Technical Study: The bear market puzzles everyone
Investors worry about S&P500 as it drops below its long-term uptrend.
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
■ There should be strong growth in profits during difficult times on the share market. ■ Strong and growing cash flow is very
■ 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. ■ firstname.lastname@example.org
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.