Current trends in the Nigerian Markets: An Analysis

By Paul Okechukwu Oranika

From all indications, one could say that the Nigerian Stock Market has entered into a declining mode.  In the past few weeks, the markets experienced a turnover of 3.94 billion shares valued at about 55.25 billion naira, and during the previous week, the market activity was valued at 4.52 billion shares worth about 69.72 Billion naira. These statistics tends to support declining markets, but this in itself does not spell doom for the overall market.

The Nigerian stocks appreciated so much so fast that at this point buying pressures may have slowed down, and may have been overtaken by selling pressures, explaining the downward trend currently a feature of the markets. Generally when the buying pressure is at par with the selling pressure, the market normally moves in a sideway formation. The chart below suggests that NSE has first line of support at 580.7, which is where the market is at the moment, if the market breaks through that line of support, prices may decline to the next line of support at 497.8. There will be serious problems if prices penetrate that second line of support, so it is too early for anyone to believe that the Nigerian Stock Market is already in a bear market. 

The Nigerian All Share Index Courtesy Nigerian Stock Exchange 

To illustrate further, take a look at the Nigerian 12 month Index and Capitalization chart, courtesy of the Nigerian Stock Exchange, and notice that from June 2007 to September 2007, the Nigerian share index was actually moving in a sideways formation, indicating uncertainty on the part of the investors. This period also corresponds with the aftermath of election 2007, when Yar'Adua's faith remains unresolved. Then from late October 2007 to late January 2008, the market resumed its advance, but by February 2008, the market peaked, this month corresponds with the decision of the Nigerian election Tribunal, is there a cause and effect relationship, I do not know, suffices to say that from February 2008 the stock market entered into a distribution mode, with more sellers than buyers. This phenomenon does not necessarily mean a bear market. There needs to be a prolonged period of selling in the Nigerian market to confirm a change to bear market. How do we explain what is going on in the Nigerian Stock Market? Here are possible scenarios to explain things.

1. The Nigerian Markets have been in Accumulation mode for quite some time now, and may have entered an overbought condition, where the market appreciated so much so fast and a cooling off period or what is often called consolidation period is needed before the market resumes its appreciation mode. This consolidation continues until the market finds support from previous levels where selling counters more buyers.

2. Government unfavorable economic policies, such as tightening of money supply, which generally may lead to a credit squeeze and a reduction in new trading capital for investors.

3. After much gains in the market over the past years, many investors may be taking profits from their gains. This normally leads to selling and as shares are sold, prices tend to decline and such declines are also reflected in the level of market capitalization. This is generally known as Market Distribution mode.

4. Panic selling, another form of Distribution may also result when unfounded rumors are generated regarding potential pending problems with the market.

5. Reaction of the market to international events or sell offs. I have always maintained that in future the Nigerian stock markets may behave like other world markets, where events in one country may affect market activity in other markets. There is no evidence to suggest that this sell off in the Nigerian stock market is a reaction to specific international event. One potential issue here for the Nigerian markets could be the high commodity prices, particularly energy, which continues to exacerbate inflationary pressures.

In concluding this piece, I have to say that this sell off in the Nigerian stock market may be a healthy consolidation period, which all stock markets go through from time to time. It will be unrealistic for anyone to expect that stock markets will continue to go up and not down at times. One good news here is the behavior of lack of it from the Nigerian stock market participants, so far many have been cool to this sell off confirming their buy-and-hold inclinations and growing sophistication in stock market investing, so one may conclude that the Nigerian investor sentiment remains at a healthy level for now.

If this is the beginning of a bear market, the selling will cover a longer duration to confirm such trend. There are many ways to confirm bear markets, through the use of traditional and technical analysis. Through technical analysis one can examine the extended periods of trading activity of the NSE through charts, looking for indicators such as Accumulation/Distribution, Stochastics, Moving Averages, Support and Resistance levels, Open interest and Volume, Ballinger Bands, Williams %Ratio and many others. This in itself may be another subject for future analysis

Paul Okechukwu Oranika