How Long Will the Current Stock Market Rise Last?

Every time the market begins to rise, individuals start to question their sector investing strategy because they want to know which sector will perform best in the future. 

Sector investing strategy

So why is this? Because investors are told that they need to buy into different sectors to reduce their risk in order to achieve good returns. Based on this philosophy, it is about investing in areas that counterbalance those that are likely to under perform, or in other words, when one sector is going down another will go up to balance out the portfolio.

While this may seem like great advice on the surface, when talking to investors who follow this strategy, they claim that while they can achieve good returns in the short term, they achieve very poor to average returns, at best, over any ten year period. So, this begs the question as to who this type of investing really works well for.

While it is likely that this form of stock market portfolio management benefits the industry, it is not very beneficial for investors as they typically end up holding 25 to 40 stocks in their portfolio. But when I see over diversified portfolios like this, it is very common to find that one third of the portfolio is rising while the remaining stocks are going down or sideways. I refer to this as di-worsification given that a portfolio that is over-diversified in the stock market is exposed almost exclusively to market risk, which is why many investors end up achieving very mediocre returns.

In my opinion, you should spend less time worrying about which sector to invest in and spend more time looking for good stocks because smart investing is about buying what goes up and selling what goes down.

What are the best and worst performing sectors this week?

The Financial sector is gaining lots of attention given that it has risen around 17 per cent over the past nine days, but is this current rally really sustainable? This week both the Financials and Consumer Discretionary sectors are up over 5 per cent so far and looking good while Healthcare and Information Technology are up over 4 per cent. The worst performing sectors this week include Communication Services and Utilities, which are both up just over 1 per cent with the remaining sectors up over 3 per cent so far this week.

Looking at the ASX top 100 stocks, once again, Unibail-Rodamco-Westfield has had a stellar rise given it is up 32 per cent so far this week, and 57 per cent over the past two weeks. Prior to this, the stock was very bearish, so it appears that investors are jumping in attempting to grab a bargain. If this is the case, then this mini-run will be short lived. The next best stock so far this week is Adelaide Brighton up 23 per cent and Sounth32, which is up over 15 per cent. The worst performers include Northern Star Resources down over 8 per cent, TPG Telecom down over 7 per cent and Evolution Mining down 6 per cent so far this week.

What's next for the Australian share market?

The All Ordinaries Index has continued its strong move up for the past two weeks to confirm that it is now bullish. Up until two weeks ago, it was highly likely that the rise was just a suckers rally and high risk but I have now changed my view on this.

The question now is how long is the current rise likely to last? As I mentioned last week, I expect the market to continue to rise over the next few weeks into mid to late June although there is a possibility it could continue to rise into July. There is some short-term resistance around 6,200 points, however, I believe the market will most likely move through this to the next level of resistance at around 6,600 points over the next two weeks.

My expectation is that the current rise is likely to finish by the end of June and if the market is longer term bullish, the down move will only last for a few weeks and be under 10 per cent. If the down move is longer and/or deeper, then this may signal that we are not out of woods just yet.

For now good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online.