Will the Market Find Support and Start to Rise

When the stock market is volatile and falling, investor psychology is often amplified with many making irrational decisions. During the GFC, many investors suffered from loss aversion, as they refused to accept that they had to sell their shares for less than they had paid for them, and the same behaviour has been repeated over the past few weeks as the market fell.

Why investors suffer from loss aversion

The market rose strongly between June and August of this year and investors were jumping into stocks prematurely believing the bull run had started only to find that the move up was a sucker’s rally. Now that the market has fallen back to around the low in June, investors are sitting on losses asking if they should hold or sell. While the majority want to hear that they should hold, if I were to say they should sell, at least 90% would ignore the advice because they are suffering from loss aversion.

In reality, what they are asking for is validation of their decision to buy in the first place because most investors believe they must never loose. Their psychology is such that the thought of realising a loss is untenable, so they avoid making a decision to sell and live in the hope that the stock will rise back to or above what they paid.

Investors also make excuses to justify their decision for buying but an excuse is a lie covered with a skin of reason. Consequently, they don’t want to accept that they bought based on emotion or due to greed and the fear of missing out (FOMO) rather than sound analysis and a solid trading plan.

The market will always do what it does, regardless of your expectations or emotions. Good investors know this, which is why they listen to what the market is telling them and act accordingly without emotion. Investors who failed to follow this logic were hit the hardest during the GFC and this will continue to happen whenever the market falls unless you choose to proactively change your behaviour.

What were the best and worst performing sectors last week?

The best performing sectors included Healthcare up 1.72 per cent followed by Communication Services up 0.70 per cent and Consumer Staples down 0.03 per cent. The worst performing sectors included Utilities down 3.84 per cent followed by Financials down 3.11 per cent and Industrials down 2.92 per cent.

The best performers in the S&P/ASX top 100 stocks included Resmed up 5.59 per cent followed by Northern Star Resources up 4.54 per cent and Insurance Australia Group up 4.31 per cent. The worst performing stocks included Virgin Money down 14.69 per cent followed by Macquarie Group down 7.75 per cent and Origin Energy down 7.18 per cent.

What's next for the Australian stock market?

In a volatile week in the market, the All Ordinaries Index ended last week down 1.62 per cent falling to a low of 6,630 points by Wednesday. Most of the fall occurred last Monday although it was interesting to see that the market seemed reluctant to fall any further. This is because over the remainder of the week, it closed higher and lower twice in more of a sideways move indicating there was some short term indecision in the market.

It has now been six weeks since the high in August and on five of those weeks, the All Ordinaries Index closed lower eroding most of the gain achieved in the eight weeks it rose between June and August.

If the market is going to rise until the end of the year, it needs to find support now above the June low of 6,581 points. If this occurs, it should rise this week and continue to rise over the coming month. If this level is broken, which is looking more likely, then the market will continue to fall away 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.