The revelations that SA is the only OECD country in the world currently in a technical recession seems at odds with our local stock market. After all, the JSE doesn’t seem all that bad does it?
Actually, the JSE is looking very poorly right now if you know what to look for. Let’s go through examples of how you can peek "under the hood" of the JSE to gauge the health of the market:
First up is the 52-week rate of change, the layman’s tool for detecting bear markets. After a narrow miss in 2011, the bull market got going again in earnest until around June 2015, where we went nowhere for 28 months until October 2017 when we broke out to new highs again on Ramaphoria. This faded however, and we are back again at zero change over the last 52 weeks. It is safe to say that apart from a brief spell related to Ramaphoria, the JSE has basically made little progress over the last 3 and a half years since April 2015.
Now let’s look under the hood at another perennial favorite, the weekly Advance-Decline line. This is simply the amount of shares that went up for the week, subtract the amount of shares that went down for the week, added to the previous week’s value. When it’s going up and confirming new highs with the JSE it means we have a broad participatory rally and when it is declining against the backdrop of a rising JSE it means we have a narrow non-participatory rally. The AD line peaked around June 2014 and has been all downhill since. This means only a handful of large-cap shares are holding up the JSE and most JSE shares are not participating in the rally - normally a warning that the risks associated with the stock market are very high and future returns are likely to be sub-par.
We can confirm weak, narrow market participation by examining the percentage of JSE shares trading above their 200-day moving averages. This is a good gauge of how many shares are in a long-term uptrend or a long-term downtrend. As you see below, less than 32% of the JSE is trending up and over two-thirds of the shares are in a downtrend, with major deterioration setting in around mid-2014:
How about some fundamentals breadth metrics? This is something you won’t see anywhere, as its unique to Sharenet Analytics. We basically track some key financial and fundamental metrics of JSE shares as they release results. One of the most important metrics I like to examine, as they are such important determinants of future share price growth and health of a company (and hence the economy) is dividend and earnings increases. The Percentage of JSE shares that were increasing dividends over a full financial year (interim-to-interim and final-to-final) peaked around December 2014 and has been on a steady slide since that date. It is sitting at levels last witnessed in the Great Recession of 2008, but does appear to be improving of late:
Dividends payouts are set and decided by management for various reasons and may, therefore, mask the full impact of declines in a company’s profits. However, earnings are earnings and the percentage of JSE shares that were increasing their earnings over the prior financial year peaked around May 2014 as shown below:
Of interest is that the percentage of JSE shares increasing earnings is way below the figure we had when emerging from the financial crises, but it does appear to be bottoming out.
Let’s look at shares posting positive operating earnings. This is normally a very long leading indicator and true to form topped out around mid-2012:
Now shares with positive cashflows, which peaked around January 2015 and took a significant nosedive since December 2017.
In summary, momentum, breadth and many company-specific financial metrics all peaked mid-June 2014 to early 2015 and despite what the JSE Indices look like on the price-line, you need to consider ourselves currently being in a stock market participation bear until these metrics improve.
This means the odds of you picking a share that is going to end up a winner are significantly reduced unless you are a lot more choosy around the soundness of the shares fundamentals and financials. You could also join the crowd and follow shares/sectors in strong uptrends, such as large-cap Rand hedges, but because everyone else is chasing this narrow section of the market they are likely priced way above their intrinsic values which always introduces more risk to your operations. At the end of the day at times of narrow participation, risks are higher, and you have to be more selective in your stock picking and market timing.
For me personally, I stick to beaten up shares that have maintained their dividend and earnings growth histories despite recent challenges. If they managed to continue increasing dividends and earnings despite the economic stresses of the last 4 years, then there has to be something special going on. And if, as I suspect, the worst is nearly over, these stocks should really shoot the lights out. The bad news is these counters, especially ones that are beaten up, are few and far between.
In my next article, we will reveal some of these counters as identified automatically by our Analytics systems for our clients, or alternatively, you can come and see a full reveal at my teams next seminar. You can book over here.
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.