Best to tread water for a bit

It’s likely the JSE will spend some time consolidating, which would be healthy

The JSE has been on a tear since the second week of January 2015. The index of the largest 40 shares on the exchange rallied 13% in the six weeks from mid-January to late February. This happened in a straight line with no consolidation or correction along the way.

The index has met resistance at 47 200, however, and spent the better part of two weeks unsuccessfully trying to breach that level. That 47 200 level is significant as it was the high that was set in July 2014.

The failure and reversal down from that level is likely to mean that the JSE will now spend a while consolidating, working off the overbought condition that has been created by six weeks of aggressive strength.

The stochastic oscillator which measures market momentum has been in overbought territory through the whole of February and is now starting to turn lower as the market has begun to consolidate. The first meaningful level of support comes in at 45 200. That level was the peak reached in November last year and it offers lateral support on a pullback. The 50-day moving average and 200-day moving average both come in at about the same level. Should the market fall below that support level, then the next meaningful support comes in at 43 500, which is where the uptrend from the 2009 low comes into play. Below that level, there is further support at 41 700, which is formed by the lateral low points that marked market bottoms in March, October and December 2014. It would need to be a firm correction that would see the market trade as low as the bottom of the one-year range at 41 700, but one can’t rule it out.

A period of consolidation from current levels would be healthy for the market and would likely reset the market for another attempt at the 47 200 highs later in the year. We will need to monitor the support levels mentioned here for possible buying opportunities in the months ahead. ince the current bull market began in 2009, the domestic sectors of the JSE have been outperforming the resources sector at a healthy pace. That trend is best illustrated by looking at the chart of the JSE financial and industrial 30 index (Findi30) relative to the JSE resources 10 index (Resi10). The way this chart is calculated is quite simple. It is simply the historical closing values of the Findi30 divided by the corresponding historical values of the Resi10. Those findings are then plotted on a graph. An upward sloping chart as we see here is indicative of the Findi30 outperforming the Resi10. From a technical perspective, the relative chart has been showing outperformance by Findi30 over Resi10 since a technical breakout that occurred in August last year. Since the start of 2015 the relative chart has begun to illustrate some volatility. This may indicate that the outperformance of Findi30 over Resi10 is quite stretched at the moment and a period of further consolidation on the relative chart is likely.

There is no shortage of analysts who hold the view that the Findi30 sector of the market is expensive relative to the resources sector. But that does not mean we will see resources start to outperform any time soon. Problems remain for the resources companies and the greater likelihood is that resources remain a value trap and we may see a period of ongoing volatility in the relative chart between Findi30 and Resi10 in coming months. It’s a brave person who bets against the momentum of this chart.

The higher probability scenario is that the relative strength chart will continue to consolidate for a while before ongoing outperformance by Findi30 sets in again.