With the Nigerian Stock Exchange all-share index shedding points as quickly as it has been doing lately, investors have started asking questions. “Why is the market falling?”, “Will the market fall this week, again?”, “How much lower can the market fall?”. Good questions, so let’s take a look and see what’s up.
The market breadth is an indication of market strength. It tells investors how much power there is behind a trend. When the trend is up, advancing market breadth means that more stocks are driving the trend and vice versa. When the market breadth starts to decline, it tells you that more stocks are trading at relatively lower prices.
We have been tracking a series of in-house market breadth indicators. The one we choose to focus on today, again, is the ratio of shares above their moving averages. A rising figure points to a stronger market and vice-versa.
A quick look at the chart of shares above their 100-day moving averages informs us that there has been a rapid decline in this ratio. This indicates a rapidly weakening stock market.
A quick way to identify whether a price chart is in a trend, or not, is to compare it with its moving averages. A long-term moving average (100 or 200 periods) indicates what the long-term trend says. An intermediate moving average (50-period) average, shows us what the intermediate trend is. A short-term moving average (10 or 20 periods) shows the short-term trend.
The chart above is the 1-year price chart of the all-share index plotted along with its 200-period moving average. The chart indicates that the index is still above its 200-day moving average, and therefore, still in a long-term uptrend.
The problem with long-term uptrends, though, is that they are usually late to the party. By the time the long-term trend turns bearish, the short and intermediate trends would have been negative for ages. The index is presently sitting below its 10, 20, and 50-period moving averages, an indication of short-term and medium-term downtrends.
The index is pointing downward in both the short and medium-term trends and the market breadth, as well, is deteriorating rapidly. These are all early indications of a market turn (evidenced by the high made around 42,000 points six weeks ago).
There is a popular saying in the investing community – “Don’t catch a falling knife”. This statement is used to warn trigger happy investors that have a need to always be active in the markets. It would be a great idea to wait till a realistic support level is reached again before you entertain any buying decisions.
The 100-period moving average (the first of the long-term trend indicators), should provide support around 37,000 points. This area, also, coincides with the 25% pullback of the move, from April 2020 till January 2021.
The Nigerian Stock Exchange all-share index is presently in a short and medium-term downtrend. The market breadth, as well, has shown indications of weakness, lately. The market can expect the decline to continue till it gets close to 37,000 points where the 100-day moving average should provide support.
Investors that are not yet invested would be smart to sit on their hands. If you are already invested, you should expect few tummy upsets as the market could grind down a little further. Sorry.
Till next week, please invest or sit out responsibly!
N.B. If this is your first time here you can take a moment to read the “introductory post” first and then the “peek under the hood” post next. That should get you up to speed with the core of our stock market outlook.
Taiwo Megbope is the Co-founder and Chief Growth Officer at Investor Hangout.
He is tasked with ensuring and managing the growth of the Investor Hangout project. His responsibilities include creating and implementing the project's vision as well as executing growth-generating strategies.
Taiwo is an avid researcher and autodidact. In his spare time, he enjoys spending time with his family and friends.