Why you should worry about the JSE

DOWN: MORE THAN TWO THIRDS OF COUNTERS IN ALSI

We are approaching a situation similar to that which triggered the 2008 crash. Moneyweb

From the start of the year to the end of July the FTSE/JSE All Share Index (Alsi) was down 1.9%. While this marginally negative performance may be frustrating for investors, it isn’t necessarily eye-catching.

However, if one looks a bit deeper, the state of the market becomes more concerning. A market breadth study conducted by Methodical Investment Management to the end of July shows that only 33% of the 160 stocks in the Alsi are up so far this year.

In other words, the market is being supported by only a few stocks, and according to Methodical’s Steven van Jaarsveld, this number is growing smaller.

“The whole market is pulling down, but from an index level people don’t realise it,” he says. “The man on the street might think that this market is not in such a bad place, but looking at the breadth of the market, there is something brewing.”

As a momentum investor, Methodical is interested in this trend because directionality is important and it is becoming more and more difficult to find any positive momentum on the JSE.

“We started seeing this from around November last year,” Van Jaarsveld notes. “By January we started seeing that there is very little breadth in the market, and it’s just gotten worse.”

So far this year, the JSE has relied on a handful of resource counters, led by BHP Billiton and Anglo American, and Naspers for support. A few bank shares and local retailers have been up, but there is little else in the positive column.

“The overall market is looking more and more fragile,” says Methodical’s Andrew Cormack. “We’re not calling the market, but a decreasing proportion of stocks is actually performing well.”

What’s also worth noting is that of the counters that are down this year, the majority are down more than 10%. More than a fifth of the stocks have retreated more than 20%.

This analysis is also worth considering in the context of the fact that next month will mark 10 years since the collapse of Lehman Brothers, which triggered the 2008 market crash. While the JSE is not showing quite the lack of market breadth it did a decade ago, it is approaching something similar.

“The reason we wanted to look at this market relative to 2008 is because we felt that there was a similar environment before that crash,” says Van Jaarsveld. “Then there were just seven stocks keeping up the whole market.

“What happened in 2008 was that the smaller stocks were already in a bear market for a year prior to the crash.

“It feels like we are now in a similar position where the market is getting weaker and weaker, but the index level doesn’t reflect it. So when something happens, especially in global markets, our market could sell off very rapidly. We only need two or three stocks to move downwards.”

Offering some consolation is the fact that the global markets are not quite in the same position as the JSE. On the S&P 500 just over 60% of stocks are up so far this year, while on the STOXX Europe 600 it is just under 50%.