Is it Time to Buy Technology Stocks?

Following the COVID meltdown in March 2020, Information Technology became the hottest sector in the Australian stock market rising 195 per cent into February 2021. Yet over the following year and into June of this year, the story has been quite different given this sector is currently down 34 per cent since February 2021.

Technology sector has risen over 30 per cent

This year has been especially challenging for retail traders who have been attempting to chase quick returns from the Information Technology sector given that from 1 January to 17 June this year it was down 41 per cent and nearly 50 per cent from its all-time high in August 2021. But the news is not all bad given that in the past month this sector has risen over 30 per cent. That said, before you rush out and jump into the current rise, we need to put this into context.

Over the past 16 months, the Information Technology sector has risen 20 to 30 per cent five times, which were all followed by significant falls. Excluding the recent rise, in four of the previous rises the sector had fallen by 20 to 30 per cent following each rise with the exception of one, which fell around 10 per cent. So, while the current rise looks promising, investors looking to jump in might be wise to think before they leap. The old saying that amateurs buy at the top and sell at the bottom may be quite appropriate right now.

While I am getting very interested in this sector, I am not convinced as yet that the current move is long term bullish. Regardless of the direction this sector takes in the future, investors will need to be very selective with the stocks they choose to purchase. This is because five of the stocks are heavily weighted in this sector and while some have been rising strongly, like Xero, there are no signs right now that Xero or the sector will be longer term bullish. In the shorter term, we will see the sector fall for a few weeks to test the low in June.

What were the best and worst performing sectors last week?

The best performing sectors include Energy up 4.58 per cent followed by Materials up 1.64 per cent and Communication Services up 0.54 per cent. The worst performing sectors included Information Technology down 2.93 per cent followed by Healthcare down 2.02 per cent and Industrials down 0.88 per cent

The best performers in the S&P/ASX top 100 stocks included Oz Minerals up 35.84 per cent after a takeover bid by BHP was announced last week. This was followed by Pilbara Minerals up 8.71 per cent and REA Group up 7.48 per cent. The worst performing stocks included Computershare down 8.25 per cent followed by Ansell down 7.35 per cent and Sonic Healthcare down 5.65 per cent.

What's next for the Australian stock market?

While the All Ordinaries Index has been rising for eight weeks, over the past few weeks it has slowed, which means we may see it fall in the short term. To put this into context, over the past 15 trading days the All Ordinaries Index has been moving up at around 50 per cent of the rate it was in June and July. While this is not alarming, it does suggest that there is more caution in the market and that buying has slowed.

We are now eight weeks into the current rise and the market has not only closed higher in six of those eight weeks but it has also demonstrated that it is bullish. While this is good news, we know the market doesn’t just rise and that we will periodically see it fall away for short periods. The more the market rises now, the higher the probability it will fall away for a short period of time, which is likely to be for one or two weeks in order to confirm it will move up towards the end of the year.

We are well into reporting season with ResMed and IAG reporting last Friday, while this week we will hear from JB Hi-Fi, BHP, Brambles, CSL, Santos, ASX and Cochlear among others. So far, there have been mixed results, so we need to expect the unexpected over the next few weeks and for the market to show some volatility for a short period of time.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.