Equities market review and expectation
The bears continued their dominance on the bourse as continued profit taking led to the decline of heavyweight stocks during the first three trading days. NESTLE lost the most by value declining NGN50 which represented 5.6% decline WtD. DANGCEM, GUINNESS, GUARANTY, UBA and ACCESS followed suit resulting in the index losing 136bps. Much in line with our expectations, calm returned to the market in the last two trading days, as bears retracted giving room for the advancers. Although the NSEASI WtD return closed south with 1.01%, the resurgence of the bulls helped moderate losses. The NSEASI and market capitalization settled at 32,849.11pts and NGN10.511trn respectively; while YtD return stays at 16.99%.
OANDO topped the gainers’ list with 19.8% WtD return and closed at NGN17.94. JAPAULOIL led the laggards loosing 15.3%. In summary, 36 stocks advanced in prices while 44 declined culminating in market breadth of 0.82x.
Market activity and return in the coming week will be shaped by 2012FY result expectation. We expect a few of the bank’ result in the week on the basis of which we anticipate rally. However, baring the release of any result, we expect the mild bearish trend to be sustained.
Fixed Income market review
If Declining Yields Persist…
Yields on short and long term instruments increased in the week reversing the downward trend of previous week. At the secondary money market, TB yields increased across tenors. The 1M, 2M, 6M, 9M and 12M all increased in yields by 7bps, 10bps, 22bps, 32bps and 31bps WtD. The 3M TB still recorded a 3bps yield decline. Similarly, FGN bond reversed its declining yields with the 10-yr and 5-yr instruments recording 47bps increase
While the equities market seems to be warming up for another set of a bullish run in expectation of 2012FY results, the jury is out on if the declining yields within the fixed income arm will persist. As much as the decline has been associated with Nigeria’s improved credit rating and the inclusion of some FGN bonds in JP Morgan and Barclay’s emerging market bond index, the continuous decline in yields in our opinion will necessitate possible move of investible funds to other financial assets where the returns seem more attractive. We are of the opinion that barring the probable reduction of the MPR, yields will likely continue the negative trend and this might spell prosperity for the equities market.
Trading with Technical Indicators
Technical indicators have been historically used across financial markets to make impressive returns particularly on a short term basis. Investors exploit the observed price trend, volume, momentum and volatility of a stock to generate alpha through strategic positioning on stocks with clear and predictable trend. This report presents some technical trading strategies we have indentified to be relevant as regards equities trading in the Nigerian market.
Nigerian bourse has witnessed a drag in the bullish trend earlier experienced in the first few weeks of the year. As the market awaits the next major catalyst (the 2012 corporate actions), we opine that active investors need to pay a closer attention to technical indicators. For instance, most stocks have formed a new support and resistance level (after the January rally) while volatility and momentum are equally on the downside. Looking at these technical indicators, could there be a BUY signal? How can these “leading” and “lagging” technical indicators be exploited to generate a short term risk-adjusted alpha on the Nigerian market?
Price and Trend: Any Correlation?
A simple introduction to trend analysis of a stock covers the understanding of the movement of the price of that particular stock over time. Suffice this to mean that, price and trend are not mutually exclusive.
In the wake of recent rally of most stocks on the bourse as well as the current bears’ regime, it becomes imperative for investors to explore alternative means of riding the market waves to their advantage. Although trend is majorly all about price movement, it is not on its own a sufficient metric for a standard interpretation of a stock performance over time.
An important aspect of the trend that must be taken into consideration by investors is the time period. Technically, trending a longer period of price movement gives a more accurate detection of the pattern.
The Average Directional Index (ADX) and Directional Movement Indicator (DMI) are supportive components of the trend family. The ADX simply describes the strength of a trend regardless of the movement. The DMI which can either be negative or positive reflects the movement of each trend. A negative DMI shows a downward trend movement and vice versa.
The ADX oscillates between zero and 100, ADX value less than 20 suggests a weak trend, between 20 to 40 is seen as moderate, while ADX above 40 indicates a strong trend. Charting the trend with a candle stick chart will enable investors dictate a likely trend formation or reversal. Exploring price trend gives the investor an edge towards making short term critical investment decisions.
For example, OANDO over a period of 14 days has shown a positive trend both judging from the price chart trend as well as the DMI and the ADX. The stock is showing a higher +DMI (0.26) than a -DMI (0.05) indicating a positive trend with the ADX (23.16) also showing a strong trend. With this, we may likely take a buy decision assuming trend indicator is the sole criterion. But, a single indicator is not sufficient but a necessary condition.
Volume: The How of Volume Indicators
Volume indicators are used to test the strength of stock sentiments in a bullish or bearish market. Increased volume in a period of rising prices indicates high demand at such price levels which may further drive prices northward. However, a decline in volume at given price levels may suggest lower preference or exhaustion of current mood whether positive or negative which may result in reversal of sentiments. Indicators such as the Volume spike, Force index, Money flow index, etc. are used in this regard.
The Money flow index for example is a modified version of the Relative Strength Index which focuses on the impact of volume and prices on market sentiments. The index has maximum and minimum points of 80 and 20 respectively with an index point of 80 suggesting a stock is approaching the overbought region which would imply that investors should SELL down as prices may start to crash. Likewise an index of 20 implies the stock has reached an oversold region and investors could buy in to such stocks as prices may start to rise again.
Buy or sell decisions for an index point within the two bands will depend on whether the stock is approaching the overbought or oversold regions but it usually suggests holding on to the stock at current prices. ASHAKCEM for example has a money flow index of 74.22 which could imply a SELL as it approaches the overbought region.
Momentum: What storm does strength gather?
This is used mainly to identify the strength of a trend. Note that no single technical indicator in itself is a sufficient condition for taking a buy or sell decision on a stock. However, there are necessary conditions. Momentum and Volume moves with trend analysis. Once a trend is established, we can test for the strength of the trend by simply considering the momentum indicators such as the Williams %R, the RSI, etc. A commonly used momentum indicator is the %R which ranges between 0 to -100. When the %R is >-20, it shows a strong momentum implying the stock is overbought while a %R between -80 to -100 is considered a weak implying the stock is oversold.
For instance, computing the Williams %R and the 14-day RSI for FBNH shows that the values are -77.11 and 65.93 respectively. This suggests that the strength of the declining trend is getting weaker while the stock is tending towards the oversold region, which could imply a BUY.
Volatility: The Bollinger Band
Technical traders must assess the degree of variation in the price of a stock over a period. This is important because it gives an idea of how high/low the entry/exit price suggested by the trend indicator is, relative to the stock’s moving average price. This is often measured using the standard deviation of price movements from a mean, a concept used in Bollinger bands.
Bollinger bands are computed from the moving average of a share price, with upper and lower bands. A stock becomes more volatile as the price moves farther away from this moving average, which could be a 14 or 21-day moving average. Thus, the closer the share price moves to the upper Bollinger band, the more over bought the stock is, and when the share price moves closer to the lower band, the more oversold the share price is. Consequently, it makes technical sense to BUY when the price approaches the lower band, and SELL when it gets to the upper band.
Conclusion
Technical indicators are essential tools adopted by astute investors to take opportunities in the trend of activities and generate alpha. Unlike fundamentals which focus on long term, technical indicators are usually applied with short term trading. It, however, complements fundamentals as technical metrics signal stocks, via market pricing and volume trading, which are primarily fundamentally driven. Its applicability cuts across all market cycles. It should however be noted that neither a single indicator nor all indicators will be effective in generating alpha. In other words, a good technical analyst’s/trader’s stock selection needs to pass the test of at least 2 and at most 3 different technical indicators in order to generate significant returns.