Sell-off in Australian banks drives market lower

The S&P 200 Volatility Index (XVI) has risen 90% in the past five days as the stockmarket falls, further indicating the heightened level of fear in Australia.

Uneducated investors are panic selling, which is playing into the hands of the institutional traders who are short selling to profit as the market falls.

It's no secret that financial literacy in Australia is low, and changing this is critical to ensuring investors make informed decisions. It is typical for volatility levels to spike when the market is nearing a low, which is currently the case, as this is when most of the selling occurs.

A sell-off in Australian banks by 4-5% helped to drive the market lower. Now is still not the time to be buying bank stocks.

Downgrades to earnings forecasts led banks further into the red. And redemption costs for the fees-for-no-service scandal could be in excess of $3 billion, according to Morgan Stanley, well above the initial $500 million expected.

A number of major factors added to market woes. Talk that quantitative tightening (QT) by the US Federal Reserve is likely to lead to a US market crash, which will flow on to Australian stocks, weighed on the minds of investors.

Adding to the uncertainty are Chinese trade restrictions, now starting to create a squeeze locally.

Also, news that the Reserve Bank of Australia will reverse its policy and lift the cash rate in around 12 months didn't help matters. But the bigger the decline, the bigger the opportunity to profit from the next rise.

What to expect in the market

The All Ordinaries Index (XAO) fell by 5.3% this week to around 6000 points.

More than half of the fall occurred on Thursday, eclipsing the fall for the first three days of the week. This rush to exit stocks is a classic example of panic selling, which usually occurs near market lows.

The selling didn't start this month, the XAO started to fall at the end of August, but most investors would be oblivious to this. This isn't the first time a decline of this degree has occurred. In February, the market dropped 5% in a week, but fell only a further 1% before rising strongly.

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