Share Market Wrap 10th Aug 07

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

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