Market Update - ETFs and the impact of short term success

In my report two weeks ago, I highlighted some alarming statistics released by ASIC on investor behaviour in the wake of the coronavirus crash during March when the stock market was volatile. In the report, ASIC indicated that new account openings for retail investors were up 3.4 times on previous levels. In addition, there was a marked increase in the number of reactivated dormant accounts. ASIC also reported that there was a sharp increase in retail investors trading short-term highly leveraged markets.

This week BetaShares released its Exchange Traded Fund (ETF) review for April 2020 and, not surprisingly, it reported similar statistics with investors trading ETFs. The report states that in April investors invested more than $1bn in new money into ETFs. It also highlighted that “trading volumes remained very high in April, albeit significantly lower than the all-time record of $18bn set the month before”. As you can see, these statistics are consistent with what ASIC previously reported.

Right now, those who invested in ETFs have been rewarded for their decision as the market has risen around 10% since 1 April, although most of that occurred in the first seven days, so those entering after this period have not done as well. That said, in my opinion, the decision to invest during this time was very premature, as the market was uncertain and volatile.

The concern is that these statistics highlight two themes that happen consistently with retail investors. The first being that investors have not learnt and are still attempting to grab a bargain in the hope of making a profit. While this has worked for them so far, depending on how the market unfolds, this may not be the case in a few weeks or months. The second, and more important issue is that when investors profit from their decisions it creates a false reality, as the majority do not realise the ramifications of their decision to invest. Given this, they will, once again, attempt to bottom pick in an effort to beat the market, but history dictates that retail investors get it wrong more often and, consequently, lose a lot of money.

Energy has been the big winner up over 7% on the back of oil rising off historical lows although I am not convinced this sector is bullish just yet. Materials has also had a good week with commodities rising and is up over 6% so far, while Information Technology is not far behind up over 5%.

The worst sectors so far include Utilities down almost 2% while Consumer Staples and Healthcare are down under 1 percent, and Financials is just in the green. Looking at the ASX top 100 stocks, Worley and Oil Search are the best performers so far as both up over 16%. Santos is not far behind up over 15% while Vicinity Centres and Stockland are both up over 12%.

Over the past four weeks, the Australian market has failed to push higher in a sign of indecision and a lack of direction. Last week I mentioned that I thought the market would pick a direction soon and we may have seen that given that this week the market has risen over 3% as of writing. More importantly, price has broken above the previous high of 5,618 points set on 17 April, so my opinion is starting to change from one of being bearish to bullish.

That said, I still believe caution needs to be exercised, as the emotions in the market are still running high and stocks are being punished on negative news. Therefore, the market could fall heavily on any negative news, so it will pay investors to be conservative and to only buy quality stocks.

If the market is bullish, we will see the rise continue for the next two to three weeks with it likely to break above 6,000 points. However, if there is any weakness during this time, the good times that we have experienced in the last month may be over and we may need to get ready for the next fall.

For now good luck and good trading.

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Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice.