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Under Construction

The JSE Construction Index has gained almost 22% since its August lows last year, as the outlook for the industry improves with investors seeing opportunities. In the top window, the chart shows how the construction index seems to have bottomed out, having lost more than 30% last year. In the lower window, we have a simple Relative Strength chart of the JSE Construction Index relative to the JSE Overall Index. The Relative Strength indicator simply plots the ratio of the two items, or one data stream divided by another data stream. If the Relative Strength line trends upwards, then entity 1 is performing better than the comparative entity 2. If it is trendless or moving sideways, then there is no comparative advantage, but if the trend is downwards, then this would indicate that the entity 1 is weaker.

Firstly we see the graph falling, which tells us that the construction sector at that time was underperforming relative to all the other JSE sectors. It then went through a sideways period, or performing in-line with the other sectors, before dipping lower again. Since August last year, the construction sector has slowly started to move higher above its moving averages, suggesting market outperformance.

When looking at the recent share price performances of the bigger heavy construction companies, it seems like they have lagged slightly behind smaller companies like Basil Read (JSE: BSR). If one had to compare Basil Read’s performance relative to the JSE Construction sector, using the Relative Strength indicator, one would definitely see market outperformance. Basil Read released a trading statement at the beginning of the month, in which they stated that the company expects its headline earnings per share for the period ending 31 December 2011 to be between 28% and 38% lower compared to the previously reported corresponding period. Earnings had been negatively affected by difficult trading conditions in the construction sector, which has led to the group raising provisions for end of site losses in the amount of R115-million. These provisions relate primarily to three loss making contracts comprising a railway construction project in the Northern Cape, a roads contract in the Free State and a roads contract in Botswana. The group currently has claims against certain of these losses but due to the uncertain nature of the outcome of these claims, no provision has been made for any potential recovery. We still maintain a hold recommendation on Basil Read.

A simple Relative Strength indicator is a useful tool in a technician’s arsenal to find underperforming shares, that are about to move higher. The trick is to keep an eye open for the start of the recovery.

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2017/02/21 23:31
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