Indecision On NGSE Signals Trend Continuation, As Pullback May Confirm New Direction

Market Update for June 3

The bullish momentum and positive sentiment on the Nigerian Stock Exchange (NSE) was sustained at the midweek, as the benchmark All-Share index closed marginally up on a very high traded volume to remain on recovery path driven by smart money and corporate actions of companies that recently declared dividend.

Added to this is the impact of the rebounding oil prices at the international market helped by the economic recovery in China. For now, also, the easing of the lockdown by governments of various nations continues to propel crude oil to its pre-Coronavirus price of $40 per barrel, with the over 90% compliance rate of OPEC and its allies with the production cut agreement.

Technically, consolidation is setting in at this time, considering the trading pattern and oscillating trend of higher highs within a range, signaling indecision among players ahead of an expected weaker Q2 corporate earnings and economic data.

This is notwithstanding the seeming rise in the activities of smart money as revealed by the money flow index hitting the highest of 96.62 points since January 23, 2018.

This rebound in oil price and massive injection of funds from central banks across the globe may quicken the recovery of the global economy wrecked by the Coronavirus outbreak which has sent many economies to their historic lows.

The Nigerian stock market continues to rally amidst the global pandemic which initially brought it to its 11-year low in March. It has, so far, almost recovered from the March bottom, in the midst of weak and declining macroeconomic indicators and rising new cases of the COVID-19 infections and deaths being recorded across the country today.

However, this disconnection between economic reality and the stock market is a function of the ongoing global and domestic economic reset and the power of banks as bellwethers of stock markets and the economy. The nation’s GDP has continued to move in the opposite direction of population growth, changes in trading conditions and the recovery of markets shows the importance of liquidity and sentiments in any market today.

According to Peter Lynch, “You can flip a coin over where the market is headed over the next year.” Investors have no way of knowing ahead of time whether investor optimism will lead stock prices higher in the short term, or whether the combination of overvaluation and a sharp drop in GDP will send markets into a tailspin.

Meanwhile, midweek’s trading started slightly up before pulling back by the mid-morning to midday, oscillating for the rest of the day on profit taking and positioning in high cap stocks that pushed the NSEASI to an intraday high of 25,445.47 basis points, from a low of 25,308.50bps, before it finally finished the day higher at 25,407.96bps on a flat market breadth.

Wednesday’s market technicals were positive but slightly weak as volume traded was lower  than the previous session’s, in the midst a flat breadth and  strong buying sentiment as revealed by Investdata’s Daily Sentiment Report, showing a ‘buy’ position of 73% and sell volume of 27%. Total daily transaction volume index stood at 1.20, just as momentum  behind the day’s performance stayed strong, with Money Flow Index reading 96.62points, up from the previous 92.98ps, indicating entrance of funds to the market and some stocks.

Index and Market Caps

At the end of Wednesday’s trading, the composite index gained 24.53bps, closing at 25,407.96ps, from the 25,383.43bps it opened, representing a 0.10% up, while market capitalisation rose by N12bn to N13.25tr from opening value of N13.24tr, representing a 0.10% value gain in investors’ portfolio.

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The session upturn was impacted by gains recorded by MTNN, Presco, Stanbic IBTC, ETI Sky Aviation, AIICO, and Neimeth Pharmaceuticals among others, which impacted mildly on the NSE’s benchmark index. This reduced the NSE’s Year-To-Date loss to 5.34%, while market capitalization YTD gains stood at N295.12bn, representing a 2.28% up from the year’s opening level.

Mixed Sector Indices

The sectorial performance indices were largely bearish except for the NSE Insurance that closed at a marginal 0.05% green, while NSE Banking led the decliners, losing 0.58%, followed by NSE Consumer and Industrial Goods which were down by 0.38% and 0.16% respectively. The NSE Oil/Gas remained flat.

Market breadth was flat and negative with decliners outpacingadvancers in the ratio of 19:18, just as activities in volume and value terms were mixed with volume traded dropping by 6.5% to 353.26m shares from the previous day 377.88m units, while value was up by 16.12% to N7.04bn from Tuesday’s value of N6.06bn. This volume was driven by trades in FBNH, Nigerian Breweries, Guaranty Trust Bank, Japual Oil and Zenith Bank

Neimeth Pharmaceuticals and Sky Aviation were the best performing stocks of the day after gaining 9.7% and 9.66% respectively, closing at N1.47 and N2.27per share respectively on improving earnings and dividend payout of N0.165 per share. On the flip side, PZ and C/ Leasing lost 9.43% and 9.35% respectively, closing at N4.80 and N4.85 per share respectively on market forces.

 Market Outlook

We expect indecision to continue among investors as breakout or breakdown at this consolidation level will confirm next market direction despite profit-taking, as investors positioning reveals confidence among market players, implying that opportunities are still available before the Q2-driven earnings expectation. Also, sectors that have suffered oversold, so far, offer attractive risk-reward buy-opportunities and outlook for consideration ahead of the Q2 economic and corporate data.

While investors digest the impact of the MPR cut from 13.5%, corporate earnings and economic activities, the MFI is showing improved institutional investors activity in the midst of the oscillating oil prices, amidst the rising new cases of the coronavirus with the number of infected people crossing 10,000 and deaths above 280.

However, the market’s high dividend yield continues to attract buying interests, while more audited and unaudited corporate earnings will hit the market, going forward, despite the likely continuation of selloffs. Investors are buying to increase their positions in undervalued stocks ahead of dividend declaration and Q1 numbers. This is also against the backdrop of the fact that the capital wave in the financial markets may persist in the midst of relatively low-interest rates in the money market, high inflation, and unstable economic outlook for 2020.

Also, investors and traders are positioning amidst the changing sentiments in the hope of improved liquidity and positive economic indices that may reverse the current trend. We see investors focusing on the upcoming full-year earnings season, targeting companies with strong potentials to grow their dividend on the strength of their earnings capacity.

Again, the current undervalued state of the market offers opportunities to position for the short, medium and long-term, which is why investors should target fundamentally sound, and dividend-paying stocks for possible capital appreciation going forward.

This was noted in the 10 golden stocks and trading ideas for 2020, as discussed extensively during the Investdata 2020 Traders & Investors Summit held in Lagos.

 Also, traders and investors need to change their strategies, because of the NSE’s pricing methodology, the CBN directives, and their impact on the economy in the nearest future.

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