IT sector looks promising but is another fall on the way?

Following the COVID meltdown in March 2020, Information Technology became the hottest sector in the Australian stock market rising 195% into February 2021.

Yet over the following year and into June of this year, the story has been quite different as this sector is down 34% since February 2021.

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 January 1 to June 17 this year it was down 41% and nearly 50% 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 more than 30%. 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% 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% following each rise with the exception of one, which fell around 10%.

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 are the best and worst performing sectors this week

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

The best performers in the S&P/ASX top 100 stocks include Oz Minerals up more than 35% after a takeover bid by BHP was announced earlier this week. Pilbara Minerals is also up more than 8% and Block is up more than 6%. The worst performing stocks include Computershare down more than 9% followed by Ansell down more than 4% and the A2 Milk Company down more than 3%.

What's next for the Australian stock market

While the All Ordinaries Index has been rising, the current rise 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% 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 seven weeks into the current rise with the market not only closing higher in five of those weeks but showing 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 today, while next 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.

Get stories like this in our newsletters.