After a rocky patch earlier this year, the local stock market just marched right up to a new all-time high, again making heroes of many investors, and superstars of the investors who owned the shares that went up even more than the market.
Some of the recent winners among the larger shares include Richemont, Sasol, Remgro, the platinum shares, Naspers, Tigers and Investec.
So, how could you have known that you needed to stay invested in the market and adding to your investment - even if on a staggered basis - in the face of the short-term wobbles that the market experienced earlier this year?
To quote from my April 30 column: "We have seen good returns from the South African equity market for two years now. Bull markets tend to last longer than that, and many of the major long-term indicators for our equity market remain positive (for example, a stable currency, lower interest rates and good domestic growth)."
Of course, I also added that staggering any new investments seemed like a good idea at the time and, in fact, you should have put every spare cent into the market at that point! So, while I am nibbling at humble pie, I hope that my message that it was still a bull market came through loud and clear. I think as South Africans we are just unaccustomed to extended periods of growth and optimism.
When markets get rocky, you have three beacons to look out for in order to decide whether to sell, or to stay in.
The first one always has to be the long-term fundamentals, including the valuation. For our stock market, these have been in place, and even though the market as measured by the price-to-earnings (p:e) ratio is at the upper end of the long-term range and not as cheap as it was two years ago, is still offers reasonable value given low interest rates and inflation. A long period of low inflation combined with good economic growth were certainly two of the drivers behind the p:e expansion that investors in the American markets saw in the 1990s.
The second sign is a technical one - the trend. As long as the up trend remains in place (measured by using a good old ruler), be very careful about pulling out of the market. The more a market pulls back to the trend line, the more valid the trend. Of course, if you are concerned that the trend has really extended itself, then a staggered approach with any new investment into the market may be a prudent approach.
Then one has to look at the momentum of the market.
In a nutshell, momentum measures how fast something is going up or down. For example, if you throw a ball into the air, it goes up fast at the beginning, then slows down, then comes down slowly and picks up speed as it approaches the ground. The ball displays high positive (upward) momentum, then lower positive momentum, then slow negative (downward) momentum as it starts coming down, finishing with fast downward momentum before hitting the ground.
In technical analysis the specifier for momentum is percentage change. Shorter periods of change (for example, one week or one day) will give lots of signals, many of them just noise. Longer ones (such as 13 weeks or 10 months, for example) give fewer and more meaningful indications.
As long as market momentum is positive, even if it slows down a bit, you should be careful, from a technical point at least, about baling out even if you think that this is really as good as it's going to get and the market feels very extended.
So back to April. The fundamentals were okay, momentum was positive and the trend was still up (the one that one can trace back to 1989). Easy to look at hindsight! Three months later the market is up nearly 20 percent. What now?
The trend is still up, the fundamentals are okay, and momentum is still positive. But I cannot help feeling that the market is just a little too extended, and really needs another breather! But I guess that's exactly what bull markets are supposed to do... It has been a while since South African investors have seen a long, good bull market and it's no wonder we will have doubts along the way.