Has the Bubble Burst on Tech Stocks?

Following the COVID-19 meltdown on the Australian stock market, a new generation of investors who were stuck at home, hit the market in 2020 attempting to create some cashflow. Primarily, their focus has been on technology stocks, so much so, that over the past few months talk around these stocks has accelerated at lightning speed. In order to understand the hype around tech stocks, we need to take a closer look at the technology sector in Australia and the US.

Tech stocks likely to leave investors exposed

In Australia, the sector is quite small in relation to our overall market given there is not one technology company listed in the top 50 on the All Ordinaries Index. While in the US, technology stocks make up a significant share of the S&P 500 given that the top six companies are all technology and they make up around 17 per cent of the total market capitalisation of the Index.

To understand why Australians are so excited about technology stocks, however, we need to look at the NASDAQ, which is heavily weighted to technology companies. Since 1971, the NASDAQ has grown at a rate 0.65 points per day to the end of August in comparison the Dow Jones, which over the same period grew two times faster at a rate of 1.61 points per day. That said, in the 1970’s technology was just getting started, so we need to look at more recent times to really gauge what is occurring.

Prior to the GFC, the NASDAQ rose from October 2002 to the GFC high in November 2007 at a rate of 0.97 points per day. In the first 12 months following the GFC crash, it rose from March 2009 to April 2010 at a rate of 3.06 points per day.

Now let’s compare that to what occurred recently in the run up prior to the COVID-19 crash. Between December 2018 and February 2020, the NASDAQ has been rising at 8.69 points per day, while over the past five months, from the low in March 2020 to the end of August, it has been rising at 33.09 points per day or 281 per cent faster. Why has this occurred?

The faster a stock or market is moving, the more interest it generates from investors who jump in attempting to cash in for fear of missing out. The concern with this is that investors are assuming that technology stocks in Australia will perform like their US counterparts. However, this is not the case given that the Technology Sector has risen less than 1 point per day over the past couple of years, which signifies that there is not a lot of support for these companies from the big end of town.

Unfortunately, there is an expectation from investors that this stellar rise in the US will continue forever but the steepest rise on a market or stock is just before it starts to fall away, which is why we are likely to see the tech bubble burst in the not too distant future. Given this, investors would be wise to be very careful when it comes to investing in tech stocks right now.

What were the best and worst performing sectors last week?

Industrials ended the week up 1.75 per cent followed by Utilities, which was up just over 1 per cent, while Consumer Discretionary and Communication Services were down 1.54 per cent and 1.61 per cent respectively. The worst performing sectors included Information Technology down 7.24 per cent followed by Consumer Staples down 4.02 per cent and Financials, which was down 3.34 per cent for the week.

Looking at the ASX top 100 stocks, the best performers last week included Lend Lease Group up 9.12 percent followed by AMP, which was up 8.31 per cent. Sydney Airport and Transurban were also both up over 6 per cent.

The worst performers included IOOF Holdings, which fell 22.46 per cent last week after an institutional placement of over $700 million was finalised at $3.50 per share. IOOF will now embark on a share purchase plan to raise a further $50 million. For now, I would watch IOOF rather than buy on the pull back, as the stock may do well next year although it needs to be more convincing. Medibank Private was also down 9.61 per cent while QBE was down 7.97 per cent.

What's next for the Australian share market?

This week the All Ordinaries Index fell earlier in the week before rising in the later half, which is the opposite of what the market has been doing over the past few months. This pattern of spending roughly half the time rising and the other half falling means that the Australian market continues to go nowhere.

When the market is in a state of heightened uncertainty, it is very hard to pick when a top or bottom will occur. That said, I still believe the market will pick a direction very soon, which as I said last week is likely to be down. In fact, the pullback may have already started given that last Friday the All Ordinaries Index fell 3.05 per cent to close the week down 2.43 per cent. For now, I recommend investors be cautious in the event the market continues to fall away.

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 award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.