All Ords Report 07/04/2009

The Australian market has risen strongly over the past 20 trading days since the low on 10 March to a high of 3700.70 points or a move of 21.23 per cent, and it looks as if the rise is set to continue. As a comparison, the market rose for 32 trading days following the previous long term low in March 2003 before falling for two weeks and then rising in the longest bull-run we have ever seen. But the question remains as to whether the market has actually bottomed or whether the current rebound is simply a bear market rally.

The announcement last Thursday by the G20 has seen a positive reaction from world share markets, so we could see prices continue to rise at least in the short term. However, the fact that the market has risen over 20 days without some form of pull back is unusual, given that the last time this occurred was in August 2007. As we all know, this move was the final run up in price prior to the current bear market.

It is important to understand that short term moves in the market can be affected by announcements such as what came out of the G20 last week. And while I believe the measures announced are a positive move given that we need to see a shift away from the dominance of the US economy, in the end the medium to long term moves in the market are always predicated on solid economic fundamentals. And right now the fundamentals are not painting a rosy picture of world economies over the next few years.

So what can we expect from the market?

If we see a repeat of the move up from the low of March 2003, then the current bullish move will last until around 23 April and trade to between 3800 and 3900 points. That said we still need to be prepared for the market to fall away to test the low, which I expect will occur this month. I believe the move down to test the low will last for around one to two weeks before the market rises again to around 4200 points with my preferred target at around 4500 points in May or June.

The question on a lot of people’s mind is have we seen the bottom yet? It is possible but as of today this is still unconfirmed. The market has continued to trade on higher volumes over the past few weeks, which is a positive sign. When the market does fall to test the low, however, we need to see volume also fall as this would indicate that any down move will be short term.

Despite my outlook over the next few months being positive, we still need to be prepared in case the market does fall away. Right now the best and safest opportunities in the market are in the top 50 shares. I would caution people from investing in stocks outside the top 100 as these will be more volatile, unpredictable and subject to false moves.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst