Nigerian stocks cool off as NGX index slips 0.16%, support levels in focus

Nigerian stocks fell modestly after the Independence Day holiday, with the NGX All-Share Index declining 0.16% to 250,808.27 points. Market capitalisation shed N261.9 billion, while year-to-date return reduced to 61.17%. Sustained profit-taking in large-cap stocks dragged market performance.

The top three laggards were FIDELITYBK (-9.91%), NGXGROUP (-6.85%) and FIRSTHOLDCO (-6.16%).

Profit-taking and sector rotation

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 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 big-cap banking stocks and industrials.

The NGX Insurance Index moved marginally ahead of the benchmark, driven by defensive and niche plays. 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, as well as industrial and consumer goods stocks like BUACEMENT and Unilever, came under local pressure, dragging market capitalisation by hundreds of billions of Naira in recent trading sessions.

Liquidity rotates as investors wait for Q3 earnings

Liquidity has not entirely left the market. A rotation is taking place as more mid- and small-cap counters and a few stocks making new 52-week highs, such as Transcorp Hotels, get 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 fresh capital.

The NGX All-Share Index also followed suit, giving back some of its strong week-on-week gains, which was expected as the index traded around the 250,800 level.

Support, resistance and strategy

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. Momentum is favoring aggressive small- to mid-cap stocks, such as some transport stocks, real estate and mortgage companies receiving speculative bids.

The strategic outlook suggests a balanced approach as the market moves into Q3 earnings season. Identify Q3 earnings plays by directing the bulk of 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 and accumulate positions in fundamentally strong tier-1 banks and consumer goods leaders at all dips, rather than chasing them on short-term rallies. Historical data warns against overweighting the overbought counters that experienced intense spikes in September. Move the portfolio to defensive plays such as insurance and stable-yield stocks to cope with near-term volatility. Better still, speak to a SEC regulated investment firm for market guidance.