Financial Mail - Investors Monthly
TALKING TECHNICALS
The banking index has been consolidating and the trend is upward
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.