Is the Current Rise on the Market a Suckers Rally?
By Dale Gillham |
As a nation, the current corona virus climate has seen many Australians adjust to a new reality in how we live. Although, there is one thing that has not changed and that is how retail investors continue to walk a dangerous tight rope when it comes to investing in the stock market.
Retail investors losing millions during COVID-19
Last week, ASIC released a report highlighting its concerns about the trading activity of retail investors during COVID-19 and the statistics were quite alarming. In reading the report, it is easy to see why retail investors are blindly walking towards a cliff face blissfully unaware of the dangers they are placing on themselves.
Throughout March, the Australian stock market was extremely volatile, yet ASIC indicated that new account openings for retail investors were up 3.4 times on previous levels in addition to a marked increase in the number of reactivated dormant accounts. ASIC also reported that there was a sharp increase in retail investors trading short-term highly leveraged markets, such as contracts for difference (CFDs). Unfortunately, they also noted that a significant number of retail investors were getting it wrong with net losses in one week amounting to $234 million dollars.
One of the most concerning issues raised in the report was how people were placing ‘good till cancelled’ orders, which is a very inappropriate way to place orders in a volatile market. As I said last week, it is common to find around 50 per cent of adult Australians believe they are very knowledgeable or somewhat knowledgeable when it comes to investing in shares, however, ASIC’s report proves otherwise. While many believe CFDs and Forex are a great way to make short-term profits, mistakenly in a volatile market it is a way for the majority to lose most, if not all of their hard earned savings.
Unfortunately, what many investors fail to realise is the enormous risk they place on themselves when trading without a proper trading education. Just like Doctor Google is bad for your health, the University of Google in regards to the stock market is equally as dangerous, as it gives people a false sense of security believing they know what they are doing when, in reality, they don’t, as highlighted by ASIC’s report.
What were the best and worst performing sectors last week?
Information Technology was the best performing sector again last week up 11.34 per cent while Materials was next up 4.28 per cent. The Energy, Consumer Discretionary and Utilities sectors were also positive, all up just over 3 per cent. The worst sectors included Industrials, which was just in the green, while Healthcare, Consumer Staples and Financials were all up over 1 per cent for the week.
Looking at the ASX top 100 stocks, Magellan, Evolution Mining and Qube topped the list, as they were all up over 14 per cent, while REA Group, Northern Star and Goodman Group were all up over 10 per cent. The worst performers included Alumina and Qantas, which were both down over 6 per cent. IAG, Incitec Pivot and Sydney Airport were also down over 5 per cent for the week.
What's next for the Australian stock market?
Last week I indicated that I did not believe we were out of the woods just yet and that the current move up on the Australian stock market may just be a sucker’s rally. As of Thursday, the All Ordinaries Index was trading below where it closed 17 trading days earlier. In between this period, the market has traded both higher and lower, which indicates uncertainty.
If we look a little closer, in the 25 trading days since the 1st of April, the Australian stock market has only risen 6 per cent to the close on Thursday (7 May). Unfortunately, none of this points to the All Ordinaries Index being bullish, so the chances that we are living on borrowed time is getting higher.
For the market to prove it is bullish, it needs to rise above 5,623 points and move to rise above 5,800 points over the next month. If it cannot do that in the next week or so, it will signal that the market is weak and will most likely fall away. Again, I strongly urge investors to be on their guard and if you do invest, only buy quality stocks.
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.