Milling about for two years

JSE top 40 in­dex has not gone any­where as a whole, though sec­tors dif­fer widely

Financial Mail - Investors Monthly - - Analysis -

he JSE top 40 in­dex is trad­ing at about the same level as it was in June 2014, two years ago. The mar­ket has been range-bound be­tween 42,000 and 49,000 over the past two years. That’s a broad range but the fact is that the over­all mar­ket has ba­si­cally gone nowhere for the past two years.

The side­ways po­si­tion­ing of the 50-week mov­ing av­er­age is an in­di­ca­tion of the fact that the mar­ket has been go­ing side­ways for a lengthy pe­riod of time. It takes 50 weeks of no av­er­age price move­ment for a 50-week mov­ing av­er­age to go flat in the way that it has for the top 40.

That’s not to say that there hasn’t been plenty of move­ment in the mar­ket be­low the sur­face, how­ever. Since mid-2014 the JSE in­dus­trial in­dex has been the lead­ing per­former with a gain of 22%. The fi­nan­cial in­dex has man­aged a pal­try 4% gain over the same two-year pe­riod. How­ever, it is the re­sources in­dex that has re­ally let the mar­ket down with a loss of 46% since the mid­dle of June 2014.

With such vastly dif­fer­ent sec­tor per­for­mances, it is not easy to throw a blan­ket over the whole mar­ket and say that it is in a bull mar­ket or a bear mar­ket.

The broad top 40 in­dex is in a side­ways range, but the sec­tors within the over­all mar­ket have ex­hib­ited both bull mar­ket and bear mar­ket char­ac­ter­is­tics. If your port­fo­lio has been aligned with the in­dus­trial in­dex then you would have ex­pe­ri­enced a bull mar­ket over the past few years. How­ever, if your port­fo­lio was aligned with the re­sources in­dex

Tthen you would have ex­pe­ri­enced a bear mar­ket over that time. As for the top 40’s fu­ture di­rec­tion, it is not clear whether the 49,000 re­sis­tance will break to the up­side first or whether there will be a deeper pull­back to­wards the lower bound­ary at 42,000 first. Ei­ther sce­nario is pos­si­ble and will likely be guided by trad­ing ac­tion on in­ter­na­tional mar­kets.

While this side­ways range is in place on the JSE top 40, this re­mains a stock­picker’s mar­ket. he EuroS­toxx600 rep­re­sents large, mid and small cap com­pa­nies across 18 coun­tries in the Euro­pean re­gion. It is a broad-based in­dex and is a closely watched mea­sure of Euro­pean equities.

The heav­i­est weight­ing in the in­dex is to stocks listed in the UK (30% weight), fol­lowed by France (15.3%), Switzer­land (13.9%) and Ger­many (13.5%). The re­main­ing weight­ings are small and are com­posed of ex­po­sure to Spain, Swe­den, Nether­lands, Italy, Den­mark and Bel­gium.

There is a fixed num­ber of 600 stocks in the in­dex. From a tech­ni­cal per­spec­tive, this in­dex broke be­low its bull mar­ket up­ward trend in De­cem­ber 2015. At that point, the 50-week mov­ing av­er­age also be­gan to turn down­wards.

Since the Jan­uary lows, the in­dex has been con­sol­i­dat­ing in a small ris­ing wedge pat­tern. These are typ­i­cally bear­ish con­tin­u­a­tion pat­terns within a down­trend and they usu­ally break down­wards.

An­other pat­tern that is ev­i­dent is a po­ten­tial head & shoul­ders pat­tern that has been form­ing since early 2014. The neck­line of that pat­tern is at 320 on the in­dex. A break be­low that neck­line would be a bear­ish devel­op­ment and would con­firm the top that has been form­ing over the past two and a half years. A break be­low 320 would open the next level of sup­port at 280.

Over­all, while the 50-week mov­ing av­er­age is point­ing down­wards and the price is be­low the seven-year bull trend, the risks are to the down­side on the Stoxx600 Europe In­dex.

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