Will the Market Experience a Red or Green October?

There is an old saying that when it comes to investing in the stock market you can’t buy yesterday’s returns. However, many investors attempt to do just that by looking at sectors or stocks that have already performed and invest in the hope they will achieve the previous year’s return or better in the future. But this is exactly the opposite of what an investor should doing, which is echoed in Warren Buffets statement that investors should buy in doom and sell in boom.

Investing for future returns

In essence, Buffett is telling us to buy assets that have performed poorly and to sell assets that have risen strongly. Given this, investors should be looking to invest for tomorrow’s return, which you can do by following the money flow. For example, in 2020 the Information Technology sector has risen 41 per cent since 1 January, while the Energy sector has fallen 41 per cent over the same period.

Right now, there is an influx of investors buying technology stocks believing the big run in this sector will continue but if we follow Buffet’s advice, we should be looking for opportunities in the Energy sector. That said, I can understand an investors reluctance to buy into an Energy stock like Whitehaven Coal, which is down almost 60 per cent this year, while Afterpay (in the Technology sector) is up over 200 per cent.

As such, I am not recommending that people just sell their Technology stocks to buy Energy stocks and I am sure Buffet would not be suggesting this either. But if you are looking for stocks to buy, then look at the sectors that have been moving down, as this is where you will most often find the greatest opportunities.

Remember what goes up must come down and vice versa, so it is possible to buy tomorrows returns if you are watching the money flow.

What were the best and worst performing sectors last week?

The best performers included Information Technology up 4.44 per cent followed by Consumer Discretionary, Consumer Staples and Financials, which were all up around 2.5 per cent. The worst performing sectors included Industrials down 1.57 per cent, Materials down 0.54 per cent and Energy, which was just in the green up 0.33 per cent.

Looking at the ASX top 100 stocks the best performers included Unibail-Rodamco-Westfield up 23.25 per cent, Link Administration up 21.55 per cent followed by Bank of Queensland up 9.86 per cent. The worst performers included Flight Centre down over 9.09 per cent, CIMIC Group down 5.86 per cent while Vicinity Centres, Ramsay Healthcare, Adbri, Aurizon Holdings and Atlas Arteria were all down over 4 per cent.

What's next for the Australian share market?

Last week I questioned whether the strong move up on the Australian stock market was sustainable or whether it was just a sucker’s rally and that this would be confirmed by close of trade last Friday. From 2 October until Thursday 15 October, the Australian market had traded up for nine days closing higher than it opened on all but one day. Looking back, we have not seen such a strong rally since January and currently the All Ordinaries Index is trading at its highest level since March and looking good.

That said, it’s important to remember that October has a history of being volatile with wild swings up and down. Looking at the history of the Dow Jones Index, we know five of the biggest one-day falls, as well as five of the largest one day rises all occurred in October. While it is still possible that the All Ordinaries Index could display some short-term weakness over the next couple of weeks to fall away into an October low, I am confident the market will rise up into Christmas and into early 2021.

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.