Share Market Wrap 21st Sept 07

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.

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