Best to tread wa­ter for a bit

It’s likely the JSE will spend some time con­sol­i­dat­ing, which would be healthy

Financial Mail - Investors Monthly - - Analysis -

The JSE has been on a tear since the sec­ond week of Jan­uary 2015. The in­dex of the largest 40 shares on the ex­change ral­lied 13% in the six weeks from mid-Jan­uary to late Fe­bru­ary. This hap­pened in a straight line with no con­sol­i­da­tion or cor­rec­tion along the way.

The in­dex has met re­sis­tance at 47 200, how­ever, and spent the bet­ter part of two weeks un­suc­cess­fully try­ing to breach that level. That 47 200 level is sig­nif­i­cant as it was the high that was set in July 2014.

The fail­ure and re­ver­sal down from that level is likely to mean that the JSE will now spend a while con­sol­i­dat­ing, work­ing off the over­bought con­di­tion that has been cre­ated by six weeks of ag­gres­sive strength.

The sto­chas­tic os­cil­la­tor which mea­sures mar­ket mo­men­tum has been in over­bought ter­ri­tory through the whole of Fe­bru­ary and is now start­ing to turn lower as the mar­ket has be­gun to con­sol­i­date. The first mean­ing­ful level of sup­port comes in at 45 200. That level was the peak reached in Novem­ber last year and it of­fers lat­eral sup­port on a pull­back. The 50-day mov­ing av­er­age and 200-day mov­ing av­er­age both come in at about the same level. Should the mar­ket fall be­low that sup­port level, then the next mean­ing­ful sup­port comes in at 43 500, which is where the up­trend from the 2009 low comes into play. Be­low that level, there is fur­ther sup­port at 41 700, which is formed by the lat­eral low points that marked mar­ket bot­toms in March, Oc­to­ber and De­cem­ber 2014. It would need to be a firm cor­rec­tion that would see the mar­ket trade as low as the bot­tom of the one-year range at 41 700, but one can’t rule it out.

A pe­riod of con­sol­i­da­tion from cur­rent lev­els would be healthy for the mar­ket and would likely re­set the mar­ket for an­other at­tempt at the 47 200 highs later in the year. We will need to mon­i­tor the sup­port lev­els men­tioned here for pos­si­ble buy­ing op­por­tu­ni­ties in the months ahead. ince the cur­rent bull mar­ket be­gan in 2009, the do­mes­tic sec­tors of the JSE have been out­per­form­ing the re­sources sec­tor at a healthy pace. That trend is best il­lus­trated by look­ing at the chart of the JSE fi­nan­cial and industrial 30 in­dex (Findi30) rel­a­tive to the JSE re­sources 10 in­dex (Resi10). The way this chart is cal­cu­lated is quite sim­ple. It is sim­ply the his­tor­i­cal closing val­ues of the Findi30 di­vided by the cor­re­spond­ing his­tor­i­cal val­ues of the Resi10. Those find­ings are then plot­ted on a graph. An up­ward slop­ing chart as we see here is in­dica­tive of the Findi30 out­per­form­ing the Resi10. From a tech­ni­cal per­spec­tive, the rel­a­tive chart has been show­ing out­per­for­mance by Findi30 over Resi10 since a tech­ni­cal break­out that oc­curred in Au­gust last year. Since the start of 2015 the rel­a­tive chart has be­gun to il­lus­trate some volatil­ity. This may in­di­cate that the out­per­for­mance of Findi30 over Resi10 is quite stretched at the mo­ment and a pe­riod of fur­ther con­sol­i­da­tion on the rel­a­tive chart is likely.

There is no short­age of an­a­lysts who hold the view that the Findi30 sec­tor of the mar­ket is ex­pen­sive rel­a­tive to the re­sources sec­tor. But that does not mean we will see re­sources start to out­per­form any time soon. Prob­lems re­main for the re­sources com­pa­nies and the greater like­li­hood is that re­sources re­main a value trap and we may see a pe­riod of on­go­ing volatil­ity in the rel­a­tive chart be­tween Findi30 and Resi10 in com­ing months. It’s a brave per­son who bets against the mo­men­tum of this chart.

The higher prob­a­bil­ity sce­nario is that the rel­a­tive strength chart will con­tinue to con­sol­i­date for a while be­fore on­go­ing out­per­for­mance by Findi30 sets in again.

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