In technical analysis, Head & Shoulder (H & S) patterns are usually quite reliable reversal patterns. Fortunately they do sometimes fail. We did not warn anybody when the neckline was broken on the 7th of July. The target for the H & S was for another 8% drop to 46,400. However, we felt that the market wrongly reacted to Grexit and China.
In this case our fundamental perception differed totally from the technical analysis picture. So, instead we wrote the blog post, Trying to make sense of this market routing, in which we argued that the equity market drop is wrong and should recover. We explained how important it is to look at the bond market for direction in a crisis. That was written on the 8th, the very day the market turned around. It’s not often that one is so spot on. Must be luck. We had similar luck last year when we predicted a market correction in July and a recovery in October.
Yesterday the recovery in the All Share Index also broke the fail-safe line which means that the H & S pattern has failed and can be ignored. This does not necessarily mean that we will continue to race up. It does however mean that the long-term Bull market is intact, plus the All Share Index is again trading above its 200 day Moving Average, see chart below.
Fundamentally the market is not cheap at a P/E ratio of 17.5, although it is cheaper than the 19.4 of 24 April this year. Our GDP growth rate looks like it might disappoint again this year at below 2%. There is also still a possibility of an interest rate hike later this year if the US starts to raise their interest rates. We don’t expect the JSE to increase by more than 10% to 15% this year. The All Share index is now up 4%, leaving another 6% to 11% to go for the rest of the year. Despite the low forecast, equities is still the best asset class as bonds and cash are likely to yield a smaller return in our view.
Head Sanlam iTrade