Australian Market Falls: Is the Suckers Rally Over?

Over the past few months there has been a huge influx of new investors in the stock market seeking better returns than they would receive if they deposited their money in a bank. But when inexperienced investors get into the market, they invariably ask the same questions as everyone else who starts out with no education, which is about what they should be doing and which stocks they should be buying.

Buying penny dreadful stocks to get a bargain

One of the more common questions that is being asked right now is the topic of buying low priced stocks or penny dreadfuls as I like to refer to them. Unfortunately, investors mistakenly believe that buying a $0.10 stock is better than buying a $10 stock, as they can purchase more shares with their money. But buying a stock is not like going to the supermarket to grab the latest bargain. Let me explain why.

If you place $1,000 into a $10 share you would buy 100 shares and if you invest in a $0.10 share you would purchase 10,000 shares. However, if both shares rise by 10 percent, you have made the same amount of money. So, the question that investors should be asking is what is the risk versus reward when investing in a stock.

The risk of owning a $0.10 stock is far higher while the reward is much less compared to buying a $10 stock. That’s because when the market falls, there is a much higher probability that a $0.10 stock will be more volatile and have a higher chance of falling quickly than a quality blue chip stock. Sadly, however, inexperienced investors are attracted to purchasing cheap stocks because everyone else is doing it, which therefore, provides the justification for their ignorance when they lose money. In the end, they spend many years with poor performing portfolios that fail to achieve the returns they are seeking. But this needn’t be the case.

A solid tip that I followed when starting out in the stock market is to always purchase high-quality blue-chip stocks from the top 100 on the market, as you will lower your risk and increase your potential to profit.

What were the best and worst performing sectors last week?

It was another interesting week in the Australian stock market last week with all sectors closing lower. The Staples and Utilities sectors were the best performers as they were only down 0.35 per cent and 0.55 per cent respectively while the Healthcare sector was not far behind, down 0.76 per cent. The worst performing sectors for the week included Real Estate down over 3.9 per cent, Financials down 3.8 per cent and the Energy sector down 7 per cent.

Looking at the ASX top 100 stocks, TPG Telecom topped the list up 3.9 per cent followed closely by Coca-Cola Amatil up 3.75 per cent. Newcrest Mining was also up 3.6 per cent while Afterpay was up almost 3.5 per cent for the week. The worst performers included Unibail Rodamco Westfield down over 14 per cent, while Whitehaven Coal was down over 12 percent. CSR was also down 11.2 per cent while Vicinity Centres was down 9.2 per cent.

What's next for the Australian share market?

I feel like I have been repeating myself lately, but it is true that a week can be a long time in the stock market. Earlier in the week, the All Ordinaries Index continued its strong move up before falling away later in the week in a move that showed just how nervous the market really is. Last week I mentioned that up until two weeks ago, it was highly likely that the rise on the Australian stock market was just a sucker’s rally and high risk, which now may be the case.

In my previous two reports, I indicated that I expected the market to continue to rise into mid to late June, and while we are only a few days off mid-June, we are now entering the period for the high to occur, so the recent rise could be coming to an end. The current volatility is again a sign that the market is very emotional and likely to provide false triggers and make unexpected moves both up and down.

From here the Australian stock market could continue to fall, and as I mentioned last week, if the down move only lasts for a few weeks and is under 10 per cent, then over the medium term the market will rise into the second half of this year. That said, if the move down is longer and/or deeper, then this may signal that we are not out of woods just yet. Given this, what occurs this week is critical to determining how the market will unfold over the coming 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.