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Market wrap: Financials and Materials are falling - is it time to exit?

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The Financial and Materials sectors account for around half of Australia's market capitalisation; therefore, we can expect these sectors to influence the direction of the market when both of them are rising or falling.

Given that both sectors were down this week with Westpac and ANZ from the Financial sector falling heavily and RIO, S32 and BHP, from the Materials sector also falling away, it is not surprising to see the market is down. So what caused the sectors to fall away?

NAB, Westpac, ANZ and Macquarie all traded ex-dividend this week, so it's not out of the ordinary to see them pull back.

Remember, when stocks pay dividends, the share price will often fall equivalent to the amount of the dividend. The half-year dividend yield for NAB, Westpac and ANZ was around 3% while Macquarie's dividend yield was around 2%.

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Looking at the Materials sector, the price of iron ore has fallen on weak figures out of China for their iron ore imports. With lower quality iron ore, FMG has fallen the hardest, which was down more than 10% at one stage during the week.

RIO was also down more than 4%, while BHP was down around 3% for the week. That said, all have started to bounce back to finish the week in a much better position.

So, should we be worried about the Financial and Materials sectors? Despite the short term weakness in each sector right now, over the medium to longer term both sectors are looking good, with each likely to provide some great opportunities in 2020.

So what are the top and bottom performing sectors in Australia this week?

Information Technology is the top performer again up more than 4%, while Healthcare continues to perform well, up around 3% with Consumer Staples not far behind. While Materials was one of the best sectors last week, it is near the bottom this week together with Financials, which were both down more than 1% so far for the week. Utilities and Energy are also in the red but only slightly.

Looking at the top 100 stocks, CSL is once again a top performer up more than 3%, while Pendal Group has continued its rise, up 3% so far this week and more than 13% for the month. Bluescope, Coca-Cola, Xero, Janus Henderson and Woolworths have also done well, as they all are up more than 2.5% for the week.

The worst performers so far have been QBE down around 3%, while NAB and Bank of Queensland were down around 2 percent. These were followed by Aristocrat, Medibank, Challenger, Worley, S32 and Suncorp, all currently down around 1.5% for the week.

What to expect

I have to say that I feel like a broken record given that, once again, the market has displayed indecision this week, as it is currently trading around similar levels to where it was two months ago.

To give you some idea of what has unfolded, over the last 30 days the market has closed higher on 18 of these days and lower on 12 days. If the market were bullish you would normally see it close higher on approximately 24 days during this period. So while we know it is not bullish, it is also not bearish given that price is not falling away but instead holding at current levels.

As I have said in the past, it is important for investors to be patient right now as the market will decide on a direction very soon. Remember, it's important to focus on the medium to longer term view rather than the short term.

For the market to confirm it is bullish in the medium term, we need to see it rise above 6900 points. If this occurs, I believe it will provide the leverage for the market to trade through the previous all-time high of 6958 points that occurred in July of this year.

That said, if the market does fall, I am very confident it will be short and sharp, and nothing to be concerned about as the signs are strong that the market will trade higher over the coming months into 2020.

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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.
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