ASIC is finally investigating internet stock forums based on allegations that a number of members are ramping shares. In my opinion this investigation should have been undertaken many years ago, but as they say it is better late than never.  Based on my experience internet trading forums are a bit like the blind leading the blind, a fact which opportunists know and use to their advantage. Despite the publicity surrounding illegal scams, people still get hooked in the hope of making money and people join online chat forums for the same reason; so it’s no wonder people lose money.  

I know many experienced traders and none visit these types of forums, and for good reason. As I have always said, the only way to be consistently profitable in the share market is to get a solid education from experienced professionals that are focused on you achieving your financial goals.   So what’s happening on the market? 

The market has behaved quite erratically over the last two weeks, which is very abnormal for the Australian market. The large fall last Thursday was unexpected and the strong rise over the past 4 days, as the market rebounded, has also been a surprise. That said, I indicated last week that I expected the market to rise, however, I believed it would take a couple of weeks to rise up to its current levels.   Even though the market has risen strongly out of the low of last Thursday, we are yet to confirm it has stopped falling. This is obviously very important if you are considering any new positions in the market; therefore caution needs to be exercised as there is still a high probability that the market will fall further, particularly as I am still expecting the 4 year low that I mentioned in my last report.  It is possible that what we have seen over the last few week is the start of the fall into the low, which if correct means the All Ordinaries Index could move down to around 5000 points over several months, but again this is not confirmed. For now it is better to sit back and take a wait and see attitude until we can confirm the medium to longer term direction of the market.        

During times when the market experiences significant volatility, it is always better to take a global view to understand the facts rather than get caught up in the emotional microscopic view.  As of market close yesterday, the All Ordinaries Index had fallen 978.40 points or 15.12% in price over 24 trading days. In 2006 the All Ordinaries Index fell 626.10 points or 11.69% over 24 trading days into the low of 14 June 06. Given this, the fall to date can be placed in the context a normal market pull back.

If we compare the current market pull back to the 1987 crash, where the market fell 798.5 points or 34.53% in 24 days, then it is unimaginable to even suggest we are experiencing a market crash right now. The reality is that market crashes like 1987 are extremely rare with only two occurring in the last century - 1929 and 1987. Most crashes actually occur over many years like the one we suffered between 1970 and 1974, when the market fell 62.17%.

So what’s happening on the market?

Last week I indicated I was expecting the market to rise this week, although there was the probability it would continue to fall to below 5800 points and possibly as low as 5600 points. After rising on Monday the market turned to fall heavily over the following 3 days to move below my target of 5600 points to a low of 5490 points yesterday.

Although the fall was larger than anticipated, it has fulfilled both the time and price targets I was expecting. Given this, there is a higher probability that the market will rise, at least in the short term. That said, our market is due for a 4 year low similar to the fall we experienced into March 2003 and as such any rebound now may be short lived. Once again, for the market to prove it is bullish, it needs to rise for at least 4 to 6 weeks - if it fails to rise for more than 2 weeks, it is possible the market will continue to fall away.

The last few weeks on the Australian share market has highlighted how our desire for high returns through the over use of leveraging can create significant volatility. While I strongly believe leveraging is a smart way to increase wealth, I also believe it is important to apply safety margins when using this facility in case of unforseen circumstances.

For example, when using a margin loan to buy shares, I always recommend that investors only margin on a 1 to 1 basis, which means their margin never increases above 50%. And if an investor is purchasing property they should never borrow more than 80%.

The old adage that ‘cash flow is king’ still rings true today and in my mind good investments should not only deliver capital gains but income as well, where the income generated is used to fund the leveraging. Remember it is important to only invest in assets that increase your wealth but to avoid those assets that remove money from your back pocket.

So what’s happening in the market?

Since the Australian market achieved a low of 5922 points on Monday 6 August, it has rebounded rising 4.5%. Although this was expected, I believed the market would rise for around 5 to 10 trading days before falling away again. However, the market has only risen for 3 days before falling away today, which I believe is simply an over reaction to the Dow falling heavily last night. Despite this, I am expecting the market to continue to rise next week.

That said, there is a probability that the market won’t rise, however, the All Ordinaries Index would need to fall below Monday’s low of 5922 and do so in the next 3 to 4 days for me to change my mind. As I mentioned last week for the market to prove it is bullish, it needs to rise for at least 4 to 6 weeks - if it fails to rise for more than 2 weeks, we can expect another fall to occur with price moving down to below 5800 points and possibly as low as 5600 points. Following this I believe the market will rise and present some great buying opportunities

As we all know the market runs on fear and greed, and there has certainly been a case of rampant fear over the last few weeks resulting in the market falling heavily.

I believe the underlying cause of the market volatility is something that I have been talking about for a long time and is the over exposure to leveraged positions. This is resulting in individuals and institutions selling on mass right now in order to protect capital.

In recent years, leveraging has increased ten fold which has been fuelled by the greed for higher returns. However, this over exposure to leveraging also increases the risk associated with investing and in turn the fear of losing. If we then consider the use of technology and the ease with which we can access information, you can see how this would further fuel fear in the market place.

While the market was always going to fall into its normal cycle, it is obvious that the recent pull back has been amplified by the use of both leveraging and technology. Opportunities like this, however, pay testament to Aesop’s Fable about the tortoise and the hare given that now is the time for the tortoise to look for opportunities while the hare is distracted.

So what’s happening on the market?

I have heard the term ‘market crash’ being used this week by different market commentators, however, let me say that our market is definitely not crashing. As you know I have been saying for the last few months that the market needed to pull back to below 6000 points and while this has taken longer than anticipated, I can assure you that what has happened over the last two weeks is quite normal.

The unsettling news is that the pull back may not yet be over. On Wednesday 2 August, the All Ordinaries Index fell to 5952 points, confirming my first price target for the fall. From here I believe the market will rise for at least 1 to 2 weeks as it rebounds before possibly falling away again.

For the market to prove it is bullish, it needs to rise for at least 4 to 6 weeks - if it fails to rise for more than 2 weeks, we can expect another fall to occur with price moving down to below 5800 points and possibly to as low as 5600 points. If this does eventuate, the total fall will equate to around 12% from the all time high of 6469.20 points which is on par with a normal market pull back.

There is a new trend in the Australian investment arena with the introduction of Listed Managed Investments (LMI) or Exchange Traded Funds (ETF) in recent years. Put simply, these are managed funds that are traded on the Australian stock exchange; therefore it is like buying a share in BHP or any other listed share on the ASX. The trend has resulted from the enormous success of ETF in the

U.S. where funds generally try to mirror an index such as the S&P 500. The implication is that anyone buying shares in the fund should achieve the same returns as the index. I don’t believe the same strategy would apply to the Australian market given that the All Ordinaries Index is ruled by the top 20 shares on our market. Therefore buying shares in an ETF that mirrors the All Ordinaries is not a really good investment in my opinion. You would do better to simply buy the top 10 shares on the Australian market. That said, LMI’ also invest in areas such as property and infrastructure, which may be worth investigating if this suits the risk profile of your portfolio.   

 So what’s happening on the market? Last week I stated that the market was unfolding in a rare sideways pattern that generally spells the end of a bull run. I also indicated that if I was correct in my research, the market would fall over the next week, which looks to be the case given that over the last two days (25 and 26 July) the market has fallen 2.4%. I believe the market will continue to fall by at least another 1% to 2% on Friday (27 July) as it reacts to the

US market falling heavily last night. The falls in recent days does not necessarily constitute an end to the bull market, therefore now is not the time to panic but rather to be conservative and to watch your open positions for any triggers to sell.  

 I believe the market will rise slightly mid to late next week as it rebounds before it falls again. If the market is turning bearish, I expect it will fall to below 6000 points and possibly fall as low as 5900 points in the next few weeks. Following this I believe the market will rise and present some great buying opportunities.