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Should you Invest in the Financial Sector? P1

by Dale Gillham
August 16th 2021

In this week's Talking Wealth podcast, Janine talks about the industries within the Australian Financial Sector and whether it is likely to continue to rise. She also shares a summary of her analys... More

Yeah. Hey there podcast listeners welcome to talking wealth. The show where the wealth within team are on hand to teach you how to become a more confident, competent and more importantly, profitable trader or investor Wealth within was voted # three for Stock market podcast globally in 2018. So I hope you enjoy listening. We cover topics from trading to investing as well as wealth creation to ensure you can achieve your financial goals because as we always say, lifestyle matters as a global leader in stock market education, you can fast track your journey towards financial freedom by studying with wealth within. If you'd like more information about our government accredited courses or to listen to more talking well, podcast, head over to wealth within dot com dot au and click on the talking while podcast under the learning center, please note that the information in this podcast should not be considered personal financial advice. Hello and welcome to talking wealth. I'm Janine cox, senior analyst at wealth.

Within this week, I'd like to share with you my thoughts on the financial sector. We know that a lot of superannuation funds are heavily invested in this sector, partially because the managed funds have mandates that require them to have investments across the broader index, particularly in exposure to the heavier section of the market or the heavyweights in the market. A lot of those heavyweight stocks are of course, the big banks now, the financial sector is comprised of a number of areas, including banks, insurance companies, diversified financials and real estate stocks. So there's a really good spread in that sector of companies in that space. What I find really exciting about this sector is the fact that we've just been through a major correction, not just because of Covid. Now, a lot of stocks on our market fell heavily because of Covid, but there were many stocks on our market that we're going through a cyclical decline.

Long term sick nickel cyclical declines. Now, the banks were one of those. So we saw the mining stocks go through a major decline 2011-2016. We saw financial stocks go through significant declines in their share prices from 2015 through to around 2018 and into 19. We saw a big fall, of course, with COVID some stocks falling around 40% during that decline. Banking stocks were not immune of course to that sell off. But what this is created on the financial sector chart is a really important long term low, that's actually well above the GFC low. And what that tells us when we're looking at stock patterns is that long term this sector should be bullish, really bullish over the long term. Even though we can expect short term volatility. Could stocks and markets could be down for a number of weeks or months throughout the year, but that the longer term trajectory should be up.

So I guess the question is, did Covid really helped create that flush out of the market and that low. And if you know me and you've been watching our Tuesday's show, I have a number of concerns about what went on during the selling of the stocks, during that Covid pull back and that's I guess for another another time, another discussion. But right now it's more about the financial sector and where I see that going. So it's true that the financial stocks have reached a really important junction right now because they've traded back to levels that were pre Covid recently and made highs or around the level of the Covid highs. Pre Covid highs and they're pulling back just to test by support at the moment. And I guess the conviction of the sellers because if we see more resistance around the current level and a stronger pull back, that's actually going to be better, particularly for bank stocks in setting up for the next run. So, there is some resistance around on the financial sector chart around that 14,200 point mark.

And recently we did trade close to 6800 points before the financial stocks have pulled back. But the all time high for the financial sector still hasn't been broken through. So we know that there's significant upside potential down the track for financials. It's just a question of when and it's about being patient now over the coming months, these stocks more of these stocks may give exits to sell and that's OK, because there could be some more good medium term trades coming up down the track and that's, I think important. It's important to still protect the downside just in case the alternate view is correct. So there can always be two views, three views of the way a stock could unfold because the stock can always go up down or sideways. Now, if the financial sector does keep rising and we do go through that all time high, then we could be bullish for the long term. And our overall market projection is indicating that we could be bullish for the next few years And a financial sector is supporting that and we know that our market is waited about 35% to the financial sector.

So this is important to bear in mind now, I'm going to walk through a few more discussions on other sectors in the marketplace and talk to you about those over time, over the coming months. So, but I thought I'd start with the financial stocks first because it is the bigger one. And we may talk about some other stocks within that sector in my next report because we've got great stocks like commonwealth Bank, Westpac ANZ um, not, not as much now, but now has looked like it's improved over time and tends to be tracking more with the other banks more recently, which is great and we've got second tier banks that we can have a bit of a discussion about And then there's insurance stocks and what they're doing in the upside potential, that's with the insurance side of things. Um some diversified financials. We might touch on a few of those and of course the real estate sector, he is also important. So next time I come back to you, I'm going to be chatting more in detail about particular stocks. But I guess the important thing is to remember that the financial sector is following an important pattern so far.

It's all unfolding as we expect it to, even though some of the individual stocks have actually not um adhered to the historical patterns that one would expect them to unfold in the financial sector at times will have between 35 and could be in excess of 40% of the stock market in terms of the weight, the weight of the companies. Whereas at the moment, we've also got the material sector, which is smaller than the financial sector, but together they are typically around 50 or, or could be more 50-60% by weight of the overall market, which is quite incredible. So if you get to know those two sectors really well, you could have a reasonable view reasonably close anyway in terms of what's likely to happen on the stock market going forward. But I thought we'd get into it with the financial sector because the financial sector stocks tend to be less volatile than the materials stocks or energy stocks, Mining stocks historically are a lot more reliable volatile and can be less reliable than financial stocks.

What was interesting though was what happened with Covid because the stock market is all about pattern recognition. Okay, so with price analysis, don't ever let anybody tell you that the stock market is random because it just isn't stocks and stop historical stock prices form patterns over time. Just remember that because it's about science, it's about the universe. It's about what happens in nature. If you look around the world, you'll see examples of where mathematics, for example, fits within nature. One would think things were completely random, but and yet we've got seasons which they are not random. So there's a lot of things in the world that happen in a really organized way. But to us it might seem that it's not because we're not actually looking at the bigger picture. And that's why it's really important to look at a big picture. Long term chart Of anything that you're studying.

And we're looking at the financial sector right back to 2001 because that's where the data starts. We don't have data beyond that point because that it wasn't collected as a sector performance or sector um caption if you like of what was going on in that space prior to that the S. And P ASX data. This is what we're looking at Um is showing that it starts in 2001. But that's good because we've got 10 years at least of data given that we're in 2021. And that's really what's important when you're studying long term, is to have at least 10 years of data that you can review because of this pattern recognition that you need. And because stocks and markets unfolding patterns, we really need that amount of time to get an appreciation for where a stock or market is in its overall pattern. Now, the great thing about the financial sector chart is it shows quite clearly where it's trading at the moment, which is amazing. Now, some of the stocks within the space actually threw us in terms of the pattern recognition because they traded beyond levels, that actually meant that the pattern was not valid anymore.

So that's an example of that commonwealth Bank was one of those examples. And yet now, when we look at the sector chart, we can sort of make sense of the big picture and we know that if the big picture is influenced by commonwealth bank and commonwealth Bank has a significant waiting in the overall sector, then sometimes it's easier to take out some of the volatility and changes in commonwealth bank and look at the broader market or broader sector to see what's more likely to happen because generally if the banks are going up, commonwealth Bank will be driving it, other banks will be driving it, the big banks will be pushing forward. So what we're looking at at the moment is where is the market headed or where are the financial stocks or big banks headed? Now, you will have heard Dale's market report, We talk about the fact that we think the market is bullish more medium to longer term at the moment. The financial sector is definitely bullish medium to longer term at the moment. Now, the current risk, I guess for the banking sector, is this short term in action that we're seeing in the price movement of the stocks in that space?

Because in the short term we could see further downside occur on these stocks. The reason is because they're all at major resistance levels. Now, they've gone back to levels, they were pre covid and the markets assessing that and deciding is there enough in it. Can we see that there's growth there? That's well above and beyond what we've already factored in. And remember the market factors in to the share price. The growth 6 to 12 months in advance. Generally, we're looking at the stock market now and the financial sector now and seeing that the short term resistance just overhead. So the sector has been trading At a level, which is a problem, it's below the 7000 point mark. So it's been trading at 6600 points last week's close was around that level. It doesn't have to rise much to get to the next level. So the next level of resistance we're going, we're likely to see is somewhere near the old time high, which was the GFC high. So when the GFC hit, the financial sector Reversed at around about 7556 points, or 57 points and fell quite significantly.

So, if you can imagine this Training at 7557 points To then be trading at 2,525 points in the GFC when it made that low in March 2009. So, you're talking about a third of the value was wiped off the 2/3 of the value, sorry, was wiped off that sector. Now, going forward from there, if we're looking at what's likely to happen in future, we can use that information to tell us what could be the potential upside for this sector down the track. Now, that may not make a great deal of sense to you until you actually see these things unfold. The important thing is to think about is the sector unfolding in a random way, which I'm indicating to you that it won't do that. It will be very, very organized in terms of the way that this sector will unfold from here because after it hit the low In the GFC, the March 2009.

Hello. And remember, it was really important to see that it actually fell by a certain amount. It recovered, 50% of what it lost In around the 1st 6 or seven months. So again, that's an important bit of information to observe how the market recovered and eventually in, In around 2000 And 15, it traded almost up to the all time high that it achieved in the GFC. Now, this is where the banks were doing extremely well at the time. And all of that information came out about the anti money laundering. There was the Royal Commission, which I mentioned before and that really threw the banks into a spin. So the banks literally spent from 2015 All the way into the COVID low in 2020. That's five years in a decline. This is the financial sector pulling back that amount influenced significantly by those banks Remember, again, it took about five or 6 years for the sector to rise into that high.

This is no coincidence in terms of the timing of things happening, because it's all relational. And then from there we're seeing from the Covid low. So far, The market's been rising since since March 2020. In my opinion, not a coincidence that the low happened in March, when the low in the GFC happened in March 2009. Okay, we're getting some picture here of what is really interesting about the stock market and how it's not completely random. Okay, so when you start to see this, um you really, you'll be in denial at first, but that's and it's not a river in Egypt. And I know my sense of humor is really poor, but it's not it's not funny, my husband tells me, but look, I think it's pretty good actually. So let's have a look here. When we go to the right hand side of the chart, we can see that there are some really strong resistance levels overhead. Now, this is where like you stand up, you bump your head, the stock market's going to bump its head at some point and pull back its where the market decides that everything's been factored in or everybody who was going to buy has already bought and that's it.

And therefore the stock market turns and the short sellers take over once there, there's a little bit of traction involved and the market or the stock gets sold down significantly. We haven't seen any of that unfolding. In fact, while a stock or market is bullish, don't try to talk it down. I've been speaking to a lot of people, a lot of negative thinking about the stock market. The market might only go down for a few months, a couple of months, maybe 12 months, three months. It could be six months. You know, it's not diabolical in terms of what was going to happen on the market, it could keep going up for the next few months. So when the markets rising, don't talk yourself into thinking it's going down until it actually confirms it's going down. So there are ways to do that. And now trendlines dale shown you in his book is one way to give you an indication of when the market is turning and you can use trend lines on a weekly chart. This is what we teach our students in the diploma course and the short course, we also teach how you can use rules on a monthly child as well.

So it's really important to be able to apply some of the techniques to your monthly charts. This is basically where you get a bird's eye view or a window into what's going to happen from a big picture sense how anyone cannot get excited about having this opportunity to see these things. I don't know, and maybe it's the disbelief for those doubting tom's thomas is in your head that are getting in there and trying to convince you that it's not true, but I can tell you that I can see it. It is. And looking at the way the financial sector is unfolding, It looks really bullish. And I can see there's a really important level at about 8200 points Up to about 9000 points. So I think this is where the financial sector is headed in the short term, medium term, that we're likely to see this sector continue on. There may be a short term pullback in financial stocks. It may go up a little bit more before we see that pull back. What's really interesting to me at the moment is how it's come back in, This occurred in july, it came back and made a low and you wouldn't believe right where previous highs have actually occurred.

So back all the way in 2006, there was a high there that occurred around the same level and you might think, well, that's just one, why is that important? But then the low that occurred in August 2007 occurred at the same level or pretty close to it, which is really interesting. Now, I remember that there was a period of time there where the Fed came out and decided that they were going to change their stance on, um, Their policies, changed their policies. And so the market basically went sideways and this was in 2014. Now, we can see when we're looking at 2014, the sideways moving the financial stocks and that occurs right around that same level, which is quite amazing, isn't it? But that's not all because when the sector actually fell away In 2015, the first four or five months of the decline that happened, the actually slowed down and went sideways for a few months.

People were coming back in thinking that the market was going to turn bullish again, it was going to start to rise again, but this was one of those false rallies before the final flush out and guess where it happened, right at that same resistance level. Okay, so it hit its head again, just like we talked about before, Around that 6200 or 6250 points to be a bit more precise. And that's a line that in history has proven to be important for this sector. But what I said at the start of this point, what's really interesting is how it actually came down, bounced off that level in july and started to move up again. So this level is going to be really important in determining whether the sector is actually going to continue to rise in the short term or not. So we just need to keep watching the right hand side of the chart and let the chart confirm for us where the market or where the financial sector is going, don't try to second guess it because the market and the stocks in the sector continue to give you clues on the chart that tell you these are levels you need to watch because if the stock or the sector of the market goes below those, suddenly the risk increases of a further decline and look even if we have a decline on the sector, which I'm hoping that we do so that we actually get that really nice sell off before the next rise because then the rise is more likely to be sustainable.

Whereas we could have three months up and then we get a bit more of a stronger pull back after that point. Now, if the market find support now and keeps going, there's still a chance it could rise towards that 8200 point mark from here, But it may not be as strong and may not go all the way to the 9000 point mark. So again, you've got to have different views, You can't be fixed in your thinking when you're looking at the stock market and thinking about how it might unfold because there are always there's always more than one scenario that could unfold. But the chart will keep telling you as it goes along and that there's more data on the right hand side of the chart? It will tell you which theory is actually unfolding? You just have to watch it and read the bars to understand that. So beyond that, do I see any further upside for the, for this sector and for the market? Absolutely. Because there is a really strong level at the 10,000 point mark, the mind boggles, doesn't it? You know, can we get from 7000 or 6600 points where we were last Friday to around 10,000?

And the answer is yes, absolutely. We can. The question is, in what time frame? And when do we expect that to occur? Now? That's what I'm going to share with you next time in my podcast. So I hope you've enjoyed the discussion today. I look forward to chatting with you again soon. I'm Janine cox, senior analyst at wealth. Within bye for now. Thanks for listening to this podcast is brought to you by wealth within a global leader in stock market education for more information on our courses or to listen to more talking. Well, podcast. Head over to wealth within dot com dot au and click on the talking while podcast under the learning center. Mm

Should you Invest in the Financial Sector? P1
Should you Invest in the Financial Sector? P1
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