Expect Uptrend Amid Profit-Taking Slowdown, Investors Positioning For Q2 Numbers

Market Update for July 19

Earnings expectations boosted trading on the Nigerian Exchange Monday as volatility and the mixed session continued, thereby extending the bullish outing for two consecutive days on a very high traded volume and positive breadth.

The rekindled buying interests in dividend-paying stocks and mid-cap equities with a high possibility of sustained an uptrend in earnings as the market expects their half-year and Q1 numbers any moment from now. This has supported the session’s high volume trades, which was on 98% buy position and money flow index looking up to read 69.21 points, indicating the entrance of funds into equity space ahead of more numbers and outcome of next week’s Monetary Policy Committee meeting.

Market players who understand the importance of combining fundaments and technical analysis in making investment decisions in the stock market should take this opportunity to position in some sectors for medium and short-term gains. They include the banking, telecom, industrial, agribusiness, real estate, construction, and consumer goods sectors, after a careful study of economic recovery and sectors that had supported the weak recovery which is likely to influence the performance of the companies in that industry and the market.

Technically, NGX index action has gradually entered wave 5 extension in continuation of its zigzag chart patterns that support an uptrend in the face of weak economic recovery and expectation of more corporate earnings to boost liquidity, sentiment, and momentum. This is as Investors on the sideline jump back to the market after the MPC meeting holding July 26 and 27, 2021.

Many analysts have typically increased estimates for Q2 numbers while companies are forecasting higher earnings in Q3, even as higher-than-expected earnings will make stocks cheaper.  At the moment, the market’s Price-to-Earnings ratio, just as in many companies, is trading below 18 times of earnings. In an environment of relatively low interest and high inflation, stocks historically, tend to move higher on earnings performance.

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Meanwhile, Monday’s trading opened slightly on the upside and oscillated to a marginally positive position on buying interests in energy, insurance, and manufacturing stocks that pushed the NGX index to an intraday high of 37,953.35 basis points from its lows of 37,912.50bps, and thereafter closed slightly above its opening point at 37,952.65bps.

Market technicals were positive and strong, with volume traded higher than the previous day’s, in the midst of breadth favouring the bulls on a high buying pressure as revealed by Investdata’s Sentiments Report showing 98% ‘buy’ volume and 2% sell position. The total transaction volume index stood at 2.02 points, just as momentum behind the day’s performance was relatively strong, as seen in the 69.21pts Money Flow Index, compared to the previous day’s 59.91pts, indicating that funds entered the market, despite closing flat.

Index and Market Caps

At the end of Monday’s trading session, composite NGXASI inched up by 5.47 basis points, closing at 37,952.65bps, from an opening level of 38,947.17bps, representing a 0.01% up, just as market capitalization rose by N2.84bn, closing at N19.77tr, from its opening value of N19.77 trillion, representing a 0.01% value gain.  

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Monday’s upturn was driven by position taking in Presco, GTCO, United Capital, Honeywell, Vitafoam, University Press, Livestock Feeds, Wema Bank, Cutix, and Africa Prudential, among others. This impacted mildly on Year-To-Date loss, increasing it to 5.76%, while the drop in market capitalization YTD rose to N1.2tr, representing a 5.98% drop from its opening value of the year.

Bullish Sector Indices

Performance indexes across the sectors were bullish, except for the NGX Banking that was down by 0.37%, while the NGX Insurance index led the advancers, after gaining 1.18%, followed by Energy, Consumer, and Industrial goods with 0.29%, 0.10%, and 0.01% higher respectively.

Market breadth remained positive with gainers outnumbering losers in the ratio of 22:10, while activities in volume and value terms were mixed after traders exchanged 462.81m shares worth N1.2bn, with volume driven by trades in Jaiz Bank, Sterling Bank, Wema Bank, Sovereign Trust Insurance and Universal Insurance.

Eterna and University Press were the best-performing stocks, gaining 10% and 9.93%, closing at N7.15 and N1.55 per share respectively on earnings expectation and market forces. On the flipside, FTN Cocoa and Sovereign Trust Insurance lost 7.32% and 6.06% respectively, closing at N0.38 and N0.31per share, on profit-taking.

Market Outlook

We expect an uptrend after the holidays on bargain hunters positioning and investors accumulation, as profit-taking slows down amidst rekindled buying interests ahead of more Q2 numbers grace the market, amid the increasing volume that suggests that an end is in sight, while smart money takes advantage of pullbacks to reposition. It is noteworthy that oil price continues its oscillation at the international market, even as corporate actions and interim dividend possibilities are around the corner. 

We note also that some stocks are trading within their buy ranges to become more attractive at this point for income investors and traders, even as the market anticipates positive news, while oil price continues to oscillate above $69pb to support global economic and stock market recovery across climates. We also expect the ongoing COVID-19 vaccination to support the global and domestic economic recovery that will enhance the market and give direction.

The banking sector and others remain attractive on the back of the prevailing low prices, despite the Q1 mixed numbers.

Again, the way to go is: Target dividend-paying stocks and fundamentally sound companies with growth prospects in 2021, looking the way of mispriced equities ahead of interim dividend announcement. This is especially given that despite the seeming improvements, fixed income yield continues to offer a negative real rate of return due to the galloping inflation.

However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by expected Q2 earnings reports, until the next MPC meeting in the coming week.

https://investdata.com.ng/expect-uptrend-amid-profit-taking-slowdown-investors-positioning-for-q2-numbers/