Green-shoots talk in the press is making a comeback and even the JSE Index is looking perky with better than 10% gains since the October 2018 lows.
But this rise in optimism and stirring of the animal spirits is yet to show up in any leading indicators that matter.
Let’s start with the economy. As we stated in a communication to Analytics clients last month, "There is no slapping any lipstick on this pig. It’s just plain darn ugly. Every conceivable composite leading indicator pointing down".
The JSE can often move counter to the economy, as it is supposed to be a forward-looking discounting mechanism, so let us put the economy aside for a moment and inspect the Analytics JSE Leading Indicator (JLEAD):
The JLEAD has posted a welcome rise in January (a rare event for the last 3 years), assisted by the recent reporting season where the percentage of JSE shares raising earnings and dividends bounced nicely and a very brave but weak improvement in market breadth was seen.
But caution is advised here, as breadth needs to follow through, the ABSA PMI is at a crossroads, net foreign sellers of our stocks and government bonds are still rampant as investors remain not entirely convinced by our government’s intentions and the interest rate environment (hiking cycle) remains a major traditional stock-market headwind.
When will we be more convinced of a broad-based sustainable rally? Well at the very least the JSE TOP-40 will need to break resistance at 49,000 and the JLEAD needs to post at least 3 consecutive monthly rises to demonstrate it has broken its downtrend that commenced in November 2013:
Now all is not doom and gloom. In fact, we believe the worst for the stock market is over. In mid-December, we posted an alert to Analytics subscribers (view here) where we said valuations were at an extreme point that was favorable for buying the market. This was 2 days after the JSE P/E printed a low of 15.7 and as you can see in the updated chart below, the JSE P/E has been expanding ever since the market put in its major low:
In early January we followed up with another subscriber alert when our multifactor probability model stated that the odds that we have witnessed the bottom of this correction reached over 94%. That meant that according to the long-term multi-decade record of past correction (1) drawdown sizes, (2) durations and (3) loss of confidence intensity that in only 6% of cases did things get worse than at the J200 43,771 bottom we witnessed on 25th October 2018.
The updated output as of yesterday from the model appears below:
So, this means that if you have some good analytics or a great dealing desk with great brokers, or a really good investments team, you should be able to be picking up high-grade investment quality local shares in the right sectors at attractive low-risk prices. You can just tick the "I am interested in" section in the newsletter subscription form below and our team of seasoned professionals can connect you to world-class analytics or brokers or even to our dedicated Analytics Dealing Desk.
NOTE: I will be covering more on this topic in our upcoming free Investment Outlook 2019 Seminar. Johannesburg is booked out, but we still have seats in Cape Town available. You can book you FREE seat over here or contact Jerome on email@example.com
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.