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As the bear trend gains momentum, it becomes more and more difficult to find shares that are likely to perform well. Bear trends are like that. Even if the share you select is of excellent quality, it will probably go down in line with the rest of the market, especially if it is highly rated. The systematic risk in the market is pervasive at the moment, and sentiment among international investors is now predominantly “risk-off”.
With the fall in the S&P500 through the key support level at 3900, the excessive enthusiasm and bullishness which have characterized this bear trend so far, have become harder to find. Most of the bulls in this market are relative newcomers, having joined the market since 2009 and hence have no direct experience of a true bear trend.
The extended bull trend that they have known has led them to believe that sooner or later all downward moves in the market are short-term and there is money to be made by “buying the dip”. That has been their consistent truth for the past 13 years to the point where they take it as a rule – but even they have to admit that none of the previous downward trends that they have seen before is quite like this one. Consider the chart:
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/sp_17SePaRT22.jpg" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/sp_17SePaRT22.jpg" /></a>
<figcaption class="figure-caption">S&P500 Index: February 2022 - 16 September 2022. Chart by ShareFriend Pro.</figcaption>
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 This chart shows the firmly established and very important support/resistance levels at 4170 and at 3900. The 4170 level was first established in February and March earlier this year when the S&P came down to find support at that level. Then in May there was backing and filling before that level was broken. Later in May and early June there was a period of 8 trading days when the resistance at 4170 was tested before the market fell back to reach its June low at 3666. The two-month bear trend rally, which began in June and ran until mid-August, also saw a period where the market struggled to penetrate above 4170. Then finally, the remarks of Federal Reserve Bank governor destroyed bullishness at Jackson Hole on 26th August. This resulted in the market collapsing back to the lower support level at 3900.
The 3900 level was first established as an important level in May this year when the S&P came down to test it twice. Then following the cycle low of 3666, it was tested twice in the bear market rally before finally being penetrated in the second half of July. Now, after Jackson Hole, the S&P fell back to find the 3900 level again and when it failed to penetrate it, we saw a resurgence of bullishness for four days taking the market back towards the 4170 level. The disappointing August US inflation figure saw the market fall back to 3900. Then on Friday the 3900 level was resoundingly broken and the S&P ended up at 3873.
So, what happens now? In our view the S&P will now fall back to test the 3666 cycle low which it made on 16th June 2022. And we believe that after some backing and filling around that level it will break down to a new lower low – and in doing so, confirming the existence of a major bear trend.
At the same time the “risk-off” sentiment will cause the rand to be under considerable pressure – but no more than first world currencies like the euro.
Share prices on the JSE have generally lagged behind the S&P in this bear trend. Firstly the JSE Overall index reached its highest point on 2nd March 2022 – two months after the record high on the S&P which happened on 3rd January 2022. Secondly, the JSE Overall index on Friday was only down 14,1% from its record high whereas the S&P was down 19,1%. So, our market is running 5% behind the S&P and is likely to play “catch-up” in the coming weeks and months as risk-off sentiment takes hold.
You might want to know how far down the markets will go. There is no clear answer to that question – but probably the S&P will fall at least to somewhere around 2400 with the JSE following close behind. On the chart above we have superimposed the 300-day simple moving average (MA). When that moving average turns up you can be fairly certain that the bear trend is over. Since World War II the slope of the 300-day MA has been an excellent indicator of bull and bear markets. The only problem is that it is a little slow.
 
Feedback
<ol>
<li style="text-align: justify;">On 18th July this year we published an <a href="/index.php/tesla" target="_blank" rel="noopener">article</a> in which we suggested that one share which could perform well during the bear trend was Tesla. At the time it was trading for $720 per share. Since then it has done a 3-for-1 share split and the share closed on Friday at $303.35 – which means that it is still up 26,4% from $720. </li>
<li style="text-align: justify;">On 29th August we published an <a href="/index.php/bear-pick-balwin" target="_blank" rel="noopener">article</a> in which we recommended Balwin as a strong property share worthy of your attention. At the time Balwin was trading for 250c. Since then, it has published a very positive operational update saying that its headline earnings per share for the six months to 31st August 2022 will show headline earnings per share (HEPS) up between 45% and 50%. The share has moved up to 270c. </li>
<li style="text-align: justify;">On 12th September 2022 (last week) we published an <a href="/index.php/capitec-and-the-bear" target="_blank" rel="noopener">article</a> in response to several enquiries from clients asking whether it was a good time to buy Capitec. We said that despite the quality of Capitec as a share it would almost certainly fall further before reaching a bottom because of the bear trend and the fact that it was over-priced relative to the other big banks. At the time it was trading for R1913.33 and it has now fallen to R1744.17.</li>
</ol>