Stock Market Breaks All-Time High: What's Next?

After 140 months or 4,284 days the Australian stock market finally breaks the illusive all-time high that was set back on 1 November 2007. Since then, there has been a lot of water under the bridge and pretty much every conceivable challenge we could face, not the least of which was multiple Prime Ministers.

What led the market to an all-time high?

The low interest rate environment over the past few years has seen an increasing amount of investors flood into stocks in search of greater income and higher returns. More recently, surging commodity prices, a weakening Australian dollar, and companies posting record profits have all been catalysts for the markets rise. I also think another key contributor was the surprise election outcome, and positive investor sentiment that has steadily grown this year, which rallied even more so after the election.

The miners have been the main sector to drive the Australian stock market higher, as they are up over 24 per cent this year, and are moving in the same direction as the Financials sector, which is up nearly 17 per cent this year. Remember, these two sectors make up over half of the market capitalisation.

While doom and gloom has surrounded the Financials sector over the past few years, it got a strong lift after the dust settled from the fallout of the royal commission. But neither the banks nor the miners led the Australian stock market, instead it was Information Technology and surprisingly Communications Services that have been the best performing sectors this year, both up over 30 per cent.

What’s next for the Australian stock market?

The ramification of making a new all-time high is significant and should not be played down. We need to remember this marks the longest stretch in time for the Australian stock market to create a new high, so breaking this milestone now means investors have more certainty and confidence, and I believe there is further upside.

That said, as I mentioned in a previous report, alarmists have been ringing the bell about a potential market crash once the All Ordinaries Index pushes through its all-time high, although in my opinion this is just hype as a market crash is definitely not on the horizon at this point in time.

Best and worst performers for the week

The best performing sector last week was Energy up by around 4 per cent, although it has been the worst performer this year, so this may present opportunities moving forward. Information Technology has been the best performing sector this year up over 3.5 per cent last week alone, followed by Consumer Discretionary up just over 3 per cent.

Surprisingly the worst performing sector last week was Materials, which was slightly in the red followed by Utilities and Healthcare, which were both up over 1 per cent.

Of the top 200 stocks, IOOF Holdings shocked the market with good news, as it reported bumper quarter net fund inflows, and was, therefore, the best performer up over 12 per cent. Speedcast International also rose over 12 per cent, followed by Bellamy’s Australia, which rose over 11 per cent this week after receiving a green light from Chinese regulators. That said, the strong rise in Bellamy’s is likely due to speculators covering their short positions, as it has been heavily shorted over the past year. A2 Milk shares also rose by around 3 per cent on the same news.

The top five worst performers last week were all in the Materials sector with Iluka being the worst performer, falling heavily over 14 per cent after announcing their half year production was down. Regis Resources was down over 10 percent, followed by Rio, which was down over 5 per cent. As earnings season continued, Fortescue Metals Group was the next worst performer down over 5 per cent after updating the market with its June quarter results. Despite a record quarter, a 30 per cent increase in average iron ore price and costs cuts, FMG fell. This could be due to news that Vale is ramping up its production.

What do we expect in the market?

Now the breaks have finally come off the market and we are trading in blue sky, I believe the Australian stock market will trade up strongly for a few weeks with a top end target of around 7,200 points. That said, I still expect the market is searching for its yearly high prior to pulling back into its yearly low.

My expectation is that the market will continue to rise through to late August or early September before falling into a low late September or October with the decline likely to be around 8 to 15 per cent from the high. For now, investors who are buying over the medium to longer term should expect a small dip in their stocks before the end of the year with the knowledge it will be short lived. The best sectors for opportunities I believe will be Financials, Energy and Materials. 

So let’s get into this week’s stocks of interest. Watch the video to find out more. 

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 Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.