Between bulls and bears
JSE top 40 looks choppy as resources climb and the domestic sector tops out
he JSE top 40 index is currently trading at about the same level it was three years ago. But that fact masks the volatility that has been present, as well as the sectoral shifts that have occurred over that time.
The top 40 has traded in a range between 42,000 and 49,000 over the past three years. That’s a 16% trading range. The 50-week moving average is generally a good indication of a bull market or a bear market. An upward-sloping 50-week moving average typically indicates a market with a bullish tone. On the other hand, a 50-week moving average that slopes downwards indicates weak momentum and is associated with a bearish market environment.
The 50-week moving average on the top 40 index has been tracking sideways since early 2015. This has made the trading environment tricky, leaving one unsure whether to trade according to a bull or bear market strategy.
The truth is that, at an overall index level, it is neither a bull nor a bear market. It has been a sideways, choppy market with no clear trend. But beneath the surface there have been well-defined bull and bear markets within different sectors.
The domestic area of the JSE had been the strongest area of the market until the start of 2016. Financial and industrial stocks enjoyed solid upward trends from early 2009 until late 2015. During that time, the resources sector was under pressure.
Resources stocks were generally in a bear market until late 2015, and financial and
Tindustrial stocks were in a bull market during that time. All that began to change at the start of 2016. Suddenly resources began to perk up, and many shares in the resources space have since enjoyed gains of more than 200%.
All the while, many domestic stocks have come horribly off the boil. The likes of general retailers and some financial stocks have had a torrid time in 2016. This can be seen in the chart of the findi 30 index (J213). This index represents 30 of the largest industrial and financial stocks on the JSE. It’s a good representation of “SA Inc”.
What is notable about the chart of the findi 30 index is that it has broken down below the bottom of a triangle pattern and has also broken convincingly below its 50-week moving average for the first time since 2009. The 50-week moving average has also taken on a negative slope for the first time since 2009.
This is a meaningful development, as it implies that the bull market in the findi 30 index has probably come to an end. From here it may either track sideways or show further weakness. But substantial strength looks unlikely.
As the findi 30 index tops out, the resources index seems to have found buying interest this year, and it looks as if that area of the market will now prop up the top 40.
This is the opposite of what we have become used to in the past seven years. It now looks as though one needs to be overweight in the resources sector and underweight in the domestic sectors of the market.
What does all this mean for the top 40? Unfortunately, it probably means more of the same: sideways, choppy action with no clear trend. Technically, the break below 45,000 on the top 40 index validated a head-and-shoulders pattern that projects down to 42,000. That is the area where the bottom of the broad range comes in.
If the top 40 trades down to that level and holds the 42,000 support, it may present a buying opportunity for an oversold bounce on the broader market.