Lithium Stocks Continue to Fall: Is it Time to Invest?

Dale Gillham, Chief Analyst and Head Trainer of Wealth Within

By Dale Gillham |

The demand for electric vehicles has been outstripping supply for quite some time due to COVID lockdowns and supply chain issues. That said, increased demand is also being driven by Governments legislating the move away from internal combustion engines and a desire by consumers to be environmentally friendly.

What is driving lithium stocks down?

With energy prices currently soaring, you would think this would push demand for electric vehicles even higher, and in turn, increase demand for lithium used in the manufacture of batteries. However, while lithium fell from March to May 2022 and has started to recover, lithium stocks have continued to fall.

Looking at the top 10 lithium stocks by market capitalisation, only two are in positive territory right now and with the exception of Rio Tinto, all have fallen by more than 20 per cent this month. Three have also fallen by around 40 per cent in June while another three have fallen over 30 per cent. So, if lithium has stopped falling, why are these stocks nosediving and does this spell opportunity for investors?

Interestingly, the significant rise and subsequent fall in the price of lithium stocks isn’t totally due to increased demand for the commodity but rather investor greed and fear. Following the COVID crash in early 2020, many new investors jumped into the market and by late 2020 the price of lithium started to rise and the more it rose, the more investors jumped in.

However, as prices started to fall in 2022, investors became fearful pushing prices down even further. In the short term, I expect further falls as more investors exit these stocks. Right now, I would look at putting a number of these stocks on your watch list, as they will turn in the not too distant future.

What were the best and worst performing sectors last week?

The best performing sectors included Information Technology up 8.09 per cent, which jumped over 6 per cent last Friday on the back of several large tech stocks like Appen, IRESS, Xero, Altium and others trading up significantly. This was followed by Consumer Discretionary up 5.36 per cent and Healthcare up 5.32 per cent. The worst performing sectors included Materials down 4.88 per cent followed by Energy down 4.5 per cent and Utilities down 0.20 per cent.

The best performers in the S&P/ASX top 100 stocks included Block up 21.6 per cent followed by REA Group up 19.71 per cent and IDP Education up 13.33 per cent. The worst performing stocks included Evolution Mining down 8.40 per cent followed by Santos down 7.32 per cent and Fortescue Metals down 7.10 per cent.

What's next for the Australian stock market?

Two weeks ago, the Australian stock market fell heavily ending the week down 6.74 per cent while last week surprised many, as it held up well to close up 1.49 per cent. It was interesting to see how the All Ordinaries Index unfolded given that last Monday it fell over 1 per cent early in the day to a new low of 6,581 points and while it fell to around where I stated the market would find support, it was too early to tell whether it had stopped falling.

On two of the remaining four trading days last week, the Australian market rose strongly but the rises were unconvincing; so, the market could go either way over the next week or so. Given this, it is wise to assume further falls are likely and if the market does fall, I am confident it will find strong support around 6,200 points and is unlikely to fall further.

To confirm that the low of 6,581 points last Monday is the end of the current down move, we need to see a sustained upward movement in the All Ordinaries Index over at least the next three weeks. Until this occurs, the safest option for investors is to err on the side of caution and to assume that further falls may unfold, and to plan accordingly. Right now, I recommend investors look at the top 50 stocks as many are setting themselves up nicely for the impending rise that is likely to unfold in the second half of this year.

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.

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