TALK­ING TECH­NI­CALS

The bank­ing in­dex has been con­sol­i­dat­ing and the trend is up­ward

Financial Mail - Investors Monthly - - Contents -

Bullish out­look in the bank­ing sec­tor not in ques­tion for now

The JSE bank­ing in­dex has been a solid per­former through­out the bull mar­ket that be­gan in early 2009. The in­dex gained around 280% from the 2009 low to the re­cent high. The bull trend re­mains in­tact with a pat­tern of suc­ces­sively higher lows and higher highs.

The past six months have been a pe­riod of con­sol­i­da­tion for the in­dex. As can be seen from the chart, this is not un­usual. The in­dex has en­dured lengthy con­sol­i­da­tions on a num­ber of oc­ca­sions in the bull mar­ket of the past few years. The longest of th­ese was dur­ing 2010 and 2011, when the in­dex went side­ways for al­most two years.

The cur­rent con­sol­i­da­tion that be­gan in April this year looks healthy. The pull­back in the bank­ing in­dex re­cently has been con­trolled and or­derly. It has not bro­ken any long-term trends but will soon be at a point where it is likely to test the long-term up­trend sup­port.

The long-term up­trend sup­port line that be­gan in 2009 and joins all the lows since then comes in at around 7 000. A pull­back to 7 000 on the bank­ing in­dex will rep­re­sent a re­treat of around 18% from the re­cent peak. That’s a de­cent cor­rec­tion and serves to re­set the in­dex for the next po­ten­tial leg higher.

The weekly stochas­tic os­cil­la­tor is show­ing pos­i­tive di­ver­gence. This hap­pens when the price makes a lower low but the os­cil­la­tor makes a higher low. The os­cil­la­tor is there­fore not con­firm­ing the price ac­tion. Pos­i­tive di­ver­gence im­plies that there is some buy­ing ac­tion be­gin­ning to emerge at the lower lev­els, and usu­ally pos­i­tive di­ver­gence will pre-empt a change in short-term trend.

In this case, the pos­i­tive di­ver­gence is likely hint­ing at the sup­port level at 7 000 hold­ing and for the in­dex to ul­ti­mately break be­yond the up­per re­sis­tance line that has capped gains since April.

A weekly close above 7 700 will con­firm that an­other leg to the up­side is due to get un­der way.

Those look­ing to pick a level to buy bank­ing stocks can look for the sup­port at 7 000 to hold on the in­dex it­self, and then se­lec­tively look to ac­cu­mu­late bank­ing stocks.

A con­vinc­ing break be­low 7 000 would put the bullish out­look into ques­tion, but for now one has to re­spect the trend and re­mem­ber that “the trend is your friend” un­til proven oth­er­wise.

Only a con­vinc­ing and sus­tained break be­low the 7 000 level on the bank­ing in­dex will put the bullish out­look in ques­tion.

Look­ing at the “big four” in­di­vid­ual bank­ing stocks and where they each have long-term up­trend sup­port, the fol­low­ing lev­els are rel­e­vant: FirstRand has long-term up­trend sup­port at R45, Bar­clays Africa at R150, and Ned­bank at R215 and then R200. Stan­dard Bank re­cently tested its long-term up­trend sup­port at R135 and there is fur­ther strong lat­eral sup­port at R120 that can be mon­i­tored as po­ten­tial buy­ing lev­els.

Earn­ings growth ex­pec­ta­tions for the bank­ing sec­tor for the 2016 financial year are ex­pected to be in the or­der of 10%-12%, ac­cord­ing to Reuters con­sen­sus fig­ures. For­ward div­i­dend yields for the sec­tor are be­tween 5% and 6%, which is de­cent in the cur­rent en­vi­ron­ment and should pro­vide an un­der­pin to bank­ing stocks at the lower lev­els.

With the av­er­age for­ward PE ra­tio for the bank­ing sec­tor at around 9,5 and the earn­ings and div­i­dend fore­casts as men­tioned, it seems that any fur­ther weak­ness in the bank­ing in­dex to­wards the 7 000 level will present a de­cent buy­ing op­por­tu­nity.

GARTH MACKEN­ZIE www.trader­scorner.co.za

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