Don't bottom pick bank shares

After looking bullish earlier in the month, the market fell away over the past two weeks causing concern for investors. However, last week was pivotal for the Australian market, as it found support and started to rise again. This is a good sign as it indicates the market may continue to rise through to Christmas and the New Year.

We saw a strong recovery for Information Technology (XIJ) this week up 7 per cent with rises from Afterpay Touch Group (APT), WiseTech Global Ltd (WTC) and Technology One Limited (TNE), all with low double-digit gains. Communication services (XTJ) was also up nearly 2 per cent which helped the market rise back up this week.

Iron ore prices fell around 8 per cent in one day this week, causing Materials (XMJ) to fall around 2.7 percent. The fall in iron ore was caused by news of decreasing demand from China, and steel mills offloading inventories. We experienced heavy selling on Monday in the Materials sector including BHP, which is down around 2 per cent, RIO down around 4 per cent, whilst FMG was up around 1 per cent this week due to the market over reacting on speculation.

The good news is that the Iron ore price has recovered 2 per cent and continues to look bullish. I still believe there will be some great opportunities to pick up some good stocks in the Materials sector in the not too distant future as this sector is starting to look stronger.

Financials (XFJ) got a lift from the big 4 banks this week, all up around 2 percent. Since their November low, the big 4 have recovered with ANZ up 9 per cent, CBA up 11 percent, NAB up 7 per cent and WBC up 6 per cent.

With the worst of the Royal Commission likely behind us and the final deadline on the 1st of February, many investors may start to bottom pick bank shares trying to grab a bargain. However, this is a very risky strategy because, more often than not, when investors bottom pick, the stock has further to fall. Anyone who has tried this over the past few years would know this all too well, as the banks have continued to slide further into the red.

That said, good stocks do not fall forever, and the banks have suffered most of the fall they needed to have. For now, you are better off investing your capital elsewhere, as banks may continue to move sideways through Christmas, with further downside in the early months of 2019 once the Royal Commission report is released.

So what do we expect in the market?

In previous Market Wrap reports, we mentioned that the All Ordinaries Index was searching for a low before starting its next bull run. Given the rise this week, it is quite possible the expected low occurred on 21 November at 5675.90 points, however, it is still too early to confirm.

The expectation is that the market will rise for the next four to six weeks through to early January and up through 6000 points.

Looking further afield, the Australian market will generally be bullish through to late March moving up through the lower end of my target range of 6200 points and possibly above 6400 points. That said, only time will tell and, for now, it would be prudent to stick to stocks in the top 50 in the market.

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