The South African Reserve Bank (SARB) has cut the repo rate by 50 basis points, from 7.5% to 7%. This has resulted in an increase in the PowerStocks Monetary Policy Indicator (MPI) Timing Model signal as shown below: As you can see, the point gained by the MPI Timing Signal as a result of today’s rate cut merely negated a MPI point expiration that occurred on 10 August 2009 (for the 10th February 2009 rate cut). If you recall, our Monetary Policy Timing model allocates points when rate cuts occur, but these points expire after 6 months as their effects on the economy and markets wear off. BUY/SELL signals occur when the MPI crosses 0 (shown by the yellow line above).Our quantitative research for the JSE confirms international research that Expansionary monetary periods (declining interest rates) result in much better stock market returns than restrictive monetary periods (rising interest rates) and as our 31-year research also showed, the MPI signal line score (currently 5) is directly correlated with the strength of expected JSE returns.
The result is that there is no change to any of the current PowerStocks Market Timing signals as a result of this interest rate cut. However from 22nd September the MPI expiries start coming thick and fast and will pull the MPI down to 2 in no time at all if there are no further rate cuts. This is not necessarily a cause for concern though as the MPI Model is but one of 4 voting timing models comprising the PowerStocks Composite SuperModel Timing System. The other timing models are the Econometric Model (based on the South African Leading Economic Indicator and contributing 1 vote), the Trendex/Coppock Momentum Model (2 votes) and the PowerStocks Seasonality Model (1 vote).