Volatility in the Market Spells Opportunity

It is currently reporting season in the Australian share market with many companies releasing their financial year results, as well as their outlook for the coming year. This tends to cause market volatility, as companies report results that may be better or worse than expected causing share prices to rise or fall over a short period of time.

Over the past 18 months, there has been a surge in the number of new people investing in the Australian share market, and given there has been some surprises this reporting season, I suspect it may be driven by the increased trading from these new entrants. With many in lockdown, it is possible that they are sitting at home attempting to profit from the current market volatility, as companies report their results.

Appen and a2 Milk stocks ramped during reporting season

Prior to releasing its result last week, Appen rose nearly 16 per cent from its close on Friday 20 August but after it announced on Thursday 26 August that its net profit after tax was down 55.1 per cent, it fell heavily closing over 21 per cent lower compared to the previous day’s close.

Infant formula company, a2 Milk was up nearly 10 per cent two weeks ago and last week it rose another 5 per cent before falling immediately after releasing disappointing results together with a weak forecast for the coming year. By market close on Thursday 26 August, it was trading at levels where it was only nine days earlier.

Both of these stocks were previous market darlings pursued by retail investors chasing big gains with Appen rising over 350 per cent between 2018 and 2020 while a2 Milk rose nearly 150 per cent over the same timeframe. However, more recently, both stocks have fallen heavily, as they were down around 75 per cent until a few weeks ago.

This indicates that many individuals are speculating on these stocks, however, attempting to bottom pick a stock hoping it will rise is never a good strategy, and attempting to do so based on an announcement is very hit and miss, as the above examples demonstrate.

What were the best and worst performing sectors last week?

The best performing sectors included Energy up 2.15 per cent followed by Information Technology up 1.61 per cent and Financials up 1.06 per cent. The worst performing sectors included Consumer Staples down 3.03 per cent followed by Communication Services down 2.24 per cent and Utilities down 1.57 per cent.

The best performers in the ASX/S&P top 100 stocks included Wisetech Global up 29.32 per cent after releasing a great report and raising its dividend by a massive 141 per cent. This was followed by Qantas up 21.18 per cent and The Star Entertainment Group up 11.39 per cent. The worst performing stocks included Link Administration down 15.59 per cent followed by Reece Ltd down 15.26 per cent and Ansell down 10.88 per cent.

What's next for the Australian share market?

Last week, the stock market traded up over the first three days closing higher each day before turning down on Thursday and Friday in a sign that the bears from the prior week may have returned. While the market is still technically bullish, it is searching for a two year high and, as such, we need to consider that this may be occurring right now although it is a little too early to tell.

If the All-Ordinaries Index trades below 7700 points this week, which was the low it achieved two weeks ago, it may be starting its move down into the low that is expected in September or October. If this is correct, we should get ready for a fall of at least 8 to 12 per cent or slightly more.

That said, as I keep saying we need confirmation that a down move is unfolding before we react as the current bearishness may just be a pause in the current uptrend. Given we do not have confirmation of a move in either direction, now is not the time to make emotional decisions rather you need to prepare yourself for what may occur.

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.