Volatility is normal

Published in the Daily Telegraph, November 2014 by Dale Gillham

When you see the value of your portfolio jump up and down whilst your money is on the line, share market movements are likely to be playing on your mind. 

What you can take some comfort from is how these movements over recent months, although volatile, are mostly quite normal. 

Let me explain my current thoughts on the market.

You may have observed that every strong rise is generally followed by a strong fall. 

Now, if you haven't noticed, perhaps you are paying too much attention to the market's daily movements on the nightly news rather than getting a bigger picture of what's going on. 

Let me tell you that daily moves will, if they haven't already, do your head in. 

So instead, I want to share with you what you need to be aware of, and what may lie ahead.

When there is a strong fall on the Australian market, you can expect that the rate of the decline will generally be well in excess of the prior rise. 

Put another way, the market goes up the stairs and down in the elevator.

It's immediately after you have just watched your shares go down in that elevator when you need to pay most attention to it. 

Learn from it so that you are in a better position to act when a much bigger fall starts to unfold in the future.

To keep you up to date with what is going on with the market, here is my review, along with some signposts to pay attention to over the coming weeks. 

In August, it was great to see the Australian share market break another one of my milestones, as it raced into a target zone between 5600 and 5800 points. 

The market achieved a high of 5672 points on 21 August 2014. 

Given the strength of the rise, I lifted my target zone for 2014 to 5800-6000 points; however, as you know since then the market has fallen away.

In September, the market demonstrated just how the elevator works, dropping by around 10 per cent in around seven weeks, which wiped out all of the growth for the past twelve months. 

Now, typically the market will pull back between around five and ten per cent during one of these periodic declines. 

Something important for you to be aware of.

At the time, I forecasted a short term rebound, with a rise to around 5400 to 5500 points and the Australian share market delivered, rebounding rapidly to break the upper band of this zone.

The rise has been a little faster than my analysis had indicated, showing just how eager the buyers have been to take control.

Given this, I would like to see the market pull back over the coming weeks to around 5350 points, to allow time to build strong support for the next rise, which my analysis indicates will soon see our market challenge the August high of 5672 points, before moving towards 5800 to 6000 points. 

That said, should the market hold its ground next week and continue straight up from here, buying opportunities are likely to present sooner rather than later.

I have one final observation that you may be surprised by. 

The price chart of the market shows how it often tends to hold up in the week of the Melbourne Cup, only to fall away within a week or two after the event. Wondering why?

Perhaps some of the institutional traders enjoy the racing season a little too much.

For now, we await the market's next move, and therefore patience is the word.

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