Inside the market

Materials and Financials pullback, IT and Healthcare continue advance

The All Ordinaries index was down 0.71% for the week ending 3 May 2019. The index ended the week 5.0% above its 200 DMA but backed away from the new highs established during the previous week.

The index managed to hold above its new support level of 6425; however, it is critical for it to continue to do so. If the index is unable to maintain support, this portends a retracement to test prior support levels at 6200.

Of the 491 stocks currently comprising the index (and for which we collect data), 310 of these (63%) ended the week above their respective 100 DMAs. Two hundred and forty stocks were up for the week, while 251 ended the week flat or down. Two hundred and forty-six shares finished the week within 20% of their 52-week highs, with 81 of those within 5% of 52-week highs.

The hardest hit sector during the week was Real Estate, with the ASX 200 A-REIT index falling 4.2%. The losses were most pronounced in the large capitalisation names comprising the index. The index itself fell below support, which could be as a result of the general rotation taking place into higher risk positions, or it could be the first sign of international investors retreating, especially with the Aussie Dollar testing support at 70c.

Financials and Materials are also retracing back to prior resistance levels that should now act as support. It’s crucial that both indices can hold their respective support levels. The banks and big miners are essential contributors to the Australian stock market and with the banks facing pressure from a declining housing market and the miners starting to correct the overall index is sure to reflect any weakness in these sectors.   

The Information Technology sector continues to carry the index, with stocks comprising the sector rising 2.7% on average during the week and the ASX 200 Information Technology Sector Index increasing 3%.

The sector is in an uptrend and a cursory glance at the leading names including Afterpay (APT), Xero (XRO), Wisetech (WTC), Altium (ALU), Appen (APX), Technology One (TNE), Iress (IRE) and Bravura (BVS) shows very clearly what this uptrend is being driven by.

The Healthcare sector has also broken forcefully above resistance driven in part by the more significant capitalisation names such as Resmed (RMD) and Cochlear (COH), but backed up by powerful moves at the smaller end of the market by companies such as Polynova (PNV), Nanosonics (NAN) and Pro Medicus (PME).

By Danny Sandler

Founder of Ocean Asset Management.