The All Share spent the whole of last week flipping between positive and negative, up until Monday. We started last week Monday at 28 116 and opened this morning (Tuesday) at 28 124, a nice eight-point move over six trading days.
All the volatility that had been dominating the trade so far this year seems to have died down and this has been reflected in the VIX index in the United States dropping to multi-year lows. Often referred to as the “fear gauge”, the VIX (Volatility Index) is a brilliant forward-looking indicator of what investors and traders are prepared to pay in the market for risk. It is a tradable index that that reflects a market estimate of future volatility in the S&P 500 options.
The higher the gauge, the more risk, and the lower the value, the lower the risk. Currently at 18% volatility, the market is saying that there is less risk now than we saw 18 months ago (i.e. before the worst crash since the Great Depression). Now, I’m not an economist, but I don’t believe the world is exactly in a perfect place. China appears to be looking a little overheated and our local stocks, including the retailers, are sitting at all-time highs. The likes of Shoprite, which is now up 20% this year and is trading on a price/book of 7 and a forward PE of 18, doesn’t exactly look bargain basement. But as we have seen in the past, when the foreigners start buying, they can move a market 5%. But as quickly as they enter the market, they can also exit.
There is also an old adage in the trading world, which goes along the lines of: When you start to read it on the front pages, you should probably be selling. So, when I see all-time highs, the consumer is feeling great, new home sales are increasing and the market is pricing in no risk … we should probably be selling.
Anyway, more guidance will be given with this week’s MPC meeting out of the United States and traders will be dissecting all the rhetoric that follows. Add to the fact that Monday was the second quietest day of the year on the JSE and you get the feeling that this market is feeling very tired and something is needed to jumpstart it. Let’s hope this week picks up from the boredom stakes, but something tells me when everything looks perfect … tread carefully.
Nick Kunze is head of trading at BJM Private Client Services