Fund Managers Manufacture Stock Market Freefall Based on Coronavirus

In this week’s report, Dale discusses why investors have been punished, as fund managers use the coronavirus outbreak to manufacture a freefall in the stock market.

The one thing I know with absolute certainty is that the mood of the market overrides rationality and fundamental value. This certainly rings true right now, as many companies were oversold based on emotion rather than logic or fundamental value. The reason why I say this is because many companies have not changed their earnings forecast, which means they do not foresee any issues arising from the coronavirus. Given this, I see no reason to sell, as many of these companies will bounce back in the not too distant future.

While the Australian stock market took a hit last week, this is due predominantly to the significant amount of negative news around the corona virus. In other words, the big end of town is essentially manufacturing these falls, as they benefit the most from the volatility. We need to remember that the big fund managers conduct the majority of buying and selling in our market and they know that individuals overreact to market news, so they use these opportunities to their benefit.

While I understand the coronavirus is a concern for world health, what we are experiencing in the market right now is a very short-term emotional over reaction to the news, and in the not too distant future, the coronavirus will be a distant memory.

You need to understand that the mood of the market will dictate direction and while the short-term mood is bearish, the medium to longer-term mood is still more bullish and the medium term direction is up. Therefore, my recommendation is to ride out the short-term waves right now.

So what were the best and worst performing sectors?

Given the market was down last week, all of the sectors fell. Utilities was the best performing sector down just under 6 per cent, while Healthcare, Materials and Financials were down just over 6 per cent. Energy was hit the hardest last week down over 10 per cent with Information Technology down just under 10 per cent and Consumer Discretionary just under 9 per cent.

Looking at the top 100 stocks, the best performers included Northern Star Resources, which was up over 2 per cent for the week. A2 Milk was also up almost 1 per cent for the week with Cleanaway just staying out of negative territory.

The worst performers included Reliance Worldwide down 26 per cent followed by Link Administration down 22 per cent and Magellan Financial down over 17 per cent.

So what's next for the Australian share market?

It is safe to say that the All Ordinaries Index has achieved the high I was expecting and is now moving into the low. It is normal for the market to fall 8 to 12 per cent when moving into a low and since 20 February, which is when the all-time high occurred, the All Ordinaries Index has fallen around 8 per cent. Given this, we are now entering the target zone for the low to occur.

If the market falls to 15 per cent, then the bottom target is around 6,200 points. If the market does continue to fall, the good news is that I believe it will be short lived. Now is not the time to panic but rather sit on your hands and wait for the dust to settle.

For now good luck and good trading.

By Dale Gillham, chief analyst, Wealth Within
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