All Ords Report 09/08/2011

Over recent months economic data out of the US is still showing a depressed economy and no signs of a recovery in the near term, whilst news around the world now reflects that both America and Europe might not skate free from the threat of a ‘double dip’ recession. This concern reached a tipping point on Thursday night across global markets, and in particular in the US when S&P 500 dropped by around five per cent. Personally I was not surprised to see this occur, as in my opinion investors have been hanging onto hope that the economic numbers would improve in the short term. However, reality suggests that a recovery is not likely to occur before mid-2012, when US housing and jobs data is likely to start showing signs of a real improvement.

After the assault to the US market on Thursday night some commentators are suggesting we may see a more serious correction in the US. Now although I am not going to rule this out completely, I believe they are ignoring a simple fact that markets don’t crash at the top, but rather the biggest falls occur towards the end of a decline due to panic. Given that the market has been nervous for some time, many have made their investment decisions a long time ago and as such a mass panic is less likely. Also considering that the US market has declined by around 18 per cent since May, I would go so far as to suggest that we may have already seen most of the current decline in the US. Let me explain...

When a country’s major stock market index falls by 20 per cent most market commentators declare a bear market is underway, following which one of two things may occur; either the selling will continue for a few months or weeks before a recovery, or the market moves into a much longer decline. In the current climate, particularly in Australia, a lot of investors have already de-risked their investments by reducing their exposure to the market. However, history shows that the average bear market falls by around 34 per cent and it is the people who don’t understand the share market that wait until near the end of the decline to sell. In doing so, they create the last and generally more volatile part of the decline which for people in the know can present great opportunity.

What do we expect in the market?

The All Ordinaries Index slipped strongly below the 4,500 point support level last week as a string of bad news continued to build fear across global markets and led to further selling into Friday’s close, which pushed the share market below the May 2010 low of 4,194 points, In just one week the Australian share market lost around 9 per cent and the selling continued this week, with the All Ords having finally traded below 4,000 points today. The analysis indicates that the next level of support for the All Ords is 3,800 points and therefore the market may find support over the coming month.

Regular readers will know I have a number of simple philosophies to keep you safe in these bearish times. The most important is to ‘hope for the best and plan for the worst’, and this simply means have an exit strategy by setting stop losses on your investments. Remember no one worries about investments that are rising in value. Those who have followed this simple philosophy have more money to take advantage of the inevitable rise when the market turns around, and more importantly, will be able to sleep at night, knowing their downside risk is limited.

Until next time
Good luck and profitable trading

Dale Gillham
Chief Analyst