Stock Market to Fall as Low as 6,100 Points

We all know the saying that history repeats, yet when some mass event occurs we tend to think this time it will be different, which is even more prevalent in those who are younger or far less experienced. I say this because for centuries, the cycles of fear and greed in the stock market cause bubbles whether it is with individual stocks or markets and with every bubble there is the inevitable bust that leaves destruction and devastation in its wake.

Gamestop stock rises 2,000 per cent on speculation

In early 2018, the Bitcoin bubble exploded, yet only a few short weeks earlier the masses were saying this time it will be different. In the early 2000’s, when the end of the tech boom was approaching, we heard cries that the old economy was out, and the new economy was in, yet only a short time later the new economy was in ruin.

The challenges with COVID on our ability to work and our lives has now created another wave of new market participants with traders now speculating on apps that makes trading appear like a game as well as chat forums ramping up the price of speculative stocks. As always, it is the young or less experienced that are attracted to this in the hopes of making a fortune.

Last week, GameStop, which is a video game retailer in the US, gained notoriety after a group of retail investors on Reddit ramped up the share price over the last three weeks to around 2,000 per cent, although it displayed weakness late last week to close up around 1,600 per cent.

Surprisingly, an Australian stock with the same stock code, which is a mining company, rose 109 per cent during the same time, as inexperienced retail investors bought into what they thought was GameStop. Eighty five per cent of the gain occurred on Wednesday, Thursday and Friday of last week before falling heavily late on Friday to end the week lower than it opened. Again, this is history repeating itself with the inexperienced falling prey to the herd mentality and speculation.

While the names and technology involved may be different, what has not changed is human psychology, as fear and greed is running the herd just as it has done in the past and will do in the future, in a cycle that I call rinse and repeat. When it comes to the stock market, nothing replaces knowledge and experience and those who do not heed this advice are bound to fall into the same traps of those who have come before them.

What were the best and worst performing sectors last week?

After being the worst performer the prior week, Utilities became the best performer up 1.29 per cent followed by Consumer Staples up 1.11 per cent and Consumer Discretionary up 0.21 per cent. The worst performing sectors included Energy down 8.89 per cent while Materials was down 5.90 per cent and Information Technology down 3.02 per cent.

The best performers in the ASX/S&P top 100 stocks included IDP Education up 12.59 per cent followed by Treasury Wines Estates up 7.83 per cent and a2 Milk up 5.52 per cent. The worst performers included Ampol down 14.89 per cent followed by Beach Energy down 12.03 per cent and Oil Search down 10.80 per cent with both Fortescue and Mineral Resources also down over 10 per cent for the week.

What's next for the Australian share market?

After a strong start to the year, the All-Ordinaries Index is now displaying weakness having traded down 2.94 per cent last week. In my last report, I indicated that the Australian market might peak last week and start to fall away, which is what occurred given that last Monday the All-Ordinaries Index rose to a peak before falling away the rest of the week.

While I expect the market will continue to fall away, I believe the fall will only be short lived with the market likely to travel down to between 6,500 points and 6,100 points over the next couple of weeks. As I have previously communicated, I believe our market will be bullish over the medium to longer term with the market expected to make a new all-time high in March and then rising to between 7,300 and 7,500 points over the next couple of months.

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.