Technology and Health Care showing strength, risk on?

The All Ordinaries index was up 1.8% during the week ending 18 January 2019. This was an impressive move bringing total gains since the December 24 low to 6.9% and taking the index back up to within 3% of the 200 DMA, a significant level from an overall trend perspective.

As always it’s not the headline number that interests us but the numbers behind this number that gives us a better understanding of what’s driving the market at the more granular level of sectors and companies.

The standout sectors for the week were Staples and Technology, with the stocks comprising each sector rallying an average of 3.3% and 3.2% respectively. These were followed closely by Financials, Consumer Discretionary and Industrials, which added 2.5% each for the week. Utilities and Energy were the only sectors whose average stock lost value during the week. Materials, Health Care and Communications stocks also gained an average of 1.7%, 1.6% and 1.3% respectively, while Real Estate stocks were largely flat for the week.

Energy stocks have lead the rally so far this year, so it was not altogether unsurprising to see them pausing this week. More interesting to us was the fact that Technology stocks were able to continue making gains alongside Healthcare.

Healthcare was lead by the Biotechnology names such as Clinuvel and CSL as well as the Healthcare Equipment and Suppliers leaders Resmed, Cochlear, Fisher and Paykel Healthcare and Nanosonics.  

Technology leading the way

Former leaders in the Technology sector are again beginning to attract attention, many of whom suffered heavy losses in October through December last year. This rotation back into these traditionally expensive technology names might be just a FOMO rally following the first sign that the panic selling experienced in December is over or it could mark a sign of real strength underlying the market that would be needed to propel it higher.  

The so called WAAAX names including Wisetech, Altium, Appen, Afterpay and Xero, with the exception of Xero have all performed strongly this week and indeed since the December lows. Some of the other notable Technology leaders suchs as Bravura, Technology One and NEXTDC are also benefiting from the rotation.  

Wisetech (WTC)

Up 28% from the December 24 low. Now at the top of its recent trading range but still more than 20% below its highs.

Altium (ALU)

Very similar looking chart formation to Wisetech. Up more than 20% from the December 24 low, and now sitting at the top of its recent trading range but again, still more than 20% of its high.

Afterpay (APT)

Made its low for this range earlier than the rest of the group on the back of stock specific regulatory news. Up over 50% since then and has now broken out of its recent trading range, with a strong sign of strength rally following release of their quarterly update showing the progress being made for the business in the US. However still more than 30% below its August highs.

Appen (APX)

Has been the strongest of the group, showing significant strength even as the market faltered. Now within striking distance of its all time high.

Xero (XRO)

Xero is the heavyweight of the local Technology sector. The stock is still 20% below its highs and struggling to reclaim and hold above it 200 DMA. Seems to be showing signs of accumulation in recent weeks with heavy volume up days and a tightening price structure.

NEXTDC (NXT)

Has managed to hold 3 tests of the bottom of the range around the $5.80 mark established in September. Now trading at the very top of its range, without any clear signs of timing or direction. Similar to the others in the group, the stock has been very strong since December 24 and is now at the top of the trading range.

Bravura (BVS)

Bravura has been remarkably strong and now looks to be pulling back into the top of the mini trading range formed during November – January. Volumes have been low during this most recent pullback which bodes well for an eventual test of its all time high.

Technology One (TNE)

Another one that has been remarkably strong, making all time highs while the market was floundering in November. Definitely making a case for itself to join the leaders list alongside the more celebrated WAAAX names.

A point on value

Xero, Wisetech, Afterpay and NEXTDC are all in the top 10% of most expensive stocks in XJO as measured by a composite of value measures, while Altium and Appen are in the top 20% of most expensive stocks and Bravura and Technology One are in the top 30% of most expensive stocks. You get the picture. These are all among the most expensive stocks in the index.

Risk on, but for how long?

Make no mistake we are now in the midst of a risk on rally that is seeing rotation back into cyclical and growth names. It still remains to be seen whether this rally will have the resilience and support to result in a proper uptrend or whether stocks will need to spend more time consolidating. Indeed it’s possible that this is just a bear market rally inciting  FOMO among its participants and providing fodder for further large scale distribution. Only time will tell.