Share Market Wrap 11th May 07

Since the Australian Taxation Office announced that Self Managed Super Funds (SMSF) could invest in Contracts for Difference (CFDs) there has been significant debate as to whether this is a sensible move. Given that investing in CFDs is considered high risk because of the leveraging involved, the opponents to this move believe that this product is not really suitable for a SMSF. Those who support this move, however, claim that investing in CFDs is just as safe as buying shares, so why shouldn’t it be allowed. Interestingly, the people opposing the move are the dealer groups and financial planners who won’t benefit from a SMSF investing in CFDs.

While CFDs are a highly leveraged instrument, the problem for the ATO has been that they support options and warrants in SMSF’s, therefore it would be difficult to argue excluding CFDs. While I agree it is a concern, particularly if the investor does not have the knowledge or skill to trade CFDs, I believe trading CFDs is lower risk than trading options and warrants. My recommendation to anyone considering CFDs as part of their investment strategy should ensure they are educated in the reality of the risks and the knowledge to minimise their losses.

So what is happening on the market?

If you remember, I was expecting the market to fall around 9% over 2 to 4 weeks from the all time high set on 18 April, however, as we now know it only fell 1.77% to 1 May. Based on this some of you may be thinking that is good because it signifies that the market is still bullish. While in essence this is correct, we really want to see this sort of bullishness at the start of a bull run not at the end. Let me explain.

Price travels at a certain speed in percentage terms over a period of time and since March this year price the market has travelled at twice the speed for more than twice as long as it did following the March 2003 low. This indicates one of two things: either the market is more bullish now than it was when it rose out of the last 4 year low in March 2003, or the market is in a state of euphoria like we experienced just prior to the tech wreck in 2000. In my opinion I believe it is the latter, hence my concern. Whilst I am certainly not suggesting the market will fall as heavily as it did during the tech wreck, I do believe we need to be very conscious of where the market is right now and what may occur in the future.

So what can we expect from here? It is now likely that the market will continue to rise over the next few weeks to around 6500 points before we see a much larger fall than my original expectation possibly into June or maybe July. That said we still need to be aware that the market could still fall away at any time over the next few weeks to achieve my original price target.

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