering what just happened. 

So what can we expect in the market? 

Last week I indicated that I was expecting the market to fall by a few per cent over one or possibly two weeks in order to bring some normality into our market. Since last Friday, the market closed lower up until Wednesday falling less than 1.5%. Yesterday, in a surprising move it rose strongly to recover what it had fallen in the preceding four days.  While I expected the market to rise slightly on Thursday before falling away again into next week, it now remains to be seen if the recent strong move has just delayed the fall I have been expecting. While the market will generally be bullish through to late December or possibly early January, I still believe it needs to fall over one or two weeks in the very near future.

Last week while holidaying in New Zealand, I was reminded that investors don’t actually pay capital gains on their investments. However, the same cannot be said for Australia. In my opinion I believe we pay far too much tax on our investments especially when it comes to property where stamp duty and land taxes makes it almost impossible for an investor to turn a profit for several years.

In the share market people use capital gains tax as an excuse for poor portfolio management because they are concerned that if they sell they will have to pay too much tax. But let’s face it, if you are paying tax it means you have made money, which is the whole point of investing. Holding onto a stock simply because you want to avoid paying tax could cost you a lot of money and lost opportunity particularly if the share falls in value because you are losing profits. Indeed, the amount of capital gains tax you will pay could be much less than the amount you lose. A rule I always use, is to never make an investment decision solely based on tax.      

So what can we expect in the market?

In previous reports I have mentioned my concern that the market is currently travelling faster in price than we have seen in the last 25 years and it is doing so on lower volumes. Surprisingly, nothing has changed in the last week as the record pace of the current bull-run has continued to push the market to new all time highs. I do not believe this pace is sustainable and I still expect the market to fall by a few per cent over one or possibly two weeks in the very near future to bring some normality to our market. This is supported by the fact that over the next three weeks we are entering a very unpredictable time period on our market with natural support and resistance levels likely to be unreliable. Given this, I would urge investors to exercise caution over this period.  

To say that the rise in the Australian share market over the past seven weeks has been interesting would be an understatement. Since the low of 5490.80 points achieved on 16 August the market has risen around 22 per cent in 33 trading days. To put this in perspective, the final run up into the peak prior to the 1987 crash lasted 63 trading days, rising around 32.97 per cent.

If we compare these two periods, the current market has risen two thirds of the distance in price in around half the time. What is concerning is that I cannot find one period in the last 25 years in which the market has moved this fast in price. Right now many investors are behaving emotionally and investing in shares based on the fear of missing out, whilst most fund managers are sitting on high levels of cash. Given this, you have to ask who is making the right investment decisions.    
 
So what is happening on the market?

Currently, the market is showing signs of weakness given that it closed lower on both Wednesday and Thursday of this week, which could be the start of the pull back I indicated I was expecting in my last report. How long the market falls in time and price is critical in determining whether it will continue to be bullish in the medium term.

If the market is bullish, I expect it will only fall a few per cent in price over one or possibly two weeks. Right now I would encourage investors to be patient rather than to react emotionally given that investing in the share market is a medium to long term investment.