Share Market Wrap 3rd Aug 07

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.

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