All Ords Report 15/09/2010

The election result is now part of Australian history, but as a nation are we any wiser as to the future of our country over the next few years? For business to survive and grow it needs a large degree of certainty and stability, not only from government but also in the economy. Given that we are now faced with a marginal labour government that seems to be at the mercy of the greens and a few independents, I am not sure we will have that. If we add to this the big question mark on the US economy, the European banks, the global supply of cash, and China, then what the future hold becomes even more uncertain.

One thing that is becoming evident with the uncertainty is that many investors are staying away from the share and property markets, managed funds and financial planners, with a lot of funds staying in or moving to cash. However, I would argue that the opposite should be occurring as the best opportunities abound in times of uncertainty. For example, right now you can purchase good properties on the Gold Coast at 20 to 40 per cent less than you could two years ago, and there are many other areas in Australia that are similar. While I understand that Australian’s are wary about taking on risk right now, I have always said that those who are prepared to do their homework and take on risk will be rewarded in the long term.

So what can we expect in the market?

As a result of the GFC, I have said many times over the past couple of years that when it comes to the share market we need to expect the unexpected, and the past two weeks have been another one of those times. In my last report I indicated the market was likely to fall away in the order of 10 to 15 per cent over the coming weeks, yet it has continued to rise. You may also remember that I indicated that the appearance of the biggest one day rise in a month could be an indication that sentiment is changing but it was far too early to tell with any great accuracy. Well it now looks as though that sentiment has indeed changed.

The All Ordinaries has risen over the past two weeks following an announcement by the US Federal Reserve that they would support further stimulus in the US economy. I believe this announcement will only serve to delay the inevitable and eventually the market will find its level, which for the US I believe this is down.

It is quite possible that the low I was expecting occurred two weeks ago, although if this is the case it occurred much earlier than anticipated. We have already seen this happen twice this year, which is something we have not seen for 6 years, so the low in August this year would make it three in a row, which is unprecedented hence my apprehension. The cycle also did not unfold as normally expected or like any past cycles, which further adds to my apprehension. However, if the August cycle low turns out to be correct, the market will be bullish for the next four to eight weeks rising to at least 4800 points and possibly through the all important 5000 point level.

In trading, I always teach our students to trade on what they know, not what they think, and right now we know the market is bullish at least in the short term. Should the market continue to be bullish I expect the next low to occur between late November and mid December, and in my next report I should be able to give you a price target for the fall. Given my apprehension, should you wish to place trades, make sure you use stop losses in case the market does the unexpected, once again.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst