Is the Stock Market Rebound Sustainable?

Not surprisingly, the RBA raised interest rates again last week but they only increased by 25 basis points or a quarter of a per cent. This signalled to the market that things may not be as bad as we have been led to believe, as the All Ordinaries Index has risen over 5 per cent since last Tuesday’s announcement. We know that markets and economies ebb and flow, so the surprise rate rise may be a sign from the RBA that the future is not looking too bad and we should be looking at the stock market in a more positive light.

Has the stock market finished falling for now?

Currently, inflation is a little over 6 per cent and the RBA expects this to rise to around 7.75 percent this year although their goal is to reduce it to between 2 and 3 per cent. Their expectation is that in 2023, it will drop to just above 4 per cent and in 2024 reach their target of 3 per cent.

Governor Philip Lowe also stated that the unemployment rate was sitting at 3.5 per cent, which is the lowest it has been in almost 50 years, while job vacancies are very high. As the economy slows over the next 12 months, unemployment may rise but in reading between the lines it seems with the incremental rate rise this month, the RBA believes they have everything under control and moving in the right direction.

So, how will this play out in the stock market? Institutions tend to plan for the worst and hope for the best. With inflation very near its peak and the smaller than expected rate rise, maybe the worst is over or will be very soon, as Institutions are buying up right now but we’ll have to wait and see if they continue to do so.

Investors, on the other hand, tend to do the opposite as they don’t plan for the worst, which means they often buy when they should be selling and vice versa. Given what transpired last week, I believe there is light at the end of the tunnel and investors would be wise to utilise the time to start looking for opportunities in the market, as 2023 is likely to be much better than 2022.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 10.16 per cent followed by Utilities up 5.98 per cent and Information Technology up 5.82 per cent. The worst performing sectors included Consumer Staples down 0.15 per cent followed by Communication Services up 2.02 per cent and Healthcare up 2.10 per cent.

The best performers in the S&P/ASX top 100 stocks included Whitehaven Coal up 21.64 per cent followed by Pilbara Minerals up 18.86 per cent and IGO up 12.63 per cent. The worst performing stocks included The Lottery Corporation down 2.87 per cent followed by Woolworths Group down 1.74 per cent and ASX down 1.44 per cent.

What's next for the Australian stock market? 

I know I have said it before, but a week can be a long time in the stock market and last week proved just that. After falling over 10 per cent in the prior six weeks and looking as though we should expect further falls, last week the All Ordinaries Index turned sharply rising over half of what it fell in the prior six weeks. The All Ordinaries Index closed up 4.45 per cent for the week and while I would love to say the down move is over, it is not possible just yet. One week up, even a strong one like last week, doesn’t prove anything and, as we have experienced recently, the market can do anything.

Last week I stated that if the market was going to rise until the end of the year, it needed to find support now above the June low of 6,581 points. The rise last week could be the first sign that this is occurring, or we could just be experiencing a sucker’s rally that will catch a lot of investors out. Right now, it will pay to wait for the All Ordinaries Index to decide on a direction.

Despite the positive move up last week, I still need to err on the cautious side and assume the market is still bearish until it confirms otherwise. As such, I need to consider that just as it rose quickly last week, it could just as easily turn to fall away again over the coming month with the next level of support at 6,192 points.

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