Based on the weighting of the top 20 shares in the Australian market, it would be fair to say that these stocks drive the All Ordinaries index. Given the bullish run the market has had since the low of 16 August, I think it is worth examining which of the top 20 shares has been driving the rise. 

As at the close of the market on 16 August up to yesterday (24 September 2007), the All Ordinaries Index has risen 14.63%. Of the top 20 shares, BHP has risen the most at 31.88%, closely followed by MBL and RIO at 30.94% and 30.13% respectively. Aside from MBL, which rose strongly given that it was oversold in the fall into 16 August, the other six banks in the top 20 only rose on average 8.84% with NAB only rising 4.85%. Only nine of the top 20 shares outperformed the All Ordinaries Index, while Telstra was the worst performing stock with growth of only 1.87%.

Given these figures it is fair to say that a large portion of the rise in the Australian market can be attributed to BHP, MBL and RIO. Outside of the top 20, the big movers were the resource stocks, therefore this is where the opportunities lie at present. While this is positive, what is concerning is that the banking sector is looking quite weak, which suggests that we may not have seen the end of the credit squeeze. 

So what can we expect in the market?

In previous reports I have suggested that for the market to prove it is bullish it needed to rise for more than 6 weeks and today brings to an end the six weeks since the low of 16 August.  Given this, if the current rise continues then probabilities suggest that the overall market is likely to be bullish for several months.

That said the market has behaved abnormally in recent times, therefore I have changed my opinion from being bearish to cautiously bullish. While the market will rise over the next month I believe it will fall for one to two weeks during that time. What happens during the fall will determine how the market unfolds over the next 6 months.    

This week the US Federal Reserve dropped interest rates by 0.5% in an attempt to under pin their share market given the current credit squeeze. Lower interest rates means two things: firstly, more cash in the market place leads to increased spending and secondly people tend to move their cash investments into the share market to receive dividends all of which is positive for the share market.

Obviously the government has achieved their goal as the US market has rallied this week, although I am questioning whether this is simply a bandaid fix to a much bigger problem. Prior to the 1987 crash, the use of leveraging skyrocketed, the US Dollar was falling as was the bond market, and things weren’t much different prior to the 1929 crash. While I don’t want to suggest that we will see a market crash, it is important to be aware there are many similarities between what is occurring now and what occurred then. So how does this affect us? Right now, many Australian fund managers are sitting on very high levels of cash even though the share market has been bullish over the past five weeks and you have to ask why?      
 
So what can we expect in the market?

Prior to the US announcing a cut in their interest rates earlier this week, our market had fallen away and was looking weak. However, it moved up strongly on Wednesday trading to its highest levels in nearly two months. Whilst this is a bullish sign, there are undertones in the current market conditions that keep me from getting too excited. That said there are shares doing exceptionally well right now such as BHP and RIO and there are many others that are presenting some great buying opportunities.

If the market is bullish, it will rise for another two weeks breaking above its previous all time high before falling away slightly. If it is bearish, it should turn down in the next week. Obviously only time will tell, therefore my advice to anyone intent on entering the market right now is to keep leveraging to safe levels.  

Last week I attended a public seminar run by the ASX where they introduced their new ASX CFD product to be launched next month. One of the reasons the ASX are launching this product is to capture some of revenues being generated by this the fastest growing area in the share market over the past few years. In talking with the presenters from the ASX I discovered that to date they had received a large response to people attending these seminars, but the alarming thing to me was that 70% of those attending had very little experience in the market and had never traded a CFD before.

Up until this new ASX offering the CFD arena has been delivered via over the counter product providers, whose offerings are normally limited to sophisticated investors, rather than mum and dad retail investors who are being attracted to this area like flies to honey. Some of the current CFD providers or their affiliates have used this attraction of retail investors by running dubious market campaigns, workshops and seminars akin to the snake oil salesman in order to attract new accounts. Given this I believe the new ASX CFD product will go at least some of the way to cleaning up this area in the share market and help protect the retail client, by giving them a more independent and transparent market, which obviously leads to lower risk. Regardless of the ASX participation anyone that is looking to trade CFDs needs to acquire knowledge and experience, otherwise they are taking high risk with their capital in this highly leveraged market.   
 

So what can we expect in the market?

In my last report I mentioned that if the market was going to fall it will most likely do so next week. Whilst as of writing this has been the case, the fall has not been very aggressive, in fact this week has really been one where the market has shown indecision and lack or direction. For more than a week we have seen generally lower volumes traded on the All Ordinaries Index, therefore the indecision in our market could be a positive sign that market sentiment is changing or it could just be the calm before the storm.

The market is constantly changing with new data arriving all the time, given this as an analyst it is important to be careful and not get a fixed view. Therefore if our market continues to hold its current levels or rises over the next week or so, then my opinion will start to change about further falls that I have been expecting. In saying this when it comes to the share market it is often better to have a pessimistic view than an overly bullish one, therefore it is still better to be conservative right now until we can confirm the direction of the market.        

While I don’t subscribe to the theory that the Australian market always follows the Dow, I do agree it will react when major moves occur on the Dow. This is particularly the case when there is a large down movement on the Dow, even though our market tends to fall to a lesser extent in percentage terms - although this has not been the case in recent times. Let me explain.

The All Ordinaries index peaked on 13 July at 6469.20 points, whilst the Dow peaked on 17 July at 14,021.95 points. The Dow then proceeded to fall for 22 trading days and 10.73% while the All Ordinaries Index fell over 24 days and 15.12% into a low on 16 August. The Dow has since risen 7.80% in 12 trading days, whilst the All Ordinaries Index has risen 15.80% in 14 trading days. This proves that the All Ordinaries is much more volatile than the Dow at present. That said the Dow is not looking strong and there is a high probability the US market will have further falls; given this it would be wise for investors in the Australian market to be very cautious right now.

 So what can we expect in the market?

The strong rise out of the low on 16 August has resulted in price moving one to two per cent above my original target although we are now moving into a crucial the time period that will determine whether the current rise is sustainable. As I have previously indicated, for the market to be bullish it needs to rise for at least 4 to 6 weeks and as of today it has only moved up for three weeks. If the market is going to fall it will most likely do so next week although there is still a possibility it will rise for another 3 weeks and then fall away. It is also possible that the All Ordinaries could make a new all time high, although I believe this is highly unlikely.

Historically September is the worst performing month on the Australian share market and I don’t believe we will see any difference this year given that I am expecting All Ordinaries to fall away into a low around 5000 points in the not to distant future.

This week the horse flu virus has put the racing industry on hold, which for some may not be a big deal; however, the racing industry is big business and when racing meetings are cancelled companies lose profits, which in turn effects share prices.

This week Tabcorp’s share price has fallen 6% as a direct result of the flu virus. What may not be totally evident is flow on effect that will occur if the virus continues to stop race meetings. For example, revenues will be affected for companies such as Spotless who provide catering services to race meetings. Potential revenues will also be affected in other industries including TV and radio advertising, Pubs, taxi’s, airlines, hotels, restaurants and the like. Given this, it would be wise right now to be a little cautious about buying shares that are directly related to services that support the horse racing industry, and if the situation continues for an extended period, companies that are indirectly related.          

 So what’s happening on the market?

The market has continued to behave erratically this week as it rose strongly on Monday to a high of 6199 points only to fall away on Tuesday and Wednesday, whilst the rise on Thursday showed definite signs of weakness. Currently the All Ordinaries Index is finding resistance just below 6200 points, which is a level that has stopped the market from rising three times over the past month. I expected the market to rise to around 6260 before it fell away again, however, given how the market has unfolded this week we may see it fall away sooner rather than later.  

Again I want to reiterate that even though the market has risen strongly out of the low of 5490 from 16 August, we are still yet to confirm it has stopped falling. Therefore it is best to be conservative right now and to keep your money in cash until we can confirm the direction of the market.

Right now there is high probability the All Ordinaries Index will fall away into a low around 5000 points in the not to distant future. That said the market could also break above the 6200 point level and keep rising. But as I have previously indicated, for the market to confirm it is bullish we need to see it rise for at least 4 to 6 weeks.