Investors caught

Published in the Geelong Advertiser, December 2008 by Dale Gillham

In the past week, Storm Financial has been exposed in the papers with claims that their clients are facing significant margin calls and, in some cases, financial ruin, as a result of the group’s aggressive gearing strategy. As we all know, gearing provides investors with the ability to magnify their gains during the good times, but the over use of leverage during a severe market correction combined with the mentality of a buy and hold strategy is like a ‘severe storm’ waiting to happen.

In my opinion the strategy adopted by Storm Financial was not only very high risk but fundamentally flawed as it is highly unlikely that investors clearly understood the risks of such a strategy during a market correction. It is critical in my books that if you use leverage you need to be prepared to sell your investments to not only protect profits but more importantly capital. This is the strategy I have adopted for my clients during the past 12 months, and I am pleased to say that not one of them has experienced a margin call.

So what can we expect in the market?

I have been expecting the market to rise over the past two weeks but instead it has displayed indecision by trading sideways between 3400 and 3600 points. Whilst this is not exactly positive news, it does confirm that the volatility in the market has settled.

With Christmas upon us, volumes will decrease which means it is possible the market may fall away over the next few weeks to test the low of 3201.5 achieved on 21 November. There is a small possibility that this level will not hold and that the market could fall further with the next support level at 2800 points, although this is highly unlikely. My expectation is that the market will find support in early January, and trade up until late January or early February 2009 before we see it pull back.

My longer term view is that the market will generally trade up until May or June 2009 to at least 5200 points. For the regular readers, I wish you a very merry Christmas and I look forward to returning in the New Year with some positive news on the market.

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