All Ords Report 02 August 2018

Although the drop in the US market of around four per cent on Monday 5th February (evening) was more like a tremor than a crash, is this a time to be fearful?

Firstly, a savvy investor is never fearful. But if you are fearful of market falls, it simply means that you lack the required knowledge and you need to do something about it.

If, each time the market falls, you think the worst and contemplate getting out, or you keep procrastinating about getting in, you are falling prey to the herd mentality. A savvy investor knows and accepts that the market must pull back at times, before it trades higher.

It’s often easier to point the finger at Donald Trump or to find reasons to justify your fear as to why the market has fallen, including uncertainty around the US FED’s decision to hike rates in 2018, opinions on US company forecasts, changes in bond trading, the Chinese economy, the US dollar and the list goes on.

You may agree that the more you read, the more fearful you become. And speculation in the news about the cause, is more often than not, incorrect or over exaggerated. Remember, their job is to sell newspapers.

Fear causes a cow to run in any direction or to follow the rest of the herd; whereas, an ostrich will bury its head in the sand when it’s afraid. Apply either method to the share market and you will lose.

To add salt to an open wound, have you ever noticed how the doom’s dayers seem to come out of the woodwork on mass when the emotion in the market is at its peak, and they seemingly disappear in the weeks or months that follow as the market recovers?

So what’s important to know?

Firstly, markets never crash at the top, as the heaviest selling and the biggest falls typically occur close to market bottoms. You can verify this yourself by looking at a chart of the market.

More importantly, markets unfold in one of three ways; uptrends, downtrends or sideways trends, and when a market accelerates away from its major trend, which occurred in the US over the past year as it rose to new all-time highs, history demonstrates that it will eventually pull back to the trend, which has occurred. Understanding trends, makes investing far less stressful. After all, isn’t that what you’re really wanting?

So regardless of what you think you know, let me share with you my experience in working with thousands of people. Most don’t have enough knowledge about market trends or how to profit from them. If you have or intend to have money in any market and you don’t have a solid education in the principles of trends, and how to apply the right techniques to trade them, you will continue to be fearful and misled.

What do we expect in the market?

Following the sell-off in the US market earlier this month, commentators made predictions about what would occur on the Australian market the next day, and they got it wrong.

The Dow Jones fell 6.26 per cent and recovered slightly to close 4.6 per cent down. Investors were led to believe that our market would shed around 2.5 per cent, however, the All Ordinaries Index (XAO) dropped by around 4 per cent during trade, to close down the following afternoon by 3.2 per cent, which was why the move came as a shock to some.

The sell-off saw the XAO trade back down just below the 6,000 point mark, which I previously mentioned was likely to provide support. So no surprises there.

What has occurred demonstrates how markets can overreact. But remember, this is a small move in the bigger picture, and although we still need to be watchful over the coming weeks, if you have a solid trading plan to manage risk, you can rest easy and prepare for new opportunities.

Since the fall, both the US and the Australian markets appear to be making a recovery. That said, it is important to be vigilant and clear any ‘dead wood’ or non-performing stocks from your portfolio to make way for companies that are more likely to make better gains in 2018.

Global markets

It was fascinating to see Asian markets come off recent highs at predetermined, but important resistance levels. The Hang Seng (HSI) turned just below an important level at 33,700 points, as indicated by our analysis, before trading to an all-time high of 33,484 points. If you invest in Asian markets be prepared to experience a high level of volatility; often more than double what occurs in the Australian market. To illustrate, the Hang Seng (HSI) fell by around 13 per cent from its high, whereas, the Australian market only fell by 5.5 per cent into last week’s low.

In the US, the Dow Jones achieved a high of 26,616 points in January, just above the target zone for the current rise. Now, including the month of January, the Dow has risen for nine consecutive months.

US company reporting season kicked off in January, however, Australian companies are now stealing some of the limelight as results season moves into full swing locally. Some brokers are calling it ‘confession season’. If you study the market and have ‘the knowledge’ this comment is likely to make you smile.

In the past few weeks we’ve been producing the weekly share market reports on our YouTube channel, so we encourage you to watch them to stay up to date.

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So welcome to the Wealth Within YouTube channel!

Dale Gillham is Chief Analyst at Wealth Within