Number of shares above 50-day moving averages sounds alarm bells

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During the market pullback of 9% from mid-January to early February, the number of shares in the FTSE/JSE All Share Index trading above their 50-day moving averages dropped from a high of around 80% to below 40%. Although the turning point is difficult to pinpoint, this proved to be an excellent buying opportunity, especially for the doubtful Thomas’s who have been caught being underweight in equities.

However, as the graph below shows, the number of shares now trading above their 50-day moving averages has once again risen sharply to a very high level of 85,5%. A level of above 80% has historically indicated extremely overbought levels and has often preceded a pull-back in the Index. With a considerable amount or nervousness prevailing and the market action we have seen in the last few days, it seems quite likely that we could see share prices retreat further in the short term.

Source: Plexus Asset Management (based on data from I-Net Bridge)

That said, the number of shares trading above their 200-day moving averages (see chart below) currently stands at 82,4%. With the 200-day moving average being a longer-term indicator and the trend still positive, it appears that the longer-term bull market that began in March last year is still intact.

Source: Plexus Asset Management (based on data from I-Net Bridge)

In short: lighten up your equity portfolio for a pullback or correction, especially where exposed to lower quality counters, but do not abandon the equity bull as yet.

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