March 2020, will be known as one of the most brutal months that the JSE and the equity markets have ever seen.
On 12 March, the index fell 9.51% and a further 11.98% on 16 March - two of the biggest daily drops since the 2008 Financial Crash.
CEO - JSE, Leila Fourie, said in an interview about the value drop and trade volumes:
“Over the past few weeks on average we've been processing more than 700-thousand trades a day. You can imagine the kind of pressure that puts on both back office systems as well as the trading systems.”
With the selling pressure overweighing the buying pressure, both new and old investors are dumping their positions and going back into cash.
This will lead to a drop in the JSE, which will drive stocks further down in the future.
And now thanks to uncertainty with the COVID-19 national lockdown, recession fears and with Moody's sudden downgrade, I believe the ALSI is ready to plummet another 25%...
Here's why and how I plan to profit with the plunge.
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South Africa has been downgraded to Junk!
Just over a week ago, the ratings agency Moody’s decided to downgrade South Africa’s sovereign credit rating from BAA3 to BA1.
This takes South Africa to sub-investment grade, which is also known as junk status.
The main reasons for the downgrade, according to Moody’s, was due to the unreliable electricity supply, a weak economy, lower business and investment confidence.
This downgrade will lead to South Africa being kicked out of the FTSE100 WGBI (World Government Bond Index) of local-currency debt.
Analysts now estimate that, investors are expected to dump between $4 billion and $10 billion worth of capital (rand government bonds) from SA’s bond market.
Even Geoff Kendrick, London-based head of emerging-market currency research at Standard Chartered said…
“Outflows could total anywhere between $4 billion and $10 billion”
This downgrade status will increase the cost of capital, cause lower investment confidence and the economy will be negatively affected, which will bring the JSE down further.
And Tito Mboweni said,
“The sovereign downgrade will further add to the prevailing financial market stress”
COVID-19 is disrupting the economy – with no end in sight
With majority of shops, restaurants, businesses and even clubs at a standstill, I believe there are two major issues arising.
First – Our economy is struggling as people are losing jobs, less money is flowing into the country and foreign investment is falling (now with Moody’s decision).
With the sudden downgrade along with the recession fears and economic collapse from the national lockdown - This will add to the negative outlook for weak economic growth, which will cause further panic selling.
And when we look at the JSE All Share Top 40 index (ALSI40), it looks like we are about to experience another 25% drop.
Take a look at the chart below…
Why I expect another 25% drop on the JSE thanks to COVID-19, Moody’s downgrade and the future unknown.
Above you can see the weekly chart of the All Share Top 40 Index.
Since 2014, the ALSI 40 has been in a sideways Rectangle Formation (shaded area).
In this pattern, the market continued to bounce within a range with a high price at 54,662 and a low price of 41,844.
Last month, due to all of the above reasons and more, the ALSI 40 broke below the rectangle formation, entering into a bear market or down trend.
Now we can expect the price to fall further, as the sellers are outweighing the buyers…
To calculate the next target, we’ll simply find the price range between the high and the low and subtract the difference from the low price.
Price target = Low - (High – Low)
= 41,844 - (54,662 – 41,844)
This means, we can expect the ALSI 40 price to continue to fall to 29,026 (25%) which we can take advantage of…
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How I’ll profit from the next 25% ALSI40 crash
In the next few days, I’ll be looking at selling (going short) a few retailers and banking stocks which fall, when the ALSI 40 drops.
Analyst, Red Hot Storm Trader
A small group of savvy South African traders are pocketing fast gains like 389%, 135% and even 52% in the global financial markets. You can find out how here…