Caution Required on Australian Stock Market

Last week the May unemployment figures were released with another 227,700 jobs lost during the month. The latest data now means the official unemployment rate sits at 7.1 percent, although I don’t believe this figure tells the real story. 

Unemployment in Australia rises to 7.1 per cent

That’s because there are a number of factors at play that have not been included in the recent figures. This includes people who have been looking for a job but given up in this current environment together with the thousands of individuals on the job keeper program whose businesses are only just surviving, as restrictions are lifted, because of the stimulus package provided by the government.

While the government is happy to keep paying the job keeper payments until September, I believe we will see a significant spike in unemployment when they stop given that we cannot keep increasing our debt to stimulate the economy. But what is even more concerning is that the average household has very little savings and, as such, there is very little wiggle room if the government does stop paying the job keeper payments. When this occurs, we will not only see a spike in unemployment but also a spike in mortgage defaults.

As a country, if we cannot get back to where we were pre-COVID-19 quickly, then there will be a significant strain on an already overloaded welfare system, as businesses close and unemployment increases.

What were the best and worst performing sectors last week?

The Australian stock market continues to intrigue given that it has closed lower than it opened in four of the last nine trading days. Last week Information Technology was the best performer as it was up nearly 8 per cent followed by Energy, which was up around 3.5 per cent, while Communications Services was up just over 3 per cent.

The worst performing sectors included Materials closed the week 1.7 per cent in the red followed by Utilities up just over 1 per cent so far this week and Consumer Staples up just over 1.5 per cent.

Looking at the ASX top 100 stocks, Afterpay continued its spectacular rise, as it was up over 13 per cent given that speculators continued to push it higher attempting to cash in on the run, although I suspect they may now be too late as the run will most likely end soon.

A2 milk is another stock that speculators like to jump into and it is up over 9 per cent by Thursday although it was sold off strongly on Friday to close up only 5 per cent for the week. SEK and TPM were also strong performers last week, as both were up around 11 per cent.

The worst performers include Orora down 8 per cent followed by Fortescue Metals Group down 6.9 per cent and Sydney Airport fell 6.35 per cent.

What's next for the Australian share market?

While technically the All Ordinaries Index traded lower last week, as it fell below the low of the preceding week, it closed up 1.8 per cent for the week. While the market closed higher, the rise was far from impressive because, as I previously mentioned, over four of the last nine trading days the All Ordinaries Index closed lower indicating that the market is moving forward with caution. 

When looking at the market over the past few weeks, we can see that the bears are locked in a fight, given that the market has been moving down slightly with no clear direction. Right now, caution is required in the Australian stock market, as it would be wise to assume that the market may fall over the coming week or two rather than assuming that the bulls will come in to drive the market higher.

We need to remember that we are now in the period for a short term high to occur, therefore, volatility will increase over the next few weeks and any recent gains could be ending. Last week I mentioned that the market could continue to fall, and while it did fall lower last week, I mentioned that if the down move only lasts for a few weeks and is under 10 per cent, then the market would rise into the second half of this year. Right now, it is too early to tell if the down move is over, as it could last for a few more weeks. For now, you should exercise caution when buying and if the Australian stock market does fall away be prepared to exit.

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.