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There is a belief that bear markets turn when things seem to be at their worst. That this happened recently with some commodities is apparent from the dramatic recovery of Kumba’s share price.
Kumba’s product – iron ore – has, in the midst of sombre predictions, risen firmly. Everyone was talking about global overproduction, while the Chinese economy – the biggest buyer – was not only cooling down, but a switch was taking place from investment in infrastructure to consumption and services.
The big problem when trying to predict a reversal is that business could remain sombre for extended periods. To overcome this problem, a number of techniques are used. One that has been quite successful is to check when a market or share no longer reacts to bad news. In fact, it could even rise at the news.
As the writer, Jan Hofmeyr, put it years ago in his excellent book McGregor’s Cynic’s Guide to the Stock Exchange: Take note of when bad news is good news. What this boils down to is that the problems experienced by the market or share have been discounted to such an extent that the bears are, as it were, exhausted. Those who wanted to sell have already sold.
An internationally well-known investor, Jim Rogers, who has had great success with a similar approach, says that when a market or share is regarded by one and all as a disaster, you should start looking for reasons why it could recover.
You do this as soon as the market or share remains firm in the midst of bad news. The price firms because the supply is starting to dry up. Simply too much value remains, which prevents further decreases.
Rogers applies this on a global scale. He analyses the situation in especially countries that are experiencing financial or political crises. Should he find signs that things cannot worsen and that there is potential for recovery, he will even buy all the top shares on the country’s bourse.
During a visit to New Zealand, he invested in all the top companies in the country when everyone was discouraged and pessimistic. In the process – as he did in many other countries – he made huge profits.
Isn’t this what happened in the case of shares such as Kumba, Anglo American and Glencore? They rose sharply when it was least expected. Even the lowly Implats had a good run.
On the JSE as a whole, there was also an important shift in gears since the previous tables appeared about a month ago.
Where the weakest shares – those lying below their 200-day exponential moving averages (EMAs) – were dominant, the situation has quickly reversed. Most of them now lie above their long-term averages, with Harmony still ahead of the pack. The leaders of a few months ago, such as PSG, are now even lying below their EMAs.
Among the weakest, there is only one mining share – Lonmin – that remains among the top 10.
The other weaklings are all big names such as Aveng, PPC, Nampak, Sun International and ArcelorMittal SA. Maybe the technique used by Hofmeyr and Rogers should be applied to them, with patience being the order of the day, together with a good potential for recovery.
This article originally appeared in the 17 March 2016 edition of finweek. Buy and download the magazine here.
