JSE: An­other cor­rec­tion in age­ing bull mar­ket?

Finweek English Edition - - MONEY - BY LU­CAS DE LANGE

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.

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