Breadth: Interpretation of Market Conditions

Research Notes For 16 to 20 June > https://www.unum.capital/post/r1620june

Trade Local & Global Financial Markets with Unum Capital.

To get started, email tradingdesk@unum.co.za

Key Takeaway and Implications

The data clearly illustrates a substantial and swift negative shift in short-term market sentiment for JSE Mid & Large Cap stocks over the past week. What was a relatively balanced to strong market last week has transitioned into one exhibiting widespread weakness and increasing bearish momentum.

While this deterioration suggests heightened risk and a prevailing negative sentiment, the emerging concentration of readings in 'Weak', 'Higher Bearish Momentum/Approaching Oversold', and especially 'Oversold' categories could present a near-term opportunity for investors. As a greater number of constituents enter these oversold conditions, they may become fundamentally undervalued, potentially setting the stage for a rebound or a tactical buying opportunity for those looking to acquire assets at a discount. Conversely, the sharp reduction in 'Overbought' and 'Strong' readings implies that any broad-based selling opportunities from an overextended market have largely diminished.

Interpretation of Market Conditions

This note provides a comprehensive analysis of the JSE Mid & Large Caps Short Term Trend Rating data, comparing market conditions from Friday, June 06, 2025 (representing last week's readings) to Friday, June 13, 2025 (representing this week's readings). The interpretation focuses on the shift in the distribution of constituents across various market trend categories. The hierarchy of strength, from strongest to weakest, is defined as follows: 'Overbought', 'High Bullish Momentum/Approaching Overbought', 'Strong', 'Neutral', 'Weak', 'Higher Bearish Momentum/Approaching Oversold', and 'Oversold'. It is important to note that a majority of readings closer to the 'oversold' end of this spectrum generally suggest a near-term buying opportunity, while readings closer to 'overbought' typically represent a selling opportunity.

Analysis of Last Week's Readings (End of Day: Friday 06 June 2025)

A total of 105 constituents, depicted a market that was generally balanced to bullish:

• Overbought: 7 constituents

• High Bullish Momentum / Approaching Overbought: 12 constituents

• Strong: 35 constituents

• Neutral: 40 constituents

• Weak: 11 constituents

• Higher Bearish Momentum / Approaching Oversold: 0 constituents

• Oversold: 0 constituents

At this point, a significant portion of the market, totaling 75 constituents (35 Strong + 40 Neutral), resided in stable or positively trending categories. The complete absence of 'Higher Bearish Momentum/Approaching Oversold' and 'Oversold' readings indicated a lack of significant downward pressure or extreme bearish sentiment. The relatively low numbers in 'Overbought' (7) and 'High Bullish Momentum' (12) suggested some strength but not an overheated market. Overall, last week's readings pointed to a market with healthy underlying breadth, not showing signs of imminent broad-based weakness or extreme conditions that would suggest immediate, widespread buying or selling opportunities.

Analysis of This Week's Readings (End of Day: Friday 13 June 2025)

Encompassing 108 constituents, revealed a considerable deterioration in market breadth and a distinct shift towards weakness:

• Overbought: 3 constituents

• High Bullish Momentum / Approaching Overbought: 3 constituents

• Strong: 10 constituents

• Neutral: 18 constituents

• Weak: 43 constituents

• Higher Bearish Momentum / Approaching Oversold: 10 constituents

• Oversold: 4 constituents

This week's data shows a dramatic increase in constituents exhibiting weakness. The 'Weak' category saw a surge to 43 constituents from 11. Critically, the 'Higher Bearish Momentum/Approaching Oversold' and 'Oversold' categories, which were entirely absent last week, now contain 10 and 4 constituents respectively. Conversely, the number of constituents in 'Overbought', 'High Bullish Momentum', and 'Strong' categories has sharply declined (from a combined 54 to 16). This indicates a rapid and broad-based shift in sentiment, with a significant number of stocks moving into bearish trend readings.

Net Shift in Weakness/Strength

To further illustrate the change, we can aggregate the categories:

• Last Week (June 06):

  • Strong/Bullish Constituents (Overbought, High Bullish Momentum, Strong): 7 + 12 + 35 = 54

  • Weak/Bearish/Oversold Constituents (Weak, Higher Bearish Momentum, Oversold): 11 + 0 + 0 = 11

• This Week (June 13):

  • Strong/Bullish Constituents: 3 + 3 + 10 = 16

  • Weak/Bearish/Oversold Constituents: 43 + 10 + 4 = 57

This represents a net decrease of 38 constituents in the strong/bullish categories and a net increase of 46 constituents in the weak/bearish/oversold categories. This quantifiable shift underscores the rapid and significant deterioration in market breadth.

Lester Davids

Senior Investment Analyst: Unum Capital