Market wrap: US v Australian tech sector


Herd mentality is alive and well in our markets given that the US tech sector is running rampant, as it is up more than 38% this year.

This is also evident in the Australian tech sector, as it is up around 28%. When we compare this to the broader market, the rise in the Australian tech sector is three times better than the next best sector with Communication Services up around 9%.

Blindly following the trends in the US market and applying this to the Australian market is concerning for two reasons.

Apple bonds

The first is that the US technology sector has the biggest stocks in the world that benefit from worldwide exposure to their products and services like Apple, Microsoft, Nvidia and the list goes on. The same cannot be said for Australian tech stocks who are dwarfed in size by their US counterparts.

The second concern is that the US technology sector accounts for around 28% of the S&P500 making it the largest sector in the US.

The story is vastly different in Australia, as our tech sector makes up less than 4% of the All Ordinaries Index, which means it is the ninth largest sector, and only marginally above Energy and Utilities.

The biggest sectors in the Australian market include Financials with a weighting of more than 25%, while Materials is around 24%. So why does this matter?

The S&P 500 has risen more than 13% this year, while the Dow Jones is up just under 3%. The Australian market, on the other hand, is up just more than 1%. This suggests that the rise in the US market is being driven by a few tech stocks rather than the broader market, which is concerning.

I say this because Materials and Financials are not really driving the Australian market at present, which means the rise is being driven by the broader market making the move more sustainable, unlike the US market. As technology stocks have become increasingly overheated in the US, it is possible the bubble will burst sometime in the future.

This presents considerable risk for those Australian's suffering from FOMO and following the herd mentality, particularly if they're not on the ball and watching their stocks closely.

While I'm not suggesting the US tech sector will crash in the short term, what we know is that the more bullish the rise, the more people will buy into tech stocks until eventually the crash occurs. Based on historical trends, a crash in the US tech sector will see the same occur in Australia, and while this will have a significant impact on the S&P500, the same cannot be said for the Australian market.

The best and worst performing sectors this week

The best performing sectors include Information Technology up 3.25% followed by Financials up 2.25% and Materials up 1.99%. The worst performing sectors include Healthcare down 5.78% followed by Energy down 0.71% and Utilities down 0.66%.

The best performing stocks in the ASX top 100 include Fortescue Metals up 8.13% followed by Insurance Australia Group up 7.05% and Macquarie Group up 5.87%. The worst performing stocks include CSL down 8.45% followed by Domino's Pizza down 7.87% and Lynas Rare Earths down 6.27%.

What's next for the Australian stock market

The All Ordinaries Index is once again defying logic, as it has risen this week just under 1% although it is still technically falling. The down move has now lasted eight weeks and while our market may close higher than it opened this week, this would not be enough to signify an end to the current bearishness.

Currently the All Ordinaries Index is still trading above the lows of the past few weeks, which is a good sign, and it looks as though it will make its highest weekly close in a month this week. While we still need to expect further falls, if Friday closes high and there is a continuation of the upward momentum into next week, the probability of further falls decreases and the likelihood that a bull market will unfold until the end of July increases.

If the market falls away into next week, we can expect further falls to below 7000 points, which is why I continue to reiterate, at least for now, that it's wise to sit on your hands, be patient and protect your capital, as the time to profit is not too far away.

Get stories like this in our newsletters.

Related Stories

Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.