Think about the JSE in a roaring bull market, in that mad parabolic run-up to the final peak just before we enter a bear market. How many shares on the JSE do you think are trading above their 200-day moving average and have their 200-day moving average trending upwards at this time? 80%, 90%, 100%?

You will be surprised to find that less than 25% of the 400 main-board shares on the JSE are trading above their 200-day moving averages and have these moving averages trending upwards. Bear markets are a process and take months to even up to a year to form. The JSE does not wake up one morning and suddenly decide to fall out of bed.

You see, as fundamentals weaken, each and every share that makes up the JSE starts to frequently  decline below its 200-day moving average and if it does this enough, or stays below the average long enough, eventually the 200-day moving average of the share itself starts to decline. As the bull market matures and progresses, more and more shares start to decline below their moving average and eventually enter their own little bear market and eventually if enough shares do this, the weight on the JSE starts to overwhelm it and it too, must succumb to gravity and start falling.

Why choose the 200-day moving average? It is simply the 40-week average used by most technical analysts to depict the long-term trend of a share. We could have picked 240 or any other number but this is academic and we picked the number most people identify with.

This "Feathering Effect" of stock markets, where as more and more shares start to "tail off" and enter declines that the market index itself must eventually succumb to gravity and enter a bear market is a well documented phenomenon on global markets.

At any point in time we can divide the progress a share on the JSE is making into "Four Seasons" as depicted below:

In the "Summer" period, things are very bullish and the share is trading above its 200-day moving average and the 200-day moving average is trending upwards. Eventually the share starts making regular forays below the 200-day moving average and when this happens and the 200-day average is still trending upwards, we call this the "Autumn" season which eventually becomes a lead into "Winter" if the share stays here for long enough.

In the "Winter" season the share is trading below the 200-day average and the 200-day average is trending down. This is the most bearish period for a share. But after a while the share recovers (as the economy recovers or as the bargain hunters cannot resist buying the share at huge discounts) and starts to peek its head above the 200 day moving average and this is called the "Spring" season when "green shoots" start showing. This is normally the prelude to "Summer" and if the share stays above the 200-day average for long enough we enter the new "Summer" phase and repeat the cycle all over again.

We track every main-board share on the JSE since 1996 and categorise them daily as depicted above. We exclude ETF's and derivatives instruments as these are effectively "double counts". Note this is a proportional stacked chart meaning the red and green lines together depict the total % of shares "stacked" on top of each other to represent a maximum of 100% Click on the image to get a larger view open in a new window:



As you can see, when more than 50% of the stock market shares have an upward trend we are is a Bull market. However when more than 50% of the market has  downward trending 200-day moving averages, the market index enters the "vulnerable" stage. It may well recover back to a bull market but this is normally the prelude to a bear market. It is advised you adjust your holdings to 50% cash during these vulnerable periods.

When 75% or more of shares have downward declining 200-day moving averages, we are in a bear market as the JSE index cannot fight the forces of downward momentum from its constituents. We want to be 100% in cash and totally avoid the JSE during these periods. In the depths of the bear market, near the bottom, we see that 90% or more of shares have declining 200-day moving averages.

When in a bear market, eventually more and more shares start trending above their downward pointing 200-day moving average and this has the effect of eventually pulling the 200-day moving averages upwards. When 75% to 50% of shares do this, we enter the "Tentative" stage of a new bull market. You want to start phasing cash back into the stock market at this stage. Eventually there is a huge surge of shares climbing above their downward sloping 200-day averages and the new bull market is well and truly born.

The chart below shows the information for SUMMER and AUTUMN. Click on image to enlarge in a new window:


The dark green line in this chart is just the converse of the dark red line in the previous chart. A 10% reading on the red line in the prior chart represents a 90% on the green line in this chart and vice versa. Of interest in this chart though is the "Autumn shares" (orange) line as it does something not a lot of indicators can do and that is warn of an intermediate correction. When the orange line starts trending up  and breaches 10% and the JSE is rising, this is a fairly decent correction warning.

The two charts depicted above are displayed at the end of your JSE BREADTH report in the weekly JBAR Report Pack published on the MEMBERS section of our reports portal http://www.sharenet.co.za/v3/products/powerstocks/


 
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