2 Big Signs that the Bear is Here

Despite the global pandemic breakout that disrupted economic activities last year, investors have a lot to be thankful for.

After losing 20-25% of its value during the first quarter of 2020, the benchmark NSE ASI bounced more than 60% from the low level it dipped to close the year as the top-performing index globally, delivering 50%+.

In no particular order, the bull was largely driven by the CBN’s decision to lower interest rates, increase private-sector lending and make the fixed income market unattractive.

Now that the market has dipped by 6% and 2% in February and March respectively after rally successively for 8 months, can we say that the party is over?

Technical Analysis:

In my previous post on NSE flashing bearish signs, I mentioned the key factors that could only hold the bull run going forward and how a fall off might mean that the bears are finally in charge.

Here is the recent chart of NSE All-Share Index on the daily timeframe:

A first look at the chart reveals that the market didn’t only fail to attract buyers’ interest at 39,000 support levels, but the 20-day moving average has crossed the 50-day average to the downside which means that a confirmed short term bear is in place. I expect a dip to the 36,000 basis point in the coming days or weeks.

This new trend also confirms the bearish move that follows an overbought market – before now, I have called the attention of my premium members to the Relative Strength Index and how it’s been extremely overstretched on a monthly chart.

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The monthly chart had helped me see the bear ahead – since 2013, the NSE index always gives up on its strength at 40,000 – 44,000 basis so it’s normal for me to reshuffle my portfolio, and buy into stocks that will benefit from the current economic trend.

Fundamental Analysis:

Another reason the bear may get stronger is the rising yield in the fixed income market; the CBN seems to have succumbed to the demand of fixed income investors (mutual funds and asset managers) who have been pricing in the rising risk of investing in Nigeria market (no thanks to insecurity and inflation rate). Recently the premium between local 10-year bond yield and that of the US market has widened to 9% (10% vs 1% respectively).

The attendant effect of this is that as yield continues to rise, more investors will rather move their funds from the stock market into risk-free assets, so expect a massive exodus when stocks go ex-div.

Does this mean the stock market is no longer attractive? Well, I don’t think so but we may not see the same 50%+ index return in 2021. The best way to approach the market right now is to explore a recovery strategy, find stocks that were beaten down last year, buy them and hold them till year-end.

What do you think?

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[…] should come as no surprise because a lot of factors are currently adding up to the bearish trend, one of which is the attractive yields on fixed income securities, although still offering negative […]

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