Will the bear strike?

WILL THE BEAR strike or not, and, if so, how seriously? That’s the question that investors are currently struggling to answer globally as technical factors confirm that an internal weakening is emerging despite the fact that indicators like the popular 200-day moving average have not yet turned downward.

The internal weakening on the JSE is reflected in the advance/decline line that turned downward as early as June, as the graph shows. We pointed out earlier in this column that this is a danger signal showing the market could weaken internally because it was sending out the message that more shares were falling than rising. The advance/decline line* often precedes a new trend in a general market index and is a useful aid to show the extent of the support that a trend is enjoying. Its message at present is that the support is waning.

Then the head-and-shoulders formation that developed in the world’s leading index, the US’s Standard & Poor’s 500 Index, as well as the JSE’s All Share Index, is also watched carefully. This is regarded as one of the more reliable formations indicating a possible turnaround in a trend. If the indices fall through the so-called neckline, serious declines could follow, since so many market players respond to such technical signals. There are contrarian investors (they buy undervalued or oversold shares when others start to panic) who make no secret of the fact that they are currently sitting and waiting for buying opportunities when a bear market strikes sooner or later.

It is noticeable that the S&P 500 is holding up surprisingly well, given the stream of bad news recently. Every time there’s selling pressure after bad news is announced, buyers come to the fore and support prices. However, they disappear as soon as prices have improved slightly.

As the graphs of the relative strength index of the S&P 500, as well as the JSE, show, the markets cannot be regarded as oversold. In both cases, they are lying in neutral ground.

If we look at the individual sectors, there isn’t much joy either. One exception is gold and gold shares. Here there’s a solid bull market, as is shown by the graph of the FT gold index in London, where various international gold shares are listed. This index reached a high of 3568 in April and is now in the region of 3393. What’s noticeable is that when the index falls to the 200-day moving average, buyers emerge. The index has risen by about 194% since its low in October 2008.

A well-known American technical analyst, Jack Steiman, says that it’s a waste of time trying to understand why Wall Street is sending out such confusing signals. Because if the stream of bad news is kept in mind, then, from a fundamental viewpoint, strong falls should occur. The only way to try and make sense of what’s going on, he says, is to analyse the message of the technical indicators.

This certainly includes the fact that, given the uncertain circumstances, investors sell their weaker shares during market upturns.

* The advance/decline line covers the whole market and means that the total number of shares that have fallen (daily or weekly) are deducted from those that have increased. The result is a net figure that’s added to form a cumulative line. To avoid confusing fluctuations, a moving average (say 10 weeks) is used to level out the line.