More indicators show negative short-term picture for JSE

The current market pull-back, reflected in the sharp decline in the FTSE/JSE All Share Index this week shows a negative short-term picture for local markets.

Another indicator of the market’s short-term momentum is the 10-day Advance/Decline indicator. This indicator calculates the number of shares increasing in price less the number of shares declining on a daily basis. The number is then averaged out over 10-day moving periods, i.e. from 20 April to 4 May and again from 21 April to 5 May. The following graph plots the FTSE/JSE All Share Index’s 10-day Advance/ Decline indicator.

(Click on image to enlarge)

After trading in the overbought shaded red area (which represents two standard deviations above the mean) during the first half of April, this indicator subsequently declined sharply to the zero line (i.e. the number of shares increasing in price is equal to the number of shares declining). During the latter half of April it toyed with the zero line briefly, but in the past few days it once again dropped sharply and has now moved into the oversold shaded blue area that represents two standard deviations below the mean.

The blue area, especially when the indicator has declined to below a level of -20, has signified good buying opportunities, such as those that presented themselves during the February 2010 market low. The indicator also signified the start of the post-crash bull market when it declined significantly below the shaded blue area in February/March 2009.

Could the indicator decline further to below its current level of -18,6? Considering the fact that the market is still not cheap – despite the fact that the PE ratio has declined from a high of 19,0 on 8 March 2010 to a current level of 16,7, as well as the fact that investors are nervous about further debt contagion in the eurozone and China’s ongoing efforts to cool down their economy, I would be inclined to believe this is a distinct possibility.