JSE: Another correction in ageing bull market?
Accept t hat we a r e s t i l l experiencing a bull market, but sleep with one eye open. This is how an experienced commentator summed up the current situation on the JSE amid speculation about where the market is heading after the All Share Index weakened by about 7% since reaching its high in April.
Is it t he beginning of a major correction in an ageing bull market which, based on its historic pattern, should have declined considerably some time ago in order to restore value? Or 160 155
2006 is it a limited correction that will offer opportunities to find a home for capital at fairer (but still high) prices?
On the one hand, there are those who believe that the bull market could continue for quite some time, given the enormous amount of money being pumped into the global economy by the European Central Bank and Japan. The current situation differs from the norm of the past, which preceded bear markets. Interest rates are at record lows and those billions must f ind a home somewhere. Shares offer the best option. Rising interest rates in the US are not regarded as an immediate, serious threat. They will be managed circumspectly. Or so it’s believed.
The test will now be whether the JSE will turn after the index dropped to around its 200-day moving average. Internationally, as well as domestically, this indicator is regarded as important by many investors and analysts.
There is, however, a general feeling of caution among experienced market analysts. The market is high, with a price-to-earnings multiple of 17%-18% compared to its historic average of 12%13%. Is it going to be any different this time? When this question was put to Alan Greenspan, the head of the Federal Reserve Board of the US at the time of the dot-com bubble, he remarked that he had never experienced during his (long) lifetime that markets could be “different”. The inherent cycle will always eventually restore value.
It is interesting that two early indicators that measure the market’s heartbeat are moving in opposite directions. One is the advance/decline line, which is calculated by subtracting the number of shares that decline weekly (or daily) from the number of shares that increase in value. This gives a cumulative line that can be an excellent indicator of what is in fact happening in the market as a whole. The graph of the advance/decline line has been looking negative for quite some time.
The second indicator is derived by comparing the number of highs with the number of lows in a similar exercise. A bull market requires that the highs should dominate, as has been the case on the JSE for quite some time.
When these t wo indicators are in harmony, as was the case in 2008, then danger signals begin f lashing.