RELATED TOPICS --> | The Piotroski F Score | Piotroski Backtests on the JSE | Piotroski Blog |

Our research into JSE Market Breadth has shown just how incredibly powerful it is to use underlying index share data to measure the health of the market (as opposed to measuring price and volume action of the index itself). Our research papers have shown that many breadth indicators provide startling accuracy in warning us of impending crashes, pull-backs and reversals of bottoms, most times when observation of the index daily price movements shows nothing untoward.

We are the only company in SA to have automated the computation and regular monthly cataloguing of every company on the JSE's financial strength (or distress) through the JSE Piotroski Ranking Tables we publish for our subscribers. This gives us a score from 1-9 rating a companies' financial health based on 9 pieces of key data taken from the companies last two recently published financial results:

  1. Positive earnings
  2. Positive cash flow from operations
  3. Increasing Return on Assets (ROA)
  4. Quality of earnings : Operating cashflow > Net income
  5. Decreasing long-term debt as a proportion of total assets
  6. Increasing Current ratio (increasing ability to pay off short-term debts)
  7. Decreasing or stable number of shares outstanding
  8. Increasing Asset Turnover ratio, indicating increasing sales as a proportion of total assets
  9. Increasing gross margins
Many of our subscribers actively use this data in our Piotroski Investment Strategy, which aims to pick shares selling below their book value, but with strong financials. This is one of the oldest and best performing mechanical investing strategies on our site.

Whilst doing Piotroski Backtests going back a decade, we noticed that on certain years firms were struggling to get high scores and in boom years, high scores were plentyful. Since we are already cataloging this data, we decided to launch, in what is believed to be a world-first, and the most sophisticated breadth index ever - the PowerStocks JSE Financial Strength Indices, which will measure on a monthly basis the following:

-->Financial Strength Index : Percentage of JSE shares with Piotorski "F" scores > 6
-->Financial Distress Index  : Percentage of JSE shares with Piotroski "F" scores < 3

International tests, which we have confirmed with 12 year back-tests on the JSE, show that companies with "F" scores of 7 or higher normally outperform those with scores less than 7. Also it is now accepted that companies with "F" scores less than 3 can be considered under "financial duress" and candidates for "shorting".



By launching these two indexes, we will have a good guage of the state of the financial condition of the JSE's underlying shares and as with other breadth-indicators we maintain at this site, we expect this will also provide early advance warning of recessions and stock market weakness as well as confirmation of economic recoveries.

We are busy reconstructing this index for a 10 year past history, so that we may calibrate it and perform research on its correlation to market movements to offer alerts and rules which our subscribers may use for investment purposes. This is a mammoth task and will take several months to complete, but in the meantime we will update the above chart on a monthly basis with new data as we progress with this task.

RELATED TOPICS --> | The Piotroski F Score | Piotroski Backtests on the JSE | Piotroski Blog |
 
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