Why lithium stocks are falling despite surging demand for EVs

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The demand for electric vehicles has been outstripping supply for quite some time due to COVID lockdowns and supply chain issues. That said, increased demand is also being driven by Governments legislating the move away from internal combustion engines and a desire by consumers to be environmentally friendly.

With energy prices currently soaring, you would think this would push demand for electric vehicles even higher, and in turn, increase demand for lithium used in the manufacture of batteries. However, lithium stocks have continued to fall.

Looking at the top 10 Lithium stocks by market capitalisation, only two are in positive territory right now and with the exception of Rio Tinto, all have fallen by more than 20% this month. Three have also fallen by around 40% in June while another three have fallen more than 30%. So, if lithium has stopped falling, why are these stocks nosediving and does this spell opportunity for investors?

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Interestingly, the significant rise and subsequent fall in the price of lithium stocks isn't totally due to increased demand for the commodity but rather investor greed and fear. Following the COVID crash in early 2020, many new investors jumped into the market and by late 2020 the price of lithium started to rise and the more it rose, the more investors jumped in.

However, as prices started to fall in 2022, investors became fearful pushing prices down even further. In the short term, I expect further falls as more investors exit these stocks. Right now, I would look at putting a number of these stocks on your watch list, as they will turn in the not-too-distant future.

What are the best and worst performing sectors this week

The best performing sectors include Healthcare, Financials, Consumer Staples and Consumer Discretionary, which are all up more than 3% followed by Information Technology up more than 1%. The worst performing sectors include Materials down more than 4% followed by Energy down more than 3% and Utilities, which is just in the red.

The best performers in the S&P/ASX top 100 stocks include REA Group up more than 10% followed by Block up more than 9% and QBE Insurance up more than 7%. The worst performing stocks include Mineral Resources and Evolution Mining down more than 8% followed by Northern Star Resources and Fortescue Metals, which are both down more than 7%.

What's next for the Australian stock market

Last week, the Australian stock market fell heavily ending the week down 6.74%, while this week it has held up well and is currently trading just in the green. On Monday, the All Ordinaries Index fell to a low of 6581 points and while this is around where I stated the market would find support, it is too early to tell whether the market has stopped falling.

If it does fall further, I am confident it will find strong support around 6200 points and is unlikely to fall further.

To confirm that the low of 6581 points on Monday is the end of the current down move, we need to see a sustained upward movement in the All Ordinaries Index over at least the next three weeks. Until this occurs, the safest option for investors is to err on the side of caution and to assume that further falls may unfold, and to plan accordingly.

Right now, I recommend investors look at the top 50 stocks as many are setting themselves up nicely for the impending rise that is likely to unfold in the second half of this year.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.