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All Ords Report 18 October 2017

Through no fault of their own, investors are sometimes getting it wrong when reading the commentary about whatís happening in the property market within Australia, particularly the area related to finance approvals. And frankly, Iím not surprised if you are unclear.

A client told me that after reading two different sources about housing finance data, he wondered what to make of it. One report said that the number of home loan approvals rose one per cent in August, ahead of the 0.5 per cent rise expected by the market. So he thought this is likely to be good for the property market.

But another report revealed that the number of housing loan approvals for owner-occupiers fell by 3 per cent in the same month and is at a 15-month low. In addition, the overall value of housing finance approvals fell one per cent compared to the prior month of July. Records show they are at their lowest level since April. So you too may be thinking Ďwhat-the?í

If you are interested in the property market, I suggest you go directly to the source to check the facts. The Australian Bureau of Statistics research indicates that in trend terms, the number of commitments for owner-occupied housing finance rose one per cent in August 2017. To understand the bigger picture, the graph on the ABS website displayed the total number of owner-occupied dwellings that were financed (in the summary of findings), which indicated that the trend continues to rise.

Whether you are looking at shares or property, remember a graph of historical trends can reveal much more than one monthís data ever will.

Why is this so important?

Well if you want to consistently make money in the share market, looking too short term can be very costly. Even if you want to trade short term, you need to expand your view. This way you are not trading against the longer term trend rather you are trading with it, which increases your odds of success.

This was evident when a past student who is now trading, emailed to say that what I have shared above really did sink into his head and it really paid off for him. You can read a number of traderís stories here that allow the investor to take the emotion out of the decision making.

What do we expect in the market?

It was good to see a solid rise on the All Ordinaries Index (XAO) last week and the move up continued this week. We are now seeing some light at the end of the tunnel for Aussie shares.

The All Ordinaries Index has finally traded up strongly after bouncing off 2017 lows that were repeated at around 5,700 points and it broke well above the important level I referred to in a previous report at 5,836 points. This is a strong sign and the market is now poised to finally move above 6,000 points, which is a level not traded to since May 2008, right before that fateful period during the GFC when the market capitulated south.

The market is likely to head towards 6,070 points, before moving into our next target zone of between 6,200 and 6,400 points.

Often itís the heavy-weight companies that take the market higher, however, recently the smaller end, along with the mid-caps made their move first. History indicates that this is often followed by solid rises in stocks at the top end, therefore traders should be prepared for their buy rules to trigger. While the market is now moving in the right direction, my advice is to be selective when looking short term, if you intend increasing your exposure to Australian shares.

An important point to note is Australia's construction sector has grown for eight months consecutively and the industry indicates continued expansion ahead for the coming months, while the rate of new apartments being built is gradually declining which is positive, but will Australia get the balance right? This is an area to watch.

Global news

While you may just be getting over the last US corporate earnings season, the next one is already here, with it kicking off again this month and Iím expecting news to be reasonably positive. On the plus side, third-quarter earnings in the US are expected to grow by 4 per cent this year after two strong periods but what will the festive season bring?

While I believe there is further upside in the US market, the Dow Jones is looking decidedly stretched. If you have access to a weekly bar chart of the Dow going back 20 years, compare the current rise to prior rises as you wonít see these types of stretched rises without some euphoria behind it. The question is how long can this euphoric rise last? Currently, I believe the Dow Jones will likely find some resistance at around 23,000 points, although it may continue to at least 25,000 points before any significant downturn.

Dale Gillham is Chief Analyst at Wealth Within

All Ords Chart 17 October 2017

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