Staying cautious will help

Published in the Geelong Advertiser, November 2008 by Dale Gillham

There is an old saying that markets don't crash at the top but rather at the bottom, simply because investors don't panic at the top given that their shares have made money and they mistakenly believe prices will return to previous levels.

This has certainly been the case in the current bear market given that the All Ordinaries only fell 2.7 per cent in November 2007 and 2.6 per cent in December 2007.

However, the falls in recent months (September, 11.2 per cent and October, 14 per cent) has accounted for 44.08 per cent of the total fall since the high in November 2007.

The fall in October 2008 was the largest one-month fall on our market since the October 1987 crash when the market fell 41 per cent in one month. Right now, investors are making irrational decisions and cashing up for fear of further falls which is another signal that indicates the bottom is very near.

So what can we expect in the market?

This week the market rose a little over 7 per cent before falling heavily on Thursday in a reaction to the large fall on the Dow wiping off almost half of the weekly gain, and the market is likely to fall heavily once again. Markets will always test previous highs and lows; therefore the current fall is a positive sign as we need to see the market test the low of 3693.90 that occurred on 28 October 2008.

If the market can stay above this level and rise, there is a possibility that the market sentiment will shift from bearish to bullish. While it is possible that last Tuesday was the long term low we have been expecting, it pays to be cautious right now as there is still a possibility that the market could fall to between 3400 and 3500 points; either way we will know next week.

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