The Early NSE Recovery is Beginning to Look Tepid at Best

The NSE index close of 29,215.85 as of June 16, 2009 represents a decline of 1,709 or 5.5% compared to 30,925, the most recent high attained by the index on June 2, 2009. At 29, 215.85, the index is above its 20 day, 50 day and 200 days cumulative simple moving averages of 28,922.59, 24,803.42, and 30,645.91 respectively as highlighted in the graph below

Although, the NSE index indicates that the capital market is somewhat stable since the index is above its pertinent moving averages. However, other internal indicators reveal a market in decline or mired in a trading range.  The NSE index should currently be below its 20 day moving average if adjusted for a valuation issue I believe occurred on June 8, 2009.  On June 8, 2009, while the NSE  market capitalization declined approximately by N54 billion (from 6.62 trillion on June 5 to 6.57 trillion on June 8, 2009), the NSE index increased by 1,104 or 3.9% as highlighted in the graph below. If the index is adjusted for this anomaly, the index should be at the 28,200 which is below its 20 day CSMA.

Also, banking index which I use as a major barometer of the NSE direction is beginning to show cracks in its trend indicating that the market which appeared to be in an upward trajectory a few weeks ago is beginning to look tepid. In the last three weeks, the market has either been in declining mode or in a trading range. On June 19, 2099, the banking index closed at 9.62, a level below its 20 day CSMA of 9.8, reflecting a break in the upward trend.

Additionally, using two fast dual moving averages of 9-day and 18-day, the index 9-day average of 9.84 has fallen below the 18-day average of 9.9, indicating a sell signal as shown below:

More Troubling Indicators: 

Other signs of trouble for the market is that several of the banking stocks (FBN, PHB, Access Bank, etc) which through the end of May 2009 have had tremendous gains  are beginning to indicate weak relative strength as most of these stocks are now trading below their 20-day cumulative simple moving averages (CSMAs’). Access Bank is used in the example below to illustrate the troubling trend.

Access Bank 

The importance of that famous traders’ lingo “the trend is your friend” cannot be understated here. For example, Access Bank which gained N7.31, or 206.5% through June 1, 2009 from its 2009 low of N3.54k has lost N1.85 or 17.1% through June 18, 2009. The ominous sign is that the stock is now trading below its 20 day CSMA.  Additionally, using two fast dual moving averages of 9-day and 18-day, it appears that the 9-day average is almost crossing below the 18-day average, usually the first sell signal. Although, the dual fast moving averages are indicating an early sell signal, I believe long-term traders should only exit the stock if the price violates its 30-day CSMA.

However, fundamentally, the stock price is trading below its fair value. Based on the reported net profit of N22.9 billion, EPS of 141k, and proposed DPS of 70k for the fiscal year ended March 30, 2009, the projected fair value of the stock using earnings multiple module is N10.63k.

Flight to Quality: 

Another early warning signal of a troubled market is flight to quality. A review of the price trend of most of the listed stock indicate that stocks like Nigerian Breweries (NB) Guinness, and Nestle have not been negatively impacted by the recent pull back. As I noted in my June 8, 2009 article, “The Normalcy of the Current NSE Index Pull Back”,  Nigerian Breweries (NB) is a potential play, if it breaks above N53.89k, its 52 week high which has acted as a strong overhead resistance. On Friday, June 19, 2009, NB broke above the resistance to close at N54.50K on a trading volume of 6 million. Reviewing the most recent 5 trading days, it shows a surge in NB trading volume which indicates that the current trend is sustainable.

My advice is to buy NB if the price trades above and sustains N55.90k, the 2008 high.

Conclusion
 Although, NSE index trend currently looks troubling, I remain optimistic that this market has not yet slipped into a bear mode. However, it is not advisable to take on any new position until an investor’s potential stock trades above their 20 day CSMA or if the 9-day moving average crosses above the 18-day moving average.