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Nigerian stocks fell modestly after the Independence Day holiday. The NGX All-Share Index declined 0.16% to 250,808.27 points, market capitalization shed N261.9 billion, while year-to-date return reduced to 61.17%.
Sustained profit-taking in large-cap stocks dragged market performance, as the stock indices posted losses in the top three laggards – FIDELITYBK (-9.91%), NGXGROUP (-6.85%) and FIRSTHOLDCO (-6.16%).
The latest market sessions show signs of cooling. Profit-taking, sector rotation, and a slight contraction in weekly turnover indicate that institutional and retail investors are adopting a more conservative view.
However, the solid year to date outstanding performance and high double-digit returns over the year have led institutional investors to naturally start taking profits off names that experienced parabolic runs in September (such as a few of the big-cap banking stocks and industrials).
The index moved marginally ahead of the benchmark, driven by defensive/niche plays such as the NGX Insurance Index. On the other hand, the Banking (-1.33%) and Consumer Goods (-0.91%) indexes were under intense selling pressure.
Heavy underperformance or sluggish movements in bellwethers (such as MTN Nigeria and Nigerian Exchange Group) have weighed heavily on the Index. Large-cap banking counters (like GTCO, Access Corp, ETI, and Zenith Bank) and industrial & consumer goods stocks (like BUACEMENT and Unilever) have come under local pressure, dragging market capitalization to the tune of hundreds of billions of Naira in recent trading sessions.
Liquidity has not entirely left the market; a rotation is currently taking place as more mid- and small-cap counters and a few stocks making new 52-week highs (Transcorp Hotels) like others getting buy sentiment.
Total traded volume and total turnover value per week have come down significantly. This drop in transaction velocity hints at a traditional “wait-and-watch” mode of trading ahead of next week’s release of Q3 corporate earnings data. Investors are waiting for tangible fundamentals before investing in fresh capital.
The NGX All-Share Index also followed suit, giving back some of its strong week-on-week gains, which was to be expected as the index traded around the 250,800 level.
Support and resistance Levels
There is psychological overhead resistance near the current peak territory in the short term. The index must see heavy volume breakouts above it to kick-start the broader index again.
Immediate downside support levels are in the offing. If large-cap counters fail to sustain their current consolidation range, it may give way to a further horizontal correction in the near term.
The advancer- decliner ratio has improved over recent weeks, indicating that the “broad-based rally” period has shifted toward more stock-by-stock trading. As of now, momentum is favoring aggressive small- to mid-cap stocks, such as some transport stocks, real estate, and mortgage companies receiving speculative bids.
Strategic outlook and action plan
Here is a balanced approach to consider as the markets brush off the gains and move into Q3 earnings season:
Identify Q3 earnings plays: Direct the bulk of your capital toward fundamentally strong companies with healthy cash flows, respectable debt-to-equity ratios, and a long history of dividends, which are likely to announce robust Q3 scorecards.
Watch the banking and consumer index dip: Accumulate positions in these fundamentally strong tier-1 banks and consumer goods leaders at all dips, rather than chasing them on short-term rallies.
Historical data warns don’t overweight the overbought counters that experienced intense spikes in September; move the portfolio to the defensive (insurance, stable-yield stocks, etc.) to cope with near-term volatility. Better still, speak to a SEC regulated investment firm for market guidance.
