ALSO SEE : PART-1 of this article
Hear the Radio Interview
Last week we pointed out that the current 36-month old business cycle recession had probably bottomed in November 2016. This week, we want to examine the commodities complex and what clues it can give to the business cycle. In general, the commodities market is rather important to the South African economy - and indeed the JSE - but not because commodities are a big chunk of our economy (they are not). Rather, they are an indicator of the health of the global economy, which does have an effect on our local economy.
The chart below shows the Resources-20 index on the JSE with red and green candles, a proxy for the commodity index. We see that during the Great Recession and Financial Crisis of 2008, that Resources collapsed 64.24% over 91 weeks. The SA Recession ended 41 weeks after commodities had troughed, roughly the time the 52-week moving average of the Resources index bottomed out.
You can witness in this chart above how closely the JSE followed the movements of the resources index. Generally speaking, we can confirm that commodities are in a bear market when the 52-week moving average points down, and conversely, is in a confirmed bull market when the 52-week moving average points up.
The chart below shows more recent times. Around October 2014, a new bear market in Resources was confirmed and it bottomed after declining 64.28% from its peak over a 152 week period. The decline was virtually identical to that witnessed in the Great Recession.
As with 2009, the Resources sector’s 52-week moving average pointed upwards some 41 weeks after the trough, confirming a new bull market in November 2016. If we assume confirmations of new bull markets in Resources peg the end of SA business cycle recessions, then this November date matches the November date we pointed out in last week’s article (where we used econometric data) as the most likely trough of the business cycle.
There is one important difference to note in the above chart, and that is that the trajectory of the JSE did not directly mirror that of the Resources sector this time around. We can assume that the accepted relationship between the JSE and Resources is no longer applicable. This is most likely due to two factors we have been at pains to point out for the last 12 months:
- The % of local ZAR earnings baked into the JSE has shrunk dramatically to less than 40%
- The ZAR collapsed dramatically against the US$ during this period
Let’s look at the previous chart, but this time show the JSE in US$ to remove the exchange rate distortions - the relationship between the stock market and the Resources sector has been restored!
So there you have it - this is currently the single biggest, loudest, stock-market BUY signal currently showing for the JSE.
Let’s look at the complete suite of BUY signals we are looking for (not in order of importance):
- Inflation peaks
- Local interest rates drop
- Resources back in bull market
- SA BCI confirms business cycle expansion
- Market breadth confirms new stock market bull
- Foreign outflows turn to foreign inflows
- Higher highs and higher lows in the JSE
- We exit the SA listed company earnings recession (and JSE P/E’s fall)
I cover all of these in great detail in Sharenet’s next round of seminars starting 25th February. You are welcome to come and join my team and I in person for 5 hours of discussion - book using the links below.
Dwaine van Vuuren
RecessionAlert, PowerStocks Research
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 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.