Is the market overdue for a pullback?

By Dale Gillham. Published at Feb 8, 2019, in Market Wrap

After what was touted to be a day of reckoning for the financial services industry, especially the banking sector with the release of the final report by the Royal Commission, the financial sector defied expectations and rose nearly 7 per cent this week.

So is this current move a false rally or does it now mean that the banks are finally in the clear and ready to start moving up again?

Interestingly, the banks traded up the day before we really knew what was in the final report. The shares surged again on Tuesday gapping up around 4.5 per cent on opening.

The worst had already been factored in to the share price of the banks, which was confirmed when the report was released. Right now, we need to see the dust settle before making a decision to purchase, as we could be experiencing a false rally before they fall away again.

The important work now begins

The commissioner has made his recommendations, but it will be interesting to see what regulation the Government follows through with.

I am sceptical that all the hype surrounding the royal commission is just that and very little will change.

Only time will tell.

However, the banks are some of the most efficient profit-making machines in the stock market. Given this, I believe it won’t be too long before they are back on top and delivering good shareholder returns.

Of the top 10 best gains in the top 50 stocks this week, six have come from the financial services sector with James Hardy grabbing the crown by rising around 12 per cent.

The top sector was Financials rising just under 7 per cent, followed by Industrials, Information Technology and Consumer Discretionary all up over 3.5 per cent. Healthcare was the underperforming sector this week, up just 0.3 per cent. Materials continued to rally with RIO, FMG and S32 up over 5 per cent in the past week.

As I have mentioned previously, for the market to continue to rise this year and break through the all-time high, both the Financials and Materials sector need to be rising at the same time. I am confident that the Materials sector will rise this year, but only if the Australian dollar can hold up and interest rates don’t fall further, otherwise this sector may be a little subdued.

The Financial services sector is where the uncertainty lies. Given this, investors should think about staying away until we know which direction it will move.

So what do we expect in the market?

I believe the market will remain bullish this year, and challenge, if not break above the all time high of 6873 from 2007.

That said, short term it is now overdue for a pullback, as it has been six weeks since the last low on 20 December. Therefore, I expect the market to fall any time now to between 5800 and 6000 points over one to two weeks. After that, we will get some really nice buying opportunities and will know more about what the banks will do.

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 Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.com.au

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