The Deadly Combination That Has Sent Nigerian Stocks Crashing


The Stock Market All Share Index was on a high on Thursday, June 23rd 2016 until something happened. The index had been on a stunning 7% run gaining at least 2% on the three days before the decline on Friday.

So what must have happened? Before we get to the whys we will like to remind you of what a bullish 10 days we have had in June. The stock market began a major rally from the 15th on June 2016 when the Central Bank announced its new flexible exchange rate policy. It gained over 3% on that day and above 2% every other day except for the 20th of June 2016 when it lost about 1.6%. It was considered a blip as the bulls regained steam to gain another 7% in three days. And then the slide began.

We published an article from Rasheed of TRW Stockbrokers where he indicated that profit taking was about to commence in the stock market. Here is an excerpt;

The 30,329 points close is within the October 23rd psychological resistance level (investors and traders tend to be very cautious around these numbers, but also a technical resistance within an upward price channel. What this means is that there are plenty of reasons for traders watching these levels and formations to start taking profit.

Just as he rightly predicted the market reversal began the next day (24th of June) with stocks plunging by 1.35% or losing N140 billion in just one day. That was not the only reason;

On that day, the world woke up to hear that Britons had voted to exit the European Union sending markets on a massive sell off and the pound to its lowest since 1985. The world had lost over N2 trillion by the end of that ensuing weekend. Nigeria wasn’t excluded as local investors saw this as another reason for foreign investors to delay investing in Nigeria. The market hates delays, not with short term investors calling the shots.

The trigger for the June rally were two major economic decisions that the market felt was a snag to bringing back foreign investors. First, was the removal of fuel subsidy and then most importantly the floating of the Naira. These were significant movers and investors decided to pile into the market in the hope that they can sell to foreign investors on a high by the time they return. With an imminent delay now in the offing, caution is gradually taking over and the reality is now dawning on the markets.

In a few weeks time, companies will commence publishing results and not a lot of people have high expectations. The country is on the brink of a recession with consumer and government spending in the driver’s seat. The outlook appears gloomy for most companies and very few are willing to hold on to stocks till results are released. The market will rather sell and then re-enter when results have been mostly published and digested.

We like to call this a bull trap at Nairametrics and as such regularly inform our readers to learn to buy low and sell high, rather than buy high and sell low. Buying stocks during a bull rally can be profitable but it’s also very risky as a lot more traps are laid by what investors call the smart money. We prefer to buy when the market is bearish as the upside is even more when it starts to gain. Just make sure you buy stocks with great fundamentals.

Nairametrics

Nairametrics is Nigeria's top business news and financial analysis website. We focus on providing resources that help small businesses and retail investors make better investing decisions. Nairametrics is updated daily by a team of professionals. Post updated as "Nairametrics" are published by our Editorial Board.

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