We have all heard about the stock market rally which has had a bullish run for some months now. Yesterday is got to its five year high at 36,400.16 while the market capitalisation stood at N11.636 trillion. The last time it was this high was in November 2008. But don’t be fooled it doesn’t mean stocks are suddenly sure bets as most of them will like us to believe.
First of all the All-Share Index just represents the change in the average value of all the share prices of all companies on the Nigerian Stock Exchange which most use as a measure of how well the market is performing. What this means is that the index will rise if majority of the companies that have increased their share price over the years constitute a major portion of the index. For example, Dangote Cement’s market cap is about 26% of the market capitalization of the exchange, therefore its 38% increase from its debut price of (N135 in October 2010) to N187 will have a positive effect on the All Share Index. In fact the top then stocks by market capitalization constitute about 75% of the market cap of the index. Therefore when the heavy weights see a rise in share price the All Share Index will also see a rise. So what you are basically seeing is the band wagon effect where even the poorly performed stocks also sort of get the glory.
Now contrast this to insurance stocks which have mostly remained flat if not lower over the last five years with billions lost in value. In addition, a lot of the companies either have very weak fundamentals or are just gradually recovering from a prolonged period of poor financial performance. This is the main reason why people should look at financial analysis of companies rather than technical analysis or better still a combination of both when they decided to buy shares. And by the way, as the chart above shows, we are still far from the 60,000 high of early 2008.
Dont believe the hype!!!