Market Likely to Fall by 10% in Coming Weeks

Oil prices have risen strongly since the beginning of this year, as both brent and light sweet crude oil futures are up well over 30 per cent while heating oil futures is up over 40 per cent. However, this has not translated into a rise on energy stocks in the Australian stock market.

Energy stocks likely to rise late into 2021

Looking at our oil and gas producers, Santos is the standout performer having risen over 11 per cent this year yet the three other biggest stocks in this sector have not performed well. Woodside, the largest by market capitalisation, is just in the red, Ampol is down around 9 per cent while Oil Search is up around 3 per cent although it has really been relatively flat most of this year. Looking at the energy sector as a whole, it rose strongly in January only to fall away over the following three months with the sector down last week around 4 per cent for the year.

Coronavirus cases have dramatically increased in India, which is one of the world’s largest importers of oil and, consequently, the demand for oil in India has fallen strongly. However, as the rest of the world is starting to open up, there is greater demand for oil, which is currently outstripping supply.

Putting a further strain on oil, the Colonial Pipeline, which is the largest pipeline in the US, experienced a ransomware attack this week, resulting in it shutting down for a few days causing fuel shortages and panic buying in the south eastern states.

So, with strong demand for oil are Australia's energy stocks set to rise? The answer is most likely yes and I believe Santos is well placed to continue its upward trajectory. I also believe Woodside, Ampol and Oil Search will do well in the second half of 2021. That said, you may need to be a little patient with the latter three stocks, as they may experience some short term falls before rising into the end of 2021.

What were the best and worst performing sectors last week?

Consumer Staples was the best performer up 1.08 per cent followed by Healthcare up 0.76 per cent while Consumer Discretionary was down 0.20 per cent. The worst performing sectors included Information Technology, which was down heavily once again, falling 6.89 per cent followed by Utilities down 2.53 per cent and Energy down 1.94 per cent.

The best performers in the ASX/S&P top 100 stocks included Carsales.com, which was up 13.26 per cent after being in a trading halt pending the announcement of it acquiring a 49 per cent stake in Trader Interactive based in the US. Crown Resorts was also up 7.59 per cent on news of a merger with Star Entertainment Group followed by Treasury Wines Estates and Computershare, as both were up over 6 per cent. The worst performing stocks included a2 Milk down 21.23 per cent followed by Xero down 15.89 per cent while Appen and Incitec Pivot were both down over 10 per cent.

What's next for the Australian share market?

After breaking up strongly last Monday to achieve a new all-time high, the Australian stock market turned to trade down for most of the week in its strongest move since February. That said, the market found some strength on Friday rising early before falling away late in the day, indicating that the bearish sentiment in the market earlier in the week was still present.

If the Australian stock market continues to fall away this week to trade below 7,166 points, it is likely we are seeing the start of the fall I expected would begin mid to late May. That said, as I mentioned in my previous report, the only certainty we have in our market at present is that it is uncertain, and we need to be prepared for anything to occur.

The significant decline with technology stocks continued last week with Xero, Afterpay, Appen, Wisetech and Altium all falling heavily. In my last report, I mentioned that while the Australian market may move down in the short term, I don’t expect it to be severe in either time or price. If this is correct, we may see a move down over the next two to four weeks of around 10 per cent in price from last week’s high.

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.