Reversal Ahead On NGX, Amid Profit-taking, As Investors Await Q2 Earnings Release

Market Update for July 13

The mixed sentiment, as well as the wait-and-see attitude of players on the Nigerian Exchange, continued on Tuesday with the composite All-Share index closing flat on the positive breadth and low traded volume to resist decline, while all eyes remain fixed on the expected corporate earnings and economic data.

An earnings season that could be massively profitable is here as more numbers start hitting the market again, while sectors and stocks that have historically reacted with at least 10% moves up or down over the past decade are preparing to make their numbers available to investors any moment from now. As such, investors and traders should not jump out of fundamentally sound stocks with positive technical charts base and patterns.

The prevailing mixed sentiments and NGX index action divergence with the indicators on a low traded volume are signals that reversal is imminent, knowing the power of volume in price or index movement is very important at this point. Also, the volume drying up ahead of strong support at 37,804.17 basis points indicates the dearth of supply, as the index resists a breakdown of this strong support of 37,857.27bps with the money flow index inching up to indicate the entrance of funds into the market.

We know that corporate and analyst forecasts are made to be beaten. In fact, many analysts have typically increased estimates for Q2 numbers while companies are forecasting higher earnings in Q3, even as higher-than-expected earnings will make stocks cheaper.  At the moment, the market’s Price-to-Earnings ratio, just like those of many companies, is trading below 18 times of their earnings. In an environment of relatively low interest and high inflation, stocks historically, tend to move higher on earnings performance.

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Tuesday trading started slightly in the green before oscillating to sustain the negative trend on positon taking and selloffs among high cap stocks that pushed the benchmark index to an intraday low of 37,846.94 basis points from its highs of 37,881.58bps, and thereafter closed slightly below its opening point of 37,857.24bps.

Market technicals were weak and mixed, with volume traded slightly higher than the previous day’s, in the midst of positive breadth and mixed sentiments as revealed by Investdata’s Sentiments Report showing 70% ‘sell’ volume and 30% buy position. The total transaction volume index stood at 0.89 points, just as the impetus behind the day’s performance was relatively strong, as seen in the 53.40pts Money Flow Index, compared to the previous day’s 53.21pts, indicating that funds enter the market, despite closing flat.

Index and Market Caps

At the close of trading on Tuesday, the NGX  All Share Index dropped marginally by 0.65 basis points, closing at 37,857.24bps, from an opening level of 38,857.89bps, representing a 0.002% drop, just as market capitalization lost N340m, closing at N19.72tr, from its opening value of N19.72tr, representing a 0.002% value loss. 

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The session’s downturn was due to profit-taking and indecision among traders in stocks like GTCO, Zenith Bank, FBNH, UCAP, PZ Cussons, and FCMB, among others. This impacted mildly on Year-To-Date loss, increasing it to 5.99%, while the drop in market capitalization YTD inched up to N1.84tr, representing a 6.45% drop from its opening value for the year.

Mixed Sector Indices

Performance indexes across sectors were mixed, as NGX Oil/Gas and Insurance were down by 0.04% and 0.01% respectively, while NGX Banking index led the advancers, after gaining 0.37%, followed by Consumer with 0.31% higher, while NGX Industrial goods closed flat.

Market breadth remained positive with gainers outnumbering losers in the ratio of 17:13, while activities in volume and value terms were mixed after investors exchanged 197.28 million shares worth N1.92bn, with volume driven by trades in Wema Bank, GTCO. UPDC, Fidelity Bank, and UBA.

NCR and WemaBank were the best-performing stocks, gaining 9.64% and 9.46%, closing at N2.73 and N0.81 per share respectively on market forces and earnings expectation.  On the flipside, Ikeja Hotel and Custodian Investment Plc lost 9.09% and 6.15% respectively, closing at N1.40 and N6.10per share, on profit-taking.

Market Outlook

We expect a reversal or breakdown depending on market forces today, as profit-taking and renew buying interests continued ahead of the release of more Q2 numbers any moment from now, amid the declining volume and divergence that supports an uptrend while smart money takes advantage of pullbacks to reposition ahead of earnings and economic data expectations. It is noteworthy that oil price continues its recovery at the international market, even as corporate actions and interim dividend possibilities around the corner. 

We note also that some stocks are trading within their buy ranges to become more attractive at this point for income investors and traders, even as the market anticipates positive news, while oil price continues to oscillate above $73pb to support global economic and stock market recovery across climates. We also expect the ongoing COVID-19 vaccination to support the global and domestic economic recovery that will enhance the market and give direction.

The banking sector and others remain attractive on the back of the prevailing low prices, despite the Q1 mixed numbers.

Again, the way to go is: Target dividend-paying stocks and fundamentally sound companies with growth prospects in 2021, looking the way of mispriced equities ahead of interim dividend announcement. This is especially given that despite the seeming improvements, fixed income yield continues to offer a negative real rate of return due to the galloping inflation.

However, the strong and faster recovery may continue, depending on market forces, going forward, as propelled by expected Q2 earnings reports, until the next MPC meeting in the coming week.

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Ambrose Omordion

CRO|Investdata Consulting Ltd

Tel: 08028164085, 08179547605