Saturday, January 20, 2018

From London

Dear Valuable Investors,

Has Nigerian Stocks peaked after hitting 10years high, posting 72% gain (YoY) on last Friday to settle above 45,000bpts? Would you say…..Yes? No? Maybe?

The Nigerian Stock market rally appears to be losing momentum as market returns hit above 72% (yoy) on Friday, 19th January 2018. Already, we have observed significant weakness in market breadth, with a negative divergence posture at the end of 3^rd week ended January 19^th 2018. No doubt, the bullish sentiments remain very strong in the market and we remain optimistic that the party is just starting, all other things been equal. However, It is also important to state that there is no need for panic now but a cautious bargain is highly advised- the market fundamentals remain healthy and very much in-line with macroeconomic fundamentals. In addition to this, we are anticipating better earnings reports from quoted firms with improved rewards to shareholders and investors- this would play a pivotal role in the coming events. Before we go into weekly performance analysis, we would like to share the projections and insights into New Week Ahead from our market intel group.

Insight from our Market Intel Group…The New Week Ahead

We are anticipating huge market volatility as correction or profit-taking is technically underway. And we would like investors, mostly our readers to brace up for market volatility that lies ahead in the New Week.

The anticipated market correction is likely to be massive, it may shed close to 3,000bpts .i.e. 6% to 7% reversal - we consider this necessary, important and healthy for the market- And if this fails to happen any time soon, we may be switching into bubble mode.

We are not in doubt that the year is too young for sell-offs but if we factor in the 72% returns in the last one year, we may have a rethink and brace up accordingly.

The Essential Warning Signals

The signals of bubble are beginning to creep into the market gradually. Though, there is nothing to worry about for now since numbers from quoted companies are still looking real and genuine. And we hope they won’t start ‘Distorting Facts’. Our expectations from Q4'17 and Q1'18 are certainly high. These earnings reports for these periods would be a major game changer. We need to keep close watch on this, particularly from financial services sector, which is the driver of both the stock market and the economy at large.

The awareness of stocks rally is already going gaga- we have been seeing traces of wild enthusiasm; calls from every class of investors are already disturbing- everybody has become daily and weekly traders/speculators. Newspapers are displaying attractive headlines on stock market performance. Some blue chip stocks are already over-valued, trading at an extreme new high price. Shockingly, penny stocks with no fundamentals or unimpressive fundamentals are topping gainers chart- an indication of extreme optimisms and wild enthusiasm from both investors and speculators as money has begun to ignore fundamentals.

In addition, Market RSI (Relative Strength Index) is also trading at an extreme point above 80% threshold, indicating market is overheat- we believe market needs to take a breath, correct and settle for new high. If not, the sharp uptrend may attract another sharp bearish trend.

On Friday, Nigerian stocks closed both Friday and 3^rd week positive with a strong negative divergence on both fronts, the All Share Index moved northwards while the breadth swings southward, indicating the momentum is waning- we shall watch this closely with keen interest.

On a final note, as we noted above, there is nothing to worry about as at time of publishing this article, but it is important we keep our eyes on the issues raised above. In addition, we also share the believe that the year is still young for sell-offs but if we are to consider one year gain of 72.10% (YoY), anything can happen in the weeks ahead. Again, there is no need to panic, just brace up and keep a date with our regular #MarketUpdate on twitter.

Friday, January 19, 2018...Nigerian Stocks hit 10yrs high

The All Share Index appreciated by 0.54% to hit 45,092.83bpts, pushing Year-To-Date returns at +17.91% while market capitalization also settled at N16.15trillion. However, Market breadth closed weaker with 21 Gainers against 29 Losers- indicating a negative divergence. Also, Friday marks the end of 3^rd week in the year, a significant negative divergence was observed at the end of 3^rd week.

Week-On-Week Market Review... Sharp negative divergence spotted We have deployed our technical mometum indicator (ROC) to establish our position that the gaining momentum is waning, facing resistance as profit-taking is subtly on going. Nevertheless, Nigerian equities posted 5.11% gain on Week-on-Week review as bullish sentiments remained strong. ROC (Rate of Change) is commonly used as a divergence indicator that signals a possible upcoming trend change. Divergence occurs when the price of a stock or another asset moves in one direction while its ROC moves in the opposite direction- see the chart below.

From technical stand point, we are of strong opinion that the Uptrend momentum is waning i.e. facing strong resistance as NSE-ASI hits above 10yrs high.

The bullish trend of the market continued during the week and the NSE-ASI recorded a gain of 2,193.93 points against 3,975.64 pointsrecorded in the previous week, though with a strong negative divergence. While penny stocks like SKYEBANK, UNITYBANK, WEMABANKand other unpopular stocks led the uptrend, the bullish sentiments spread to other newly listed stocks (JAIZBANK) as well. The weekly gainers declined from 66 Gainers recorded in the previous week to 40 Gainers while weekly number of losers jumped from 6 recorded last week to 32 Losers this week.

The market opened the week with 0.51% gain, reflecting active patronages towards blue-chip stocks as NSE-Premium index had indicated. This further indicates value investing pattern from investors.

Similar trading psychology persisted on Tuesday and Wednesday when NSE-ASI was up by 2.17% and 1.88% respectively, ridding on the performance of blue chips and big capped stocks.

Also, viable stocks in Oil & Gas, Insurance, Consumer Goods sub-sectors continued to dictate the pace as investors reduced exposure to banking stocks on Wednesday.

However, market experienced price volatility on Thursday to tank modestly by 0.081% as mixed sentiments hit premium listed stocks in Industrial Goods, Banking and Consumer Goods subsectors. On Friday, market garnered momentum from big capped stocks in banking, industrial goods to climb to 10yrs at 45,092.83points by 244.09points from previous close

Our conclusion

Recording New High is one of the basic requirements in a bullish market and so far we can say the major index and other indices have met this requirement. However, we are of the opinion that market needs a correction, but we can’t force it to come, though the strong negative divergence seen on Friday appeared very instructive despite the NSE-ASI moving above the 45,000 psychology mark. At this juncture, the market is ripened for major correction. And if this fails to occur- we might just be playing with BUBBLES

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