A Major Leading Indicator for the JSE Just Tanked
27 September 2018 | SA Views | Dwaine van Vuuren
 


Also read more recent article: SA PMI, Another Major JSE Indicator, Just Tanked

Foreigners were net sellers of SA stocks and bonds to the tune of almost R36Bn in August 2018. This brings the outflows of the last 4 months to R107Bn. This is not good news at all.

We had brief net foreign purchases in the wake of Ramaphoria but that has quickly evaporated and even worsened since May 2018.

In fact, since September 2013, 4 months after President Zuma commenced his second term in office, foreigners have yanked a staggering R375Bn out of South Africa in a steady one-way outflow:

image1

The seemingly close correlation between inflows and the fortunes of the JSE index are not just visually, but also mathematically apparent when looking at annual percentage changes:

image2

It is clear that at least from 1999, foreign outflows are somewhat of a leading indicator for future negative to sub-par performance of the JSE. The outflows of R107Bn in the last 4 months does not augur well for the overall local market indices.

Cumulative net foreign purchases of SA stocks and government bonds is another one of those powerful indicators to use when trying to determine the overall health of the SA stock market. In our prior article titled "This is how unwell the JSE is right now" we introduced you to the other powerful indicators that allow you to “look under the hood” of the JSE to get a feel for how well or badly things are going. We examined market breadth as represented by the Advance-Decline Line, the percentage of JSE shares increasing earnings and the percentage of JSE shares increasing dividends.

Let’s put them all together now  to show you how all these metrics peaked at around the same time:

image3

Do not be fooled by the JSE ALL-SHARE (J203) or the JSE TOP40 (J200) price line movements. These are being dictated by a handful of large caps, mostly Rand-hedges, that dominate the overall market capitalization. Below is a comparison of the free-float weighted total return indices of the TOP40 and the TOP-40 excluding the large caps that make up about 80% of the TOP-40 market capitalization. We see that the JSE excluding the large caps peaked around May 2016

image4

So, we are in a 5-year participation bear market, period. Only when more shares start going up than are going down, when foreigners start buying our shares and bonds again, or when earnings and dividend profiles of JSE listed companies start improving, can we conclude otherwise. The dividend and earnings profiles seem to be attempting a recovery, but breadth (market participation) and outflows still remain horrendous. But when all these things turn and that black "average" line in the 3rd chart above starts turning around, then we will have one heck of a bull run in the mid-caps (J201).

Do not confuse a participation bear market with a macro-economic one. We are not in a macro-economic bear market yet (although we are close), which is normally characterized by the major indices being down 20%-50% or more, a business cycle recession, rising interest rates, an inverted yield curve and the earnings yields of stocks being less than inflation. Every macro-economic bear market includes a participation bear market, but not every participation bear market is accompanied by a macro-economic one (although most are).

In the short-term however the JSE Index is oversold after a greater than 10% correction and likely to post some gains - probably from the large-caps again. Apart from intelligent stock picking (requiring hard work and a good dose of luck or try our managed portfolios) and market timing during extreme oversold periods such as more recently, there are other ways to make money during local participation bear markets such as expanding your offshore exposure, investing in high yielding (+9% p.a) income funds etc.

To see this and other techniques of managing risk on the JSE, come to our national training sessions (Cape Town on Saturday 29th Sept). You can book here.

Also read more recent article: SA PMI, Another Major JSE Indicator, Just Tanked

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Dwaine
Dwaine van Vuuren
Retail-side Research
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.


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Market Statistics are calculated by Sharenet and are therefore not the official JSE Market Statistics. The calculation/derivation may include underlying JSE data.
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