All Ords Report 11/05/2010

The events that have transpired in world markets over the past few weeks have once again increased the emotions of ordinary investors as memories of the GFC prevail. In an ideal situation, investors would behave rationality, buying and selling investments without emotion; however, given that the ordinary investors’ psychology leads to emotional decisions this situation is unlikely. Warren Buffet says to be fearful when others are greedy and greedy when others are fearful, therefore investors should be looking for opportunities in the market right now, rather than reasons to exit. That said I am a firm believer of cutting your losses short and letting your profits run, which means setting stop losses to preserve your capital and minimise any losses.

A recent study of managed funds showed record levels of inflows into managed funds at the end of a bull market and record levels of withdrawals at the end of a bear market, all because investors behave emotionally rather than rationally. But this not need be the case. If all investors did was to educate themselves as to how markets unfold, they would be able to make more informed and more rational decisions, with the end result being better returns and more peace of mind.

So what do we expect in the market?

I have said it before and I will say it again, anything is possible in the share market. As we know the market is a living, breathing barometer that runs on emotions, and uncertainty in the market place certainly increases the emotions of investors. This obviously leads to higher volatility, which is what has been unfolding over the past few weeks because of the alarming situation in Europe.

Fears about Europe caused a slight meltdown last week that has so far turned the one to two week pull back that I was expecting into 3 weeks. The length in both time and price of the current fall has changed my view of the Australian market slightly despite the fact it has risen strongly over the past two days, as we cannot confirm that the fall is over just yet. Let me explain…

Up until last week I thought the All Ordinaries Index had confirmed its yearly low at 4483 points in February, however, the market has fallen through this level and as a result I now believe we are experiencing the yearly low. As we are still in the allowable time frame for a yearly low, we need to be aware that price could fall to around 4300 points before it starts to rise again. That said if the market holds above last Fridays low to find support, it is likely that the market will rise up to my original target level of 5200 points and beyond over the next six weeks. If this occurs, you can expect some great opportunities in the next couple of weeks as the market settles in to commence its next rise.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst