As suggested in last week’s outlook, the NSE all-share index took the first steps in what could be a net-losing month after a double-digit gain. The index opened the week at ₦35,041.40 and closed at ₦34,136.82, recording a net loss of -2.58%.
Smart money expected some profit-taking to drive the markets lower and many had booked some profits in the penultimate week. The price action that we are currently experiencing in the markets is, therefore, not unusual.
What we intend to address in this week’s outlook include:
- Identifying the current trend
- Identifying the strength of the trend, if any
- Identify the best and worst-performing stock indices
- Presenting a watchlist of stocks to consider for investment ideas
- A concluding outlook with where we think the market could go.
Stock Market Trend
The Nigerian stock market made a bottom on the 6th of April and has been rising steadily since then; from ₦20,651 to ₦35,814. We can safely say that the all-share index has been in an uptrend for the last 32-weeks. Last week’s decline is simply a correction to the gains made in recent weeks.
Market Breadth
The ratio of stocks above their 100-day moving averages has risen to a higher level than it did two weeks ago. At the time of writing this post, it sits at 2.50 after touching 2.96 during the week. This raised our curiosity so, we went digging and what may be a pattern was discovered.
Since 2012, this ratio has been equal to or greater than 2.90 on only three occasions:
- February 2013,
- June 2017, and
- January 2018.
The ratio, within a few weeks of rising above 2.9 started to decline till it reached 1.0. This meant that more companies started trading below their 100-day moving averages (a sign of market weakness). The all-share index, though, did something quite interesting.
As the ratio started its decline below 3.0 on two of those three occasions, in 2013 and 2017, the all-share index commenced new rallies which lasted for about 20 weeks. Both of those rallies culminated in the all-share index gaining an average of 18% to reach ₦43,000. Once ₦43,000 was reached, an avalanche was triggered and the Nigerian stock market went into 100+ week bear markets.
Strategic investors need to pay attention to this data and follow the market’s every move to see if it shows signs similar to its historical performance.
Sector by Relative Strength
Little has changed from last week with the relative strength of the primary stock market indices. The industrial index is still the only index that has outperformed the all-share index to-date but that outperformance reduced slightly from 7% to just over 5%.
At some point, investors start to think twice about investing in sectors with long spells of outperforming the benchmark – stocks within that index can only rally for so long. We may be nearing the time to begin looking at underperforming indices for value stocks.
Stocks to watch
The stocks listed in the table above are the stocks that fulfill the requirements as set out in the introductory post stock market outlook for Nigerian stocks. These stocks show the right amount of volatility, liquidity, and fundamental soundness that we believe should make them star performers over the medium to long term, barring any sudden setbacks.
If we are to build a portfolio of Nigerian companies from this list, we would add the diversification dimension as well and choose one stock from each sector. Our top 5 stocks to watch today, therefore, would be:
- FIDELITYBK,
- DANGSUGAR,
- MANSARD,
- AFRIPRUD,
- AIICO,
- DANGCEM,
- GLAXOSMITH, and
- VITAFOAM.
Please click on this link to download a copy of the stock market outlook that has the full list of companies on the watchlist.
Outlook for the week of November 23, 2020
There is enough evidence to suggest that Nigerian stocks are presently in a strong and bullish market. This past week’s decline does not take anything away from the bullish market that we are in – corrections are good for every market.
An eye, though, needs to be kept on the potential pattern we discussed earlier. If the pattern will repeat, then we can expect a few weeks of market declines till the market finds support at either ₦32,500 or ₦29,600.
If the market gets to these levels and starts to rally with a declining ratio of stocks above their 100-day moving averages, it could be the textbook definition of history playing out in real-time.
Till next week, invest responsibly.
