Patterns and Behaviour

By Jason Fittler

Remember when we talked about market crashes and it was all focused on 1987?  Now 1987 is being spoken about as a mere correction in what is a larger pattern. Take a look at the below weekly chart of the All Ordinary Index since 1982.

I want to talk about patterns and how they affect the market, I want to expand on the last 27 years of the market. Please keep in mind, I am not a technical analysis, I work on fundamentals and only use technical analysis for short term price predictions.

Working on the below chart (make sure you take a look at it before reading on) what we can see is a number of significant periods;

1.    The bull market for 1987 started in last 1986 and ran for approx 12 months.
2.    The rate of rise in this bull market was slower than the rate of decline. It only took 3 months wipe to out all of the gains from the 12 month bull market.
3.    It was not until 1997 that the market reached the heights of 1987.
4.    In 1991 we saw the market re-test the 1987 lows.
5.    The next strong bull run started in 2003 and went for 4 years.
6.    Again the rate of raise of the bull market was slower than the rate of decline. This time the fall took 12 months to find the bottom.
7.    If we take a look at the trend from 1982 to today’s value we see that the peaks of the  prolonged Bear market which came out of the 1987 crash sit neatly under the rate of increase line. This pattern will repeat itself.

What does this all mean? Patterns are caused by behaviour, when we take a long term view of patterns we can start to form a picture of long term behaviours of the market. Keep in mind that the market is merely made up of people. People making decisions on how to invest their money. Going back 27 years we can see that the market is following a similar pattern to the last big drop. Now, we can start to make some predictions of what the market might do, going forward.

1.    The market will consolidate for a period, this will allow investors to get their heads around the change in market conditions. Moving out of hunker mode and back into business as usual mode. This is happening right now.
2.    We could expect that this would be followed by a small bull market rally pushing the market back towards previous resistance. I have two targets here 5100 and 5700 as such I would expect to see the market hit this level in the coming 12-18 months.
3.    As in 1991 we expect to see the market re-test the lows of March 2009, this could however be years away. As such there is money to be made in the near term. Also note that the re-test, does not necessarily need to go as low as the previous low.
4.    After this we can expect good growth moving forward.

How to make money.
These patterns allow us plenty of opportunity to make money, after all this is what it is about.

The first strong rebound has already happened and for those investors who had the stomach to invest at the bottom have indeed reaped the rewards.

The next stage about to start is a more prolonged growth at a steady rate, companies getting back to business as usual. This is the time of the more risk adverse investor. You can now buy stocks which are paying good dividend and have solid growth prospects over the coming 3-5 years.

Make sure you are part of this as the market may indeed turn down at some point, but this is the benefit of owning shares, you can easily sell and take some profits.

The next down turn; the patterns would indicate that at some point this will happen, this is not a negative but merely an opportunity. When you see the market pull back, increase your holding in cash with a view to invest when the lows are re-tested.

Do nothing.
Many investors will sit on their hands and do nothing while waiting for the market to re- test the lows. This is possibly the worst plan and perhaps the share market is not for you. The market will fluctuate all of the time, we know this, staying out will produce the worst overall return. Be in or out but never sit on the fence.

What next?

Start looking for high yielding good quality shares. As for now it is business as usual.

This will change at some point, when it does we will let you know.

For more information give us a call (07) 4771 4577.