In recent months much has been said and written about banks around the globe.
Comments were mostly about US banks where we saw historic names fail and others inflated with government capital or bought by others to prevent them from going under.
Through all of this I regularly heard local commentators saying that South African banks are isolated from this global turmoil. But is it?
Let's pull the charts closer to see if there is a possible answer to be found here.
In the first graphic we show the local JSE banking index (J835).
We see how banks rallied (see point 1) in a channel as it advanced from 10 000 in March 2003 to reach a record high of 43 000 in October 2007 (see point 2). This was a massive gain of 330% in 55 months.
From this high we saw banks fall 46% in 13 months to a low of 23 000 at point 3. Below the bank index we show (in maroon) how five banks performed relative to the banking index. We also show the actual price movement (in blue) of each of these banks.
From these inserts you can see how Absa and FirstRand were relatively strong if compared to the bank index as the red graphs for these two are near the top of the scale while Nedcor and Standard Bank were relatively weak as the red graphs are at a low of the scale.
The local bank index retraced 61.8% of the 2003-2007 advance as we show at point 3.
The 61.8% level is often a point of support where we see some buying interest coming back into a market after a pull-back.
The question all of us attempt to answer now is if the low in October 2008 indeed market the end of the decline for banking shares! In "normal" times this will be a challenging question.
Now we are in an economic climate that just about nobody have ever experienced before.
Nobody is clear on what exactly lies ahead as credit contracts and we enter into a probable worldwide recession.
If we had some sort of a leading indicator to suggest what lies ahead for the banking sector it will be of great help to us!
Where will we be able to find something that can help us forecast where the bank sector is heading and indeed help us to determine if a low is in place?
What if we look at some banking shares in America! What similarities can we see if we do a comparison between these shares and the local bank index? This is what we found:
We show Morgan Stanley, Merrill Lynch, Bank of America and UBS. These are four of the well known banks in America.
In these charts we show resistance followed by support and then eventually a failure of support indicated by the red circle on each chart.
Morgan Stanley fell 80% from the point where support failed till the last low was reached.
Merrill Lynch and Bank of America also fell 80% from the point where support failed while UBS thus far fell 70% from the point of failure! Note that we are not calling for a bottom in US banking shares. More selling could follow.
Now, at the bottom pane we show the JSE Bank index. What we see here is a very strong resemblance of our banking index and the five individual banking shares we show at the top. The difference is that it appears as if the JSE bank index is lagging the US banks.
We see the resistance levels that are overcome and then resistance that became support. Support was then tested twice before it eventually failed in the red circle leading into the decline.
The JSE bank index has broken below support in recent weeks.
With just about nothing else to go on, let's assume for the time being that there is a fair probability that we will see "similar" chart patterns playing out in a "similar" way.
If we then take lower support in the JSE Bank Index at 10 000 we notice that this will imply a decline of another 65% before this support is reached.
Is this possible? Yes, it happened to five US banking stocks that strongly simulated our current banking sector!
Will it happen? If the 26 500 support level fails convincingly this view becomes a very, very strong probability! This means that you will buy Absa at R40 instead of the current R100, or Standard Bank at R30 instead of the current R80! Nedcor could sell below R50 where it currently trades at R100!
As this outlook is confirmed you should forget about buying and holding. You should forget about being a value investor as you have no idea what the value will be!
Don't listen to views that price-earnings multiples are very favourably valued.
And if your advisor says that you should not be influenced by day-to-day movements in the stock market but that you invest for the long haul, take your money and run.
One of the advantages of technical analysis is that it is always possible to define a price level where you know your preferred outlook is wrong. So, where will we know that this outlook is wrong?
This will only happen if the JSE bank index advances to above 35 000.
Until then you should regard bank shares at the verge of yet another wave of selling.
- Fin24.com