Keep an eye on the door

Risks to the long rise of the stock market are growing locally and internationally

he uptrend that has marked the JSE for the past six years remains intact, but as the bull market approaches its seventh anniversary, one has to realise that it is fairly mature.

Bull markets seldom last this long and the risks are gradually stacking up. These include the start of a US rate hiking cycle and a deterioration in the rate of growth in China.

Historically there has been a market wobble when the first US rate hike is announced. This is usually a fairly short-term, knee-jerk reaction, however. The start of the next upward cycle is expected to be later this year and the pace of rate increases is expected to be very slow. This has been well documented and the US Federal Open Market Committee has prepared the market well for the start of a gradual normalisation of interest rates. So the likelihood of a sharp reaction to the first rate hike is fairly small.

A bigger issue for global markets, including the JSE, is the increasing concern that China’s rate of growth is slowing.

Much weight has been placed on the shoulders of the Chinese economy to be a big driver of global economic growth. China has not let the world down yet, but recently the data has been showing signs of strain. A sudden bursting of the Chinese stock market bubble in June has grabbed the headlines and made global investors begin to question the underlying strength of the world’s second-largest economy.

Even though these risks are

Tknown in the market, the JSE Top 40 index is maintaining the upward trend that joins all the lows of the bull market that began in early 2009 following the financial crisis.

That primary uptrend line currently comes into play at 45 800. As long as the Top 40 index holds above that uptrend, one has to respect the bull market and respect the upward trend. The cliché goes that the trend is your friend.

(Many will also say that the trend is your friend until the bend at the end.)

As things stand, that upward trend remains intact, but if we were to see the Top 40 breaking convincingly below the 45 800 level, followed by weakness below 45 000, that would mark a breaking of the uptrend of the past six years. It could result in some sharp selling pressure by trend followers who see that the trend has broken.

That has not happened yet, so there is no need to panic. But one does need to be aware of the risks mentioned above and dance close to the door at the bull market party.

Market breadth has been deteriorating globally and the JSE is no different.

Market breadth refers to the extent of participation in a rising market. A healthy market should see a broad spread of stocks rising and contributing to the overall strength of market. A market that is driven higher by only a small number of key stocks usually runs the risk of turning lower.

Over the past year, fewer and fewer JSE stocks have made new highs to continue driving the overall market higher.

Resources stocks have been dismal performers in the past year, and even a number of prior leaders in the financial and industrial sectors have seen the upward momentum in their share prices waning.

The biggest contributors to the strength of the JSE have been Naspers, SABMiller and British American Tobacco. These stocks hold a heavy weighting on the JSE Top 40 index and therefore their strength has held the overall market firm.

But scratch a little below the surface and you’ll see that the health of the current bull market is not as rosy as the chart of the Top 40 would suggest.

This is another risk to be aware of and it does suggest that preparing oneself for the possibility of a market correction might not be a bad idea.

Historically there has been a market wobble when the first US rate hike is announced. This is usually a fairly short-term, knee-jerk reaction, however