How Far Can NSE All-Share Index Go? Plus 3 Stocks to Watch.

The NSE all-share posted its largest daily gain of 5% in more than 5 years on 12th, November 2020 which triggered a 30-minutes halt of all the stocks for the first time since the Circuit Breaker was introduced in 2016. At the end of the week, the index appreciated by a whopping 12.97% to close the week at 35, 037.46 and N18.3 trillion market cap.

So far, the index is up by 30.53% on a year to date with NSE industrial index leading the pack followed by the NSE insurance and banking index.

If you are yet to discern the fundamental driver of the bull run, refer to my post on why now is the best time to buy stocks and 3 sure stocks you should buy in this new bull.

I emphasized the fact that the low-interest-rate environment occasioned by CBN’s policies in the last 6 months to 1 year is bullish for stocks. Besides, I think the bull may push the NSE all-share to its 2017 high of 40,000 basis – which means we still have at least 10% additional run before I consider a larger sell-off.

One of the supporting factors is the near zero rates on short-term, medium and long-term bill which now prints at 0.04% (from 0.34%), 0.15% (from 0.50%), and 0.30 (from 0.98%) respectively. Even at this unattractive rates, subscribers bid, as at the last auction, on 90-days, 182-day and 364-day was N99.9 billion, N92.2 billion and N411.1 billion, amounting to N603.2 billion.

What’s surprising to me was when the CBN made the allotment, it sold N19.8 billion for the short term, N10 billion for the medium and N138b for the long-term – that’s N167.8 billion out of N603.2 billion, the question is what happens to the N435.4 billion that was unallotted?

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Assuming that 1% of the idle N435.4 is invested in the stock market (because as it is right now, aside treasury bill and bonds, there is no attractive fixed income opportunities available to mutual fund and asset managers) you know what that means for stock prices.

The NSE-All Share Index on Chart

As you can see on the chart above the NSE All-Share index had appreciated significantly to a point we may see profit-taking activities – so the negative close (down by 0.865%) on Friday shouldn’t be a surprise, besides, I’d advise you to apply caution trading at this stage on some of the stocks that are overbought already.

How far can NSE All-Share Index go on a short term?

As investors take profit on some stocks that had rallied significantly, you might want to know whether we are still in a bull market or approaching a bearish reversal, right?

Let’s look at the index on a monthly chart:

The monthly chart helps you see the overall trend of the market – short term, medium and long term. This is the chart that helps you disconnect your emotion from the market – irrespective of every day moves, you are able to take buy or sell decision that aligns with the trend of the market.

On a month to date, the index is up by 12.8% while it appreciated by 5.9% and 13.78% in September and October 2020 respectively. The performance of the market in the last 3-months is no doubt a reflection of the growing appetite for stocks.

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From the chart above, the index at 35,000 isn’t close to any major resistance – after breaking through 30,000 basis point (as expected in one of my previous posts – Why now is the time to buy Nigeria stocks), I think the next major resistance is 10-15% away from the 35, 000 basis point.

If you look at the previous bull run on the same chart in the last 6 years, you’d notice that NSE All-share index tested 40,000 – 44,000 basis point twice, in January 2014 and 2018 respectively before it turned bearish.

A comparative and technical analysis of the bull run in 2017 showed that it took the formation of 8 dark green bars to see the NSE All-Share index test the 40,000 basis point.

The green bar on MACD indicator tells us that the bull momentum is high while red bar reflects bearish momentum (See more on MACD analysis here).

Even at 30.53% return on a year to date basis, we only have 3 green bars so far on the chart.

Technically, I think the bull run is still very much in its early stage. Besides, the relative strength index at 63 shows that the index isn’t overbought yet.

The momentum of this year’s bull is far stronger than what we’ve had in the previous years. There is a clear difference between buying a stock because you have no other alternative opportunities and buying with option – in 2007, 2014, and 2017, treasury bill rates on the short term, medium and long-term was between 10% – 18% with OMO still opened to local and foreign investors but now OMO market is restricted to foreign investors and banks, the same treasury bill is almost close to zero with no attractive alternative fixed income market.

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Yes, I know there is commercial paper but how often do private companies raise cash to finance working capital needs or pay maturing debts? Only a few blue chip companies sell commercial paper in a year.

I had to share this analysis so you can quickly align your portfolio to another round of bull run but this time on few fundamentally sound stocks that may pull back in coming weeks.

Here are my top 3 stock picks right now:

  • Stanbic IBTC – The banking stock closed at N46, I’d advise you to take advantage of a brief pullback, buy lower and ride the next bull run.
  • Nascon Allied – I have placed a buy order on this stock before now. The stock did appreciate past my first N15,75 resistance and now at N16.95. The next key level to watch is N20, which is 17.9% above today’s price.
  • Sterlings bank – The stock tested its key resistance area of N2.5 before losing its strength to the profit takers. I think the stock may trade lower for a while before gathering another momentum that will take it past that level. As of this analysis, Sterling stock closed the session at N2.18.

Disclaimer: Kindly do your due diligence before you buy or sell any of these stocks.

What do you think?

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