Investor logic gives us a tip

Published in the Geelong Advertiser, April 2013 by Dale Gillham

As a share market commentator, I often look at investor psychology to help me determine how the market will unfold.

How investors are reacting to market conditions is always a good leading indicator of the market.

In general, I find that most investors enter and exit the market far too late and in doing so signal the impending end to the overall move.

The bull market of the past six months has seen the first rise in margin lending applications since before the global financial crisis.

This demand for margin lending indicates a few I suggest in current market conditions you leverage no more than 40 per cent of your portfolio. 

More critically, you must use stop losses to protect capital.

So what do we expect in the market?

One of the important aspects of the market fall of the past few weeks was how long and how far it would fall. 

The answer will give us insights into the next run up.

The longer the fall, the less chance it has in reaching my target of between 5200 and 5400 points when it rises.

This week we have seen the market rise quite well.

However, before you get too things to me, one being that investors, after seeing a nice bull run since November, are more comfortable with shares.

Also, I tend to find that once the amount of margin lending rises significantly, a bull run is coming to an end.

While I am not suggesting the latter is the case today, it is wise to keep in mind that, at least in my view, a long term bull run, where margin lending is suitable to use, has not yet been confirmed.

Given this, the approach to using leverage with margin lending should be done cautiously. 

If you are considering a margin loan, then excited, one week does not confirm anything.

In any up or down move you always get a pause where the market moves in the opposite direction before returning.

Whether the low was the one I have been expecting, it is too early to tell.

If it is, then the market will generally rise for the next few months up to my target levels. 

If not, then we may only see a rise of one or two weeks up before it falls further.

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