Market wrap: Is the tech bubble bursting again?

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While the broader Australian stock market has been holding up well in the last year, the Australian technology sector, like its US counterpart, has technically crashed.

By mid-May, the Australian tech sector had effectively fallen back to pre-COVID levels and taken with it the hopes of many investors who had jumped into technology stocks following the COVID crash.

It is highly unusual to see any sector crash twice in the space of two years, yet the Information Technology sector fell 49% from a high in February 2020 into the COVID low of March 2020. It then rose nearly 200% over the following year into February 2021, as new investors and traders flooded the market attempting to cash in on the rise.

asx tech stocks bubble burst

It then fell away for a short period of time and after making a new all-time high in August 2021, it fell 44% into May 2022.

It is nearly 11 years since a fall of this magnitude occurred in the tech sector when it fell 42% from April 2010 into August 2011. Interestingly, three years earlier the technology sector fell 50% during the GFC from May 2007 to a low in December 2008.

So, it's evident that the tech sector is quite volatile with large swings in price, which is great if you are a trader but not so much if you are an investor holding over the longer term. That said, the technology sector has been the best performing sector in our market since the GFC crash, as it is up more than 300% since December 2008.

It's important to remember that the tech sector is one of the smallest in the All Ordinaries Index with 87% of the companies having a market capitalisation under $100 million while 70% have a market cap under $50 million.

When you compare these figures to the top five companies in this sector, who have a total market capitalisation of $60 billion, you start to understand how top heavy this index is and how speculative many of the companies are, which is why it pays to understand what you are doing if you decide to trade stocks in this sector.

The best and worst performing sectors this week

The best performing sectors include Energy up over 2% followed by Materials and Consumer Staples up more than 1%. The worst performing sectors includes Utilities down more than 4% followed by Information Technology and Financials, which are both down more than 1%.

The best performers in the S&P/ASX top 100 stocks include A2 Milk up more than 9% followed by South 32, WDS and Fortescue Metals, which are all up more than 5%. The worst performing stocks include Pilbara Minerals down more than 21% followed by Allkem down more than 18% together with a number of other lithium stocks, which have been falling heavily based on reports of declining Lithium prices in the coming year. Origin Energy is also down more than 11% while Suncorp is down more than 8%.

What's next for the Australian stock market

There is an old saying that the stock market rises in stairs and falls in elevators and for the past fifteen trading days the All Ordinaries Index has been climbing stairs. It has been rising over four to five days before falling for one or two days in what appears to be the start of a new bullish phase as it is making higher prices with each advance.

This movement upwards is much more sustainable than what we have seen in the past; so, I suspect in the not too distant future we will be able to confirm that the All Ordinaries Index is in a new bullish phase. That said, it is still too early to tell, as we need to see the market pullback to test the recent low on May 12 at 7157 points.

If the market falls next week and holds above this low and then turns to rise up again, this increases the probability that we will see a bullish market into the third quarter of 2022.

I continue to urge investors to exercise patience and caution, as the current mood in our market can change quickly. So, I recommend against trying to grab a bargain especially in the lithium and technology sectors, at least in the short term.

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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.