Over a period of a 15 years I relentlessly hunted for, and found, those main criteria that have a profound effect on future investment and economic outcomes on the local market since 1960. The list looks ridiculously simple and obvious in hindsight:

Current valuations of the JSE index (trailing P/E) Interest rates levels and their trend (tightening or easing) Net foreign purchases of SA stocks and bonds The local government bonds yield curve SA Leading Economic Indicators Stock market momentum Stock market participation (breadth)

The tricky part is no single one of the above leading criteria work every time since 1960, but putting them all together in a Leading Investment Conditions Index “cocktail” yields remarkable results as shown below. Whenever the Leading Investment Conditions Index falls below zero the model suggests you have 3-6 months to move to cash and sit tight collecting the prevailing fixed interest available at the time until the index moves above zero again:

There were three occasions the Leading Investment Conditions Index dipped below zero and the JSE still managed to eke out 10-15% gains. Does this mean the model was wrong? Quite the contrary – the prevailing interest rates on those three occasions are shown in the above chart, showing you would have achieved substantially higher returns than the JSE for virtually no risk. So the model is more concerned with where you are likely to get the best risk-adjusted return as opposed to trying to capture every up-trend in the stock market.

Apart from a brief 6-month attempt at staying above water from October 2017 to March 2018, the Leading Investment Conditions Index has been in a solid bear market since September 2013:

In fact whilst 2009 to 2013 was the longest consecutive bullish period since 1960, the period thereafter ranks as the longest bearish period witnessed since 1960:

The warning from this indicator is very clear – expected future stock market and economic outcomes are highly unlikely to be positive. About the only safe way to be entering the stock market now is on steep corrections of the order of 10% or more or through superior targeted stock-picking. There is also no safety to be found in any broad categories, indices or ETF’s except perhaps those with a strong Rand-hedge.

There are virtually zero silver linings in the Leading Investment Conditions Index right now:

You have got to ask yourself, with all these headwinds stacked against you – just how lucky you need to be to get a positive outcome. My only advice is tread very carefully and/or make sure your brokers or dealing desk know what the heck they are doing if you are going to punt any local shares. Make sure you are properly diversified offshore, and if you can, buy-the-10% dips when they present themselves.



Dwaine van Vuuren

Retail-side Research

RecessionAlert, Sharenet Analytics



Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and Sharenet Analytics (SA based) into subscription services used by thousands of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.