Will the Market Push through 6,000 Points?

In this week’s report, Dale discusses how the Australian share market is still showing signs of indecision, although it is starting to look more bullish than bearish, which means it may break above 6,000 points in the coming weeks.

Alarming statistics with retail investors taking high risks

In my report two weeks ago, I highlighted some alarming statistics released by ASIC on investor behaviour in the wake of the corona virus crash during March when the Australian stock market was extremely volatile. In the report, ASIC indicated that new account openings for retail investors were up 3.4 times on previous levels. In addition, there was a marked increase in the number of reactivated dormant accounts. ASIC also reported that there was a sharp increase in retail investors trading short-term highly leveraged markets.

This week BetaShares released its Exchange Traded Fund (ETF) review for April 2020 and, not surprisingly, it reported similar statistics with investors trading ETFs. The report states that in April investors invested more than $1bn in new money into ETFs. It also highlighted that “trading volumes remained very high in April, albeit significantly lower than the all-time record of $18bn set the month before”. As you can see, these statistics are consistent with what ASIC previously reported.

Right now, those who invested in ETFs have been rewarded for their decision as the market has risen around 10 per cent since 1 April, although most of that occurred in the first seven days, so those entering after this period have not done as well. That said, in my opinion, the decision to invest during this time was very premature, as the market was uncertain, very volatile, and extremely dangerous.

The concern is that these statistics highlight two themes that happen consistently with retail investors. The first being that investors have not learnt and are still attempting to grab a bargain in the hope of making a profit. While this has worked for them so far, depending on how the market unfolds, this may not be the case in a few weeks or months. The second, and more important issue is that when investors profit from their decisions it creates a false reality, as the majority do not realise the ramifications of their decision to invest. Given this, they will, once again, attempt to bottom pick in an effort to beat the market, but history dictates that retail investors get it wrong more often and, consequently, lose a lot of money.

What were the best and worst performing sectors last week?

The Materials sector had a good week with commodities rising up over 6 per cent, while Information Technology was not that far behind up over 5 per cent. The Energy sector was also up on the back of oil rising off historical lows although I am not convinced the Energy sector is bullish just yet. The worst sectors included Utilities and Healthcare down over 2 per cent, while Consumer Staples was down 1.85 per cent.

Looking at the ASX top 100 stocks, Worley was up 14.56 per cent followed by Stockland up 13.70 per cent, with Oil Search not far behind up 13.38 per cent. The worst performers included Unibail-Rodamco-Westfield down 7.92 per cent, followed by AusNet Services down 6.35 per cent and Spark Infrastructure down 4.95 per cent.

What's next for the Australian share market?

Over the past four weeks, the Australian stock market has failed to push higher in a sign of indecision and a lack of direction. Last week I mentioned that I thought the market would pick a direction soon and we may have seen that given that last week the market was up around 4 per cent before falling back later in the week. More importantly, price broke above the previous high of 5,618 points set back on 17 April, so my opinion is starting to change from one of being bearish to bullish.

That said, I still believe caution needs to be exercised, as the emotions in the market are still running high and stocks are being punished on negative news. Therefore, the market could fall heavily on any negative news, so it will pay investors to be conservative and to only buy quality stocks.

If the market is bullish, we will see the rise continue for the next two to three weeks with it likely to break above 6,000 points. However, if there is any weakness during this time, the good times that we have experienced in the last month may be over and we may need to get ready for the next fall.

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 all good book stores and online.