Bearish signals stalk local stocks after August gains

It’s been a great month, but things may be about to turn grim for local stocks, if technical signals are any guide.

The benchmark is coming off its longest winning streak since January 2014, rising for 10 consecutive days through Wednesday. The FTSE/JSE Africa All Share Index this week revisited levels above 60,000, last seen in February, taking its August advance to 4.8%, set for the best month since April.

The gauge gained 0.2% by the close on Wednesday, but here are some of the metrics that suggest the good times may be over:

The benchmark index is trading at the widest margin above its 50-day moving average in eight months. The last time the spread reached this level, in November, the gauge slumped 6.3% in the following three weeks.

The local market is vulnerable to moves in certain key stocks.

Sixty percent of this month’s rise in the benchmark index are due to gains in Naspers, whose fortunes are strongly tied to the performance of its 31%-owned Tencent Holdings in Hong Kong and luxury brands owner Richemont, which often moves with changes in the value of the rand.

Mining giant BHP Billiton and Sasol, a stock that responds to oil-price moves, round out the four most-significant index members.

Local stocks have enjoyed a “stellar run,” said Rob Pietropaolo, a trader at Unum Capital in Johannesburg. “A lot of that has been driven by the run in Naspers, Richemont and Sasol -- those were key drivers.”

While still cheap relative to most developed-nation stocks, local equities are becoming expensive when compared to emerging-market peers.

The FTSE/JSE All Share Index is now almost 20% more expensive than the MSCI Emerging Markets Index, in terms of forward price-earnings ratios.

While that premium is still nowhere near the highs of February, it is eroding the relative value of local shares.

The gauge’s relative strength index, a momentum indicator that can be used to identify overbought and oversold conditions, is approaching 70, a level that triggers a sell signal for some traders. The last time the RSI reached 70 was in January, before the index commenced a two-month, 11% decline.

“The all share has been overbought in the short term thanks to the rally, I put support at about 58,500 and we could test that level to see if it holds,” said Pietropaolo. “If it holds, I don’t see why our market can’t get to about 62,000 in the next month or two to retest that high.”

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