Keep an eye on the door

Risks to the long rise of the stock mar­ket are grow­ing lo­cally and in­ter­na­tion­ally

Financial Mail - Investors Monthly - - Analysis: Technical -

he up­trend that has marked the JSE for the past six years re­mains in­tact, but as the bull mar­ket ap­proaches its sev­enth an­niver­sary, one has to re­alise that it is fairly ma­ture.

Bull mar­kets sel­dom last this long and the risks are grad­u­ally stack­ing up. These in­clude the start of a US rate hik­ing cy­cle and a de­te­ri­o­ra­tion in the rate of growth in China.

His­tor­i­cally there has been a mar­ket wob­ble when the first US rate hike is an­nounced. This is usu­ally a fairly short-term, knee-jerk re­ac­tion, how­ever. The start of the next up­ward cy­cle is ex­pected to be later this year and the pace of rate in­creases is ex­pected to be very slow. This has been well doc­u­mented and the US Fed­eral Open Mar­ket Com­mit­tee has pre­pared the mar­ket well for the start of a grad­ual nor­mal­i­sa­tion of in­ter­est rates. So the like­li­hood of a sharp re­ac­tion to the first rate hike is fairly small.

A big­ger is­sue for global mar­kets, in­clud­ing the JSE, is the in­creas­ing con­cern that China’s rate of growth is slow­ing.

Much weight has been placed on the shoul­ders of the Chi­nese econ­omy to be a big driver of global eco­nomic growth. China has not let the world down yet, but re­cently the data has been show­ing signs of strain. A sud­den burst­ing of the Chi­nese stock mar­ket bub­ble in June has grabbed the head­lines and made global in­vestors be­gin to ques­tion the un­der­ly­ing strength of the world’s sec­ond-largest econ­omy.

Even though these risks are

Tknown in the mar­ket, the JSE Top 40 in­dex is main­tain­ing the up­ward trend that joins all the lows of the bull mar­ket that be­gan in early 2009 fol­low­ing the fi­nan­cial cri­sis.

That pri­mary up­trend line cur­rently comes into play at 45 800. As long as the Top 40 in­dex holds above that up­trend, one has to re­spect the bull mar­ket and re­spect the up­ward trend. The cliché goes that the trend is your friend.

(Many will also say that the trend is your friend un­til the bend at the end.)

As things stand, that up­ward trend re­mains in­tact, but if we were to see the Top 40 break­ing con­vinc­ingly be­low the 45 800 level, fol­lowed by weak­ness be­low 45 000, that would mark a break­ing of the up­trend of the past six years. It could re­sult in some sharp selling pres­sure by trend fol­low­ers who see that the trend has bro­ken.

That has not hap­pened yet, so there is no need to panic. But one does need to be aware of the risks men­tioned above and dance close to the door at the bull mar­ket party.

Mar­ket breadth has been de­te­ri­o­rat­ing glob­ally and the JSE is no dif­fer­ent.

Mar­ket breadth refers to the ex­tent of par­tic­i­pa­tion in a ris­ing mar­ket. A healthy mar­ket should see a broad spread of stocks ris­ing and con­tribut­ing to the over­all strength of mar­ket. A mar­ket that is driven higher by only a small num­ber of key stocks usu­ally runs the risk of turn­ing lower.

Over the past year, fewer and fewer JSE stocks have made new highs to con­tinue driv­ing the over­all mar­ket higher.

Re­sources stocks have been dis­mal per­form­ers in the past year, and even a num­ber of prior lead­ers in the fi­nan­cial and in­dus­trial sec­tors have seen the up­ward mo­men­tum in their share prices wan­ing.

The big­gest con­trib­u­tors to the strength of the JSE have been Naspers, SABMiller and Bri­tish Amer­i­can To­bacco. These stocks hold a heavy weight­ing on the JSE Top 40 in­dex and there­fore their strength has held the over­all mar­ket firm.

But scratch a lit­tle be­low the sur­face and you’ll see that the health of the cur­rent bull mar­ket is not as rosy as the chart of the Top 40 would sug­gest.

This is another risk to be aware of and it does sug­gest that pre­par­ing one­self for the pos­si­bil­ity of a mar­ket cor­rec­tion might not be a bad idea.

His­tor­i­cally there has been a mar­ket wob­ble when the first US rate hike is an­nounced. This is usu­ally a fairly short-term, knee-jerk re­ac­tion, how­ever

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