Prepare for new market swerve

Published in the Geelong Advertiser, July 2012 by Dale Gillham

When building a portfolio of shares, we are traditionally taught to buy stocks in different sectors and to diversify with large numbers of individual shares.

I have always been challenged by the logic behind this concept, especially when you consider it is based on the theory that about a third of your portfolio will be rising, one-third falling and one-third going sideways at any one time.

Any investor would rather hold only the rising shares, which is why I teach in my book how you can sell falling shares and actually increase your portfolio returns.

Sounds simple, and yet this is an approach that sadly is not well understood.

In late 2008, many resources stocks on the Australian market were bottoming, while the overall market declined until March 2009.

Now, resource stocks are falling again, and have been in decline for more than 12 months, while generally the rest of the market has either been moving sideways or trending up.

Given this, we need to consider whether the resource stocks are leading the market again and, if so, whether the rest of the market will turn back soon to repeat the sequence of 2008 and 2009.

So what do we expect in the market?

With news this week about Spain's woes intensifying came panic on a number of global markets. But the Australian share market appeared calmer as it continued to trade within the sideways band that began back in May.

I see this as a sign that Australians are not panicking and I believe the move down so far this week is about the short sellers trying to test the market's reaction to news.

What I find interesting is how the market has unfolded over the past two months, with one week up and the next week down, and how this has repeated since the low in June.

These are further signs that our market is within one to four weeks of confirming the next move and investors need to be prepared for an increase in volatility before another challenge of the 4200-point level.

Given where we are in time for a market low, now is about being prepared for what presents soon after a market bottom is confirmed.

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