Jean Temkin
20 August 2007
column
Johannesburg — U.S. CREDIT problems caused world markets to plummet. But while markets fell the dollar continued grabbing again some of its former glory against other currencies.
While the dollar has so far snatched back only 2,88% against the euro and 2,54% against sterling, the currencies of emerging and second-tier markets have taken the serious beating.
Since July 23 the rand has lost 10,41% against the dollar. It's worrying that the slope of rand's current rate of loss is similar to that seen last year from May 12 to June 23, when its value fell 23%, and August 16 to October 3, when it lost 30%. This makes its next count to above $1/R9 quite possible. This prospect may be lauded by our mining industry, but causes shudders at the petrol pump.
The good for some and bad for others is the rand's loss in value against the euro. Because Europe is our biggest trading partner since the euro came into being, the rand often mimics its moves against the dollar. But as the euro lost against the dollar, the rand plummeted against both currencies.
I've used a point-and-figure chart to illustrate the fortunes of the rand/euro exchange rate. The chart shows the number of rands that can be exchange for Euro 1. In 2005 the rand-euro exchange rate moved in a band between Euro 1/R7,40-Euro1/R8,43.
Last year, the rand lost almost 24% as it ranged between Euro 1/R7,19- Euro 1/R10,03. Despite the substantial fall followed by a partial recovery during February and March, the rand lost altogether 9,15% against the euro so far this year. The worrying part is that despite a slight gain on Friday it has lost 6,14% against the euro over a period of four weeks.
The arrows on the chart are placed to show the breaks from which forward counts have been made. The first count to Euro1/R10,40, made from broken double top, was 3,7% lower than low last October. The second arrow points to a broken triple-top in February this year, giving a count to Euro 1/R12,22. This count may appear unlikely as the euro-rand exchange rate is overbought in the short term and is at the top of a short-term cycle. But, given the present chaos in world markets, nothing can be ruled out completely.
In the longer-term, the equilibrium level (the average) of Euro 1/R10,10 on the rand-euro standard deviation plotting (not shown), starting at the low of February last year, was passed on Thursday. This indicates that in the longer term, the rand is by no means oversold. The next level of support on this standard deviation plotting is currently just below Euro 1/R10,90 and there is a second support at about Euro 1/R11.
As for the share market as a whole, with the JSE overall index's downward break through its standard deviation support, and its worst-case scenario down-count to 22445, the outlook remains gloomy.
The gloom was made worse by last week's rate rise. However, a ray of light for world markets was shed by the cut in US discount rate resulting in some markets moving better on Friday. Our market did not improve, but the JSE overall's cycle trend plotting shows the index at the bottom of a cycle and the future plotting rising gently.
The overall's MESA sine wave plotting has also broken up through its moving average, sparking off a short-term buy signal. However, this still remains a market where only the brave dare enter.
While last week's sector plottings were generally murky, some experienced an up-flip on Friday, often caused by a rise in a single index component. In cars and parts, Metair whose earnings are expected to be between 25% and 40% higher for the six months to June, resumed the strong upwards trend, but may dally around its current level for a while.
In media, Naspers N bounced from a well oversold position and looks set to gain a little more. Continuing to buck the general trend, rand-hedge stock Richemont gained a little, but is not likely to gain much more until market-madness abates. In leisure goods, Amaps, which has remained in oversold territory since May, may gain a little more. In health, Netcare, which has jogged along an oversold position for three weeks, gave a slight lift and is likely to lift more. Netcare has been given the green light to acquire the 56,25% of CGH it doesn't already own.
Industrial engineering was boosted by three of its shares. Invicta lifted from an oversold position and may gain more, and Hudaco's rise is likely to continue. Bell, which is preparing for a BEE deal, lifted slightly but is likely to continue trudging sideways for a while.
The three chemical shares gained. Omnia's acquisition of the entire issued share capital of Zetachem for R206m will be settled in cash. But Zetachem's large cash pile will become available to Omnia bringing the net cost down to R133m. Omnia's share price may gain a little more and then drift sideways. Bouncing up from its most oversold level for four years, Afrox may gently nudge better for a while, while AECI's further gain looks limited.
Using cycle trends future plottings to trawl the bottom of the market for possible bargains, I've noted that deeply oversold Telkom looks overdue for a recovery and may begin to move better. In general retailers, Woolies, Massmart and Mr Price look set for short-lived rises.
In food AVI, which expects its headline earnings for the year to June to be between 30% and 40% higher, is likely to grab back some of its loss. Illovo looks ready for a steady rise.
The short-term outlook for the mining index, which is its most oversold for three years, is encouraging.
SXR looks ready for a lift while and Sallies and Wit Gold are likely to continue their rise.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis
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