More pain ahead: What's next for the Australian stock market

What a week it has been on world stock markets, with many indices falling heavily. If you have been reading the news, it would appear that investors are driving the market down because they are worried about a global recession.

But I would like to know who these investors are, given that the majority of people I talk to are more worried about rising energy costs than a global recession, and they certainly aren't selling off their holdings.

I often get asked what is driving a stock or the market up or down, as if the answer to the question will somehow provide a crystal ball as to what to do next, when in fact the answer will mean very little to the vast majority of individual investors.

The economics around what makes a market move up or down is very complex and they don't move that fast. Given this, it's important not to put labels on events, for example, by saying that investors are driving the market down, as this implies that mum and dad investors are somehow magically moving the market.

In reality, it is the big end of town like the hedge funds and other large institutions using the current high inflationary environment to move the market. The US Fed reserve has clearly stated that the high level of inflation is only temporary, and is being driven by two main factors.

The first is due to the pent-up demand from COVID and, secondly, the rising energy costs due to the Russian invasion of Ukraine. The first will be resolved in the not too distant future, while the second is expected to slowly ease.

As I have stated previously, I continue to have issues with large institutions taking advantage of the market to the detriment of retail investors, particularly with superannuation funds lending out stocks so that short sellers can drive the market down as they are doing right now.

The best and worst performing sectors this week

The best performing sectors include Communication Services down more than 1%, followed by Consumer Staples down more than 3% and Utilities down more than 4%. The worst performing sectors include Information Technology, down more than 7%. This was followed by Energy, down more than 6% and Industrials down more than 5%.

The best performers in the S&P/ASX top 100 stocks include Lynas Rare Earths, up more than 3%, followed by Computershare, Telstra and Newcrest Mining, which are all up more than 2%.

The worst-performing stocks include Block, down more than 19% followed by James Hardie down more than 13%, and Qantas down more than 12%.

What's next for the Australian stock market  

The Australian stock market has continued to fall this week and is currently down slightly more than 5%. All of that occurred after the market opened on Tuesday following the long weekend.

The market has fallen below the recent low on May 12 at 7157 points, which indicates further falls are likely.

That said, I believe any fall will be short-lived and likely to last for one to three weeks and to around 6600 points or slightly below this level. I am also confident that the market will find support soon and become more bullish as it moves into the third quarter of 2022.

Investors would be wise not to panic sell because it is common for them to exit at or near the market bottom rather than preparing themselves for some great buying opportunities once the market settles.

Once again, I urge investors to exercise patience and caution, and not to bottom pick cheap or low cap shares, but rather buy quality stocks in the top 50 when the time is right.

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