Sharemarket bulls battle bears as market volatility rise

In an increasingly volatile market, some stocks now look ready to rebound while others are fundamentally challenged.

The fundamentals which pushed the ASX up 7 per cent in the first seven weeks of the year have not changed. Picture: Hollie Adams/The Australian

Fear beat greed on Tuesday’s sharemarket ... but only just. A dramatic drop of 3.5 per cent overnight on Wall Street was not fully matched locally, thanks largely to bargain hunters keeping one eye on US futures which stayed positive throughout the day.

In the end the ASX was down another 1.6 per cent, on top of the 2.25 per cent we endured on Monday. The issue now is whether we have a rolling correction or a short sharp shock that is already fizzling out?

Fired up on record low interest rates, the bulls — including US President Donald Trump, who suggested US stocks “look good to me” — are battling bears who say the market has run too far, too fast.

Either way we are now looking at an increasingly volatile sharemarket. The volatility indicator, the VIX, has now stirred and is unlikely to calm in the weeks ahead.

Stockbroker Ord Minnet offered a note typical of the market’s split view when it told investors this week’s loss of confidence among traders means that a 5-10 per cent correction cannot be ruled out but a bear market is unlikely.

Certainly, the fundamentals which pushed the ASX up 7 per cent in the first seven weeks of the year have not changed, but sentiment has adjusted to a new awareness of the coronavirus and what economic damage it may cause.

Unlike Monday’s session, where selling was almost indiscriminate, Tuesday’s trading offered some strong signals about which stocks are ready to rebound and which are now challenged.

CSL led a limited fightback, finishing the day barely changed, down 0.45 per cent at $324.00. The Melbourne-based blood products company has made strenuous efforts to distance itself from any talk of a ‘breakthrough vaccine’ on coronavirus but the demand for this stock is close to insatiable.

Pure play iron ore miner Fortescue was also regularly flashing green in a sea of red, finishing the day little changed, down 0.64 per cent to $10.93.

But it was smaller cap companies that made the most convincing recoveries, such as software provider Appen which put on 6.5 per cent to $25.40.

Similarly, Polynovo, the highly regarded skin repair technology group which was one of the strongest stocks of 2019, returned to its upward trajectory with a 5 per cent lift to $3.02. Meanwhile map technology group Nearmap gained 3 per cent to $1.87.

As small cap favourites lifted, sellers returned again to industrials with clear exposure to travel and tourism. Qantas dropped 2 per cent to $5.90 while Sydney Airport fell 1 per cent to $8.11.

Retail-to-resources conglomerate Wesfarmers was off 3.5 per cent while oil stocks were also weaker, with Woodside and Santos respectively down 2.2 per cent and 3 per cent.

Similarly, insurance stocks continued to sink as the prospect of increased payouts loom. IAG fell 1 per cent to $6.59, from $8 at the start of the year. Insurance companies are on edge as the World Health Organisation is close to declaring the coronavirus a pandemic — a move which could trigger increased payouts.

Gold stocks, which have been running on the back of a seven-year high for gold prices, had a mixed session as profit takers moved in on market leaders such as Newcrest (down 3.6 per cent) and St Barbara (down 9.7 per cent).

Stockbroker Marcus Padley told clients: “In a correction the market doesn’t care for quality, it cares about high price-to-earning ratios and risk. Growth stocks will underperform in a sell-off, possibly precipitously. Ultimately it will prove to be a wonderful opportunity, but not yet.”