A pull­back from un­usual win­ter highs on the JSE top 40 in­dex could still set up a base for a year-end rally

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A pull­back from un­usual win­ter highs on the JSE top 40 in­dex could still set up a base for a year-end rally

The JSE top 40 in­dex has been trapped in a side­ways range of be­tween 42,000 and 49,000 for the past three years.

How­ever, from the mid­dle of June, the market ral­lied pow­er­fully, re­sult­ing in the in­dex gain­ing 10% in a straight line in just a few weeks.

The top 40 briefly pierced the 49,000 area and touched the mag­i­cal 50,000 mark in the first week of Au­gust. But that break­out was met with profit tak­ing, and a weekly re­ver­sal oc­curred, which brought the market back un­der the 49,000 level.

This sug­gests that the market may need to con­sol­i­date re­cent gains be­fore mak­ing an­other con­certed ef­fort to break above the 49,000 area.

If a break­out above the three-year trad­ing range is to have a de­cent chance of be­ing sus­tained, it would be ideal if the market were to con­sol­i­date be­low 49,000 in a con­trolled fash­ion first. That would es­tab­lish a higher base from which the market could at­tempt a break­out.

From a sea­sonal per­spec­tive, Au­gust and Septem­ber are typ­i­cally soft months for global eq­uity mar­kets.

Though the JSE hasn’t re­ally fol­lowed its typ­i­cal sea­sonal pat­tern so far this year, it is worth not­ing that the market has his­tor­i­cally been weak in Au­gust, but that weak­ness typ­i­cally sets up a rally into the end of the year.

The chart of the top 40 sea­son­al­ity pat­tern looks at the av­er­age an­nual per­for­mance trend for the 20 years from 1996 to 2016.

What is clear is that the market is rather trend­less dur­ing the mid­dle months of the year, with Au­gust prov­ing to be a low point in the win­ter months. The market typ­i­cally trends more pre­dictably from Septem­ber to April.

In fact, the 20-year his­tory of move­ments on the top 40 in­dex shows that pretty much all gains are made in the months be­tween Septem­ber and April, with the four-month pe­riod from April to Au­gust yield­ing no re­turn col­lec­tively over the past 20 years.

While the 20-year sea­sonal pat­tern is by no means a cer­tain road map of how ev­ery year will per­form, it is in­ter­est­ing to keep an eye on.

The top 40 in­dex hasn’t re­ally fol­lowed the sea­sonal pat­tern for the 2017 year to date, but if there is a pull­back from the re­cent highs in the near term, that may nev­er­the­less set up a base from which a year-end rally could en­sue.

Over­all the top 40 has been mak­ing higher lows and higher highs on each pull­back in the year to date.

If that pat­tern con­tin­ues, then it looks en­cour­ag­ing for a po­ten­tial break­out be­yond 49,000 in the months to come. This would open higher tar­gets for the top 40.

In sim­ple tech­ni­cal terms, an up­side pro­jec­tion through 49,000 would be the height of the three-year range pro­jected up­wards from the break­out.

Given that the three-year range has been 7,000 points, a sus­tained break above 49,000 would open an up­side pro­jec­tion to 56,000.

Af­ter three years of be­lowa­v­er­age per­for­mance on the JSE, a break­out to new highs would be a wel­come re­prieve for all in­vestors.

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