Jean Temkin
8 October 2007
column
Johannesburg — WAITING for Reserve Bank governor Tito Mboweni's rates announcement this week, the recently rampant bull may pause for breath. Theory holds that when rates rise, investors move out of shares into interest-earning investments, and when they fall, investors move back into the share market.
To investigate the relationship between the share market and interest rates I have drawn a chart of the Bankers Acceptance (BA) rate together with the JSE overall index dating to 1986. The BA, currently at 10,07%, is the charge between banks for short-term loans and is now at its highest level since September 2003.
The arrows show when rates and the market may have see-sawed. I overlaid the index plotting with speed resistance lines showing the overall tended to hug the lower of the three resistance lines until 2003 when the BA began to fall to its lowest level in the period. The index is now testing the top resistance line.
While other eyes are on commodities, look at sectors battered most by interest rate fears. Some are already reviving, and others may contain bargains.
From April 2003 until this April, the general retail index rose 457%. It then fell 24% before clawing back 7,68%. While the initial fall correlated with rate rises, the recent recovery correlates with the new credit law, which may have dampened shop-till-they drop credit buyers.
In the past six months the only shares in the general retail sector that rose were Rex Truform, New Clicks, Advtech, Tiger Automotive, Cashbuild, Italtile and African and Overseas. Missing are retailers that the new wave of consumers, who fuelled the rise, may typically patronise.
Late last month, Truworth passed its R32 down-count to reach R30,46, Woolies passed its R18 down-count to reach R17,36, Mr Price fell to within a whisker of its R24 count. Foschini drooped below its R55 and R53 counts, and looks set to reach its third, less reliable count to R50. H But Truworth, Woolies and Mr Price have begun perking up.
Truworth's rise of the past two weeks pushed it into overbought territory; it may hesitate awhile. A broken double top (less reliable than a broken triple top) gives it an uncertain long-term count to R45, but its equilibrium, plotted since its low last year, is R40. Woolies is rising in overbought territory and may gain more in the short term; its tentative long-term count is R25 and its equilibrium R23. Also just out of oversold territory, but dithering, Mr Price has a more reliable count (through a triple top) to about R35, well above its R31,50 equilibrium. Foschini is rising from its oversold position and may gain more in the short term. Foschini's R68 less certain count coincides with its equilibrium.
Banks were in demand last week. The only high street bank to gain in the past six months is Stanbank , now overbought. Stanbank's longer-term count is to R126, but is almost at its R112 equilibrium. FirstRand is at an overbought level, but may gain a little more in the short term to touch its R25 equilibrium. Longer term, FirstRand has an unsure count to R31. Absa is overbought but may reach its R144 equilibrium. Absa's tentative count is to R176. Nedbank pushed out of oversold territory and is well below its R147 equilibrium. Nedbank's Cycle Trend future plotting indicates a sideways move but there is a long-term uncertain count to R159.
Assurers are overbought and may pause awhile. Longer term, Old Mutual and Sanlam have counts to R28. Liberty has confirmed a new bull trend but may take time to reach its R25 equilibrium plotted from its 2003 low.
In general finance, Pergrin has reached a nine-year high and could gain more in the short term, but longer term has a count to R26. Coronation has a new record high, and, past its R10 count, may head towards its R11,70 count. BJM looks set to improve steadily, but must first break the R5,30 resistance. If broken in the current up-leg, BJM's count will be to R6,85.
Jean Temkin is the author of More Charting for Profit, a textbook on technical analysis.
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