Will the All Ordinaries Index Rise Above 5,800 Points?

There is an old saying that you don’t know what you don’t know. In my experience, over the past few decades I have found there is one thing in common with both traders and investors and that is many overestimate their level of knowledge and competency when it comes to the stock market.

Do traders and investors overestimate their abilities?

According to surveys conducted by the ASX, 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. But given that investors have repeatedly made knee jerk reactions over the past two months out of fear and, at times, greed, it is for this reason why I believe investors overestimate their level of knowledge,

That said, the recent market conditions have caused many traders and investors to question whether they are as knowledgeable as they think they are. As Albert Einstein once said, education is the progressive realization of our ignorance and no doubt, many would agree that over the past few months the stock market has taught them a lesson or two in how much they do not know.

Unfortunately, many will not learn and are doomed to repeat the mistakes of the past. History shows that time and time again people repeat their mistakes and end up throwing their money at the share market with little or no knowledge in the hope they will profit believing it will be different this time.

In the light of the GFC and the current market conditions, and how many have reacted to these events, I believe this proves how much Australians overestimate their abilities. This is often referred to as cognitive bias, whereby we believe we are better than we actually are, and the alarming thing is that we do not know that we are not very good or knowledgeable. Unfortunately, this means that investors operate under a false sense of security, which leads to over confidence and mistakes in judgement.

Investing in the stock market is quite easy because it really comes down to following some simple rules but that is the key that most are missing. Most don’t know which rules to follow and those that follow the masses end up losing money or breaking even at best. As the old saying goes, your education will cost you one way or another and it’s your choice how much you pay. Right now is the perfect time to educate yourself, so that you do not repeat the mistakes of the past.

What were the best and worst performing sectors last week?

Information Technology was the best performing sector up 6.61 percent and in a huge turn around, Energy was up over 5 per cent given that Oil Search, Santos, and Origin all rose strongly. Consumer Discretionary was the next best up over 5 per cent for the week. The worst sectors included Consumer Staples and Utilities both down over 3 per cent, while Healthcare was down just under 3 per cent.

Looking at the ASX top 100 stocks, Link Administration was the best performer up over 10 per cent followed by Origin, Oil Search, ALS and Alumina, which were all up over 8 per cent for the week. The worst performers included APA Group down 2.7 per cent followed by Treasury Wines Estate down 2.6 per cent, while BHP and ASX Ltd were both down just over 2 per cent.

What's next for the Australian share market?

As I have said before, a week can be a long time in the stock market given that over the previous two weeks the market was looking weak, but last week there was a distinct turn around with it moving up to its highest level in seven weeks. While I do not believe we are out of the woods just yet, as the current move up may still be a sucker’s rally, the signs are far more promising that the market will return to being strong this year.

So far, the All Ordinaries Index has stayed above the important level of 5,000 points and is rising. As such, I believe we will experience a more sustained rise over the next month. That said, if the market fails to rise above 5,800 points over the next month, it will signal that the market is weak. So while the news is far more positive, I still recommend investors be on their guard and 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.