There has recently been a marked weakening of the JSE.
The share prices of only 29% of the 100 largest companies, measured by market cap, are lying above their 200-day exponential moving averages (EMAs), which means that more than two-thirds of the market is dominated by the bear.
The Top 40 and the All Share indexes have also weakened to below their long-term EMAs, reflecting the pessimism currently evident among investors.
However, declines in the market also offer opportunities as quality shares tend to become available at lower prices.
The problem is always which shares to choose, especially if a share’s decline can be ascribed to things going awry in a company – which could prove detrimental.
Mediclinic, Aspen and Tongaat are good examples of this. One simply has to look at the list of the weakest shares to see what pain this could cause for investors.
A number of years ago, the Foundation for the Study of Cycles in the US researched which technical indicator could give investors a meaningful guideline in times like these.
It became apparent that during a major downswing, quality shares whose mid-term averages (say 75 days) remained above their long-term averages (200 days) could prove to be winners in the next upswing.
This demonstrates that the so-called informed capital was prepared to support those shares despite the general pessimism.
The Achilles heel of this technique is of course that the decline could become a full-scale bear market.
It would therefore be safer to use it in tandem with good fundamental research.
The group of shares that have come to the fore through this method is currently dominated by commodity groups such as Implats, Amplats, Kumba, Northam, ARM and Anglo.
Others that look interesting include Telkom, Capitec, Naspers* and PSG. Few would have believed that Telkom, which has been a group fraught with problems for so long, would pop up as the strongest share on the JSE – measured in terms of the percentage difference between its price and its long-term average.
The group, which has been privatised (the state’s shareholding is nevertheless 40.5%), has come a long way and is not only profitable, but also distributing dividends regularly.
It has increased by 45% since the beginning of the year and, following its results, broke through the high of 8 578c reached in March 2015.
During 2007, it reached an all-time high around 19 500c. From its results it’s evident that it is making major investments in various areas that are beginning to deliver additional income streams.
This not only includes mobile phone and internet services, but also its large property portfolio, which will possibly be unbundled and listed.
Its wholly-owned subsidiary Giro owns more than 1 300 properties and has earmarked 40 new development projects, including large-scale housing projects.
Its CEO, Sipho Maseko, says Telkom wants to unlock value for its shareholders.
Then we have the ongoing speculation that Telkom is possibly going to merge with Cell C because both of them are currently finding it difficult to compete with the two giants in the industry, MTN and Vodacom.
Among the weakest shares is Sasol**, which is being punished by the market for unexpectedly announcing that it would have to spend an additional $1bn to complete its giant chemical plant at Lake Charles in the US.
The total costs have escalated to between $12.6bn and $12.9bn, equal to more than two-thirds of its current market cap.
The only consolation is that the project is close to being completed and units are beginning to come on stream, which will start generating cash flow in the near future.Among the shares that have broken through, Bidcorp and Richemont look the most interesting.
Lucas de Lange is a former editor of finweek and an author of two books on investment.
*finweek is a publication of Media24, a Naspers subsidiary.
**The writer owns Sasol shares.