Tech­ni­cal Study: The bear mar­ket puz­zles ev­ery­one

In­vestors worry about S&P500 as it drops be­low its long-term up­trend.

Finweek English Edition - - Contents -

it’s un­der­stand­able that there are many dis­cus­sions about the bear mar­ket that’s cur­rently be­ing ex­pe­ri­enced on the JSE and else­where. With only 16% of the 100 largest shares on the JSE as mea­sured by mar­ket cap above their 200-day ex­po­nen­tial mov­ing av­er­ages (EMAs), the JSE’s All Share In­dex at the time of writ­ing 19.1% be­low and the Top40 about 21% be­low their highs over the past year, there can be no doubt about how dis­mal 2018 has been.

A good ex­am­ple of the bad news that in­vestors have to di­gest is ap­par­ent from a spe­cial re­port in The Econ­o­mist. The writer pre­dicts, af­ter an in-depth anal­y­sis, that it will be more dif­fi­cult to fight the world re­ces­sion that’s un­der­way than the pre­vi­ous one.

The world is un­pre­pared for when the cur­rent up­swing in the US – the long­est in its his­tory – will reach its end. When this re­ces­sion will hit the world is of course un­cer­tain, but what’s clear is that the cur­rent weak share mar­kets across the world re­flect in­vestors’ worry over the US’s stricter monetary pol­icy and weaker growth prospects, among other things.

But while com­men­tary has been mostly pes­simistic, with many ref­er­ences to Wall Street – the world’s lead­ing mar­ket, where the S&P500 has dropped be­low a long-term trend­line – there are also those who point out that good value is be­com­ing avail­able.

Re­search un­der­taken by or­gan­i­sa­tions such as the US’s Foun­da­tion for the Study of Cy­cles shows that op­por­tu­ni­ties for buy­ing in­vest­ments that grow by as much as thou­sands of per­cent­age points be­come avail­able to in­vestors and can be found far more eas­ily in times such as these – es­pe­cially a large po­ten­tial win­ner or two among ne­glected small caps.

Ac­cord­ing to the study, there are sev­eral indicators when search­ing for these shares, in­clud­ing:

■ The qual­ity of the man­age­ment is

ex­tremely im­por­tant.

■ There should be strong growth in prof­its dur­ing dif­fi­cult times on the share mar­ket. ■ Strong and grow­ing cash flow is very

im­por­tant.

■ In­vest in a few of these high-po­ten­tial shares. The cap­i­tal that you in­vest need not be much. (For ex­am­ple, you could buy Capitec for less than R30 ten years ago and to­day it’s trad­ing close to R1 000.)

■ Grow­ing div­i­dends are im­por­tant be­cause they at­tract sta­ble, pa­tient long-term in­vestors.

■ The liq­uid­ity of smaller com­pa­nies is usu­ally lim­ited. Build your po­si­tion grad­u­ally, es­pe­cially dur­ing mar­ket slumps.

■ Don’t ex­pect very large de­clines dur­ing down­turns. The smart money will fairly soon start sup­port­ing the share price, which should be ev­i­dent on a price/ vol­ume graph.

It’s an un­usual share – Har­mony – which ap­pears at the top of the list of the strong­est shares. It’s one of the most volatile is­sues on the JSE and it’s pop­u­lar among spec­u­la­tors. The group has been buy­ing up old mines over the years and made money through clever cost con­trol. What does, how­ever, make it very in­ter­est­ing is that Har­mony and a part­ner, Newcrest Min­ing, want to de­velop a large new mine, Golpu, in Papua New Guinea. It will cost an es­ti­mated $1bn to ex­ploit the mas­sive gold and cop­per de­posit, and the mil­lion-dol­lar ques­tion is how Har­mony in­tends fi­nanc­ing its share. African Rain­bow Min­er­als is a ma­jor share­holder (13%) in Har­mony.

The weak­est shares are made up of mostly the usual sus­pects, but it is a dis­ap­point­ment that the heavy­weight, Naspers*, is ly­ing some 19% be­low its long-term EMA as a re­sult of the pres­sure ex­pe­ri­enced by Ten­cent.

Among the shares that have bro­ken through, An­glo Amer­i­can is the most in­ter­est­ing. It’s ly­ing in buy ter­ri­tory close to its 200-day EMA and is main­tain­ing a firm up­trend. ■ ed­i­to­rial@fin­week.co.za

Lu­cas de Lange is a for­mer ed­i­tor of fin­week and an au­thor of two books on in­vest­ment.

*fin­week is a pub­li­ca­tion of Me­dia24, a sub­sidiary of Naspers.

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