How to Pick Stocks In a Bearish Market
How I Pick Nigerian Stocks To Buy In a Bearish Market – Learn How To Analyse The All-Share Index Using Technical Analysis and Pick Fast-Rising Stocks
The Nigerian stock market seems to have lost the momentum it gathered at the beginning of the year. As of this writing, the YTD performance of NSE index is less than 5% compared to the impressive 16% return achieved.
What could have been the driver of the bearish market? Some analyst attributed the fall to normal market correction, others felt there is no major news that could support the next bullish run. I had earlier expected the upward trend in the oil market to be a key supporting factor but as the price of oil inch higher every week, the market seems to have taken a “U” turn. My next question is “should one sell-off existing stocks and wait for a bullish signal “? and How can one pick a good stock in a bearish market like we are seeing now?
For traders with existing stocks, I believe it’s time to cut your loss and cash out as the bearish market trend. Take a closer look at the chart below, the market sell-off seems to be stronger every day.
Maybe you should look into my low-risk and high yield investment ideas right now pending when the stock market will bounce back.
This chart may look confusing to you but if you had bought my trading strategy course on “Little Secrets that Make Big Money In Stock“, you should be able to understand the market trend displayed on the chart above.
The summary of this chart is that NSE all-share index may go down further as pointed out by the MACD and DMI. We could see the index fall to 38,000 level as selling pressure continues to increase week by week.
According to BusinessDay (publication on May 28th, 2018), this bearish trend is connected to a massive repatriation of the foreign portfolio as the yield on US 10-year bond rises to 3-year high above 3% following the US interest rate hike to 1.75%. Ordinarily, a rate hike in a country attracts investors to fixed income securities, so this is a normal capital flows that affect emerging markets more. Another factor is the political tension and party congresses as the country’s election draws near, besides, the USD/NGN exchange rate is under pressure right now: the naira has depreciated to N368 from N360 in the investors and exporters window.
To address the second question which is “How can one pick stocks in a bearish market”, I would be discussing my top 2 stocks to watch closely this year. They are Cement Company of Northern Nigeria (CCNN) and BetaGlass. From the time I recommended these stocks, the former has added N6-N10 to its share price while the latter has added N4-N5. What caught my attention to these two stocks is that they keep hitting new highs as the general market witnesses further sell-offs.
A stock that keeps gathering momentum in the midst of stronger bearish market is worth looking into, there must be something peculiar only few traders are seeing. While a good number of stocks are falling off the cliff, creating more south-ward space away from their the green territory, CCNN and BetaGlass have continued to top gainers chart, and eventually, become investors’ appetite.
Well, you could be partly right to attribute the performance to fundamentals, but I rely more on technical when picking stocks in a market like this.
As a smart trader, here is what I do to find great stocks in a bearish market:
Check the overall market performance and bearish sentiment.
The NSE market index began its bearish run in February 2018 after it posted an impressive run of 16% in January. The market has since dropped from a peak of 45,000 basis point to 40,213, that’s like 12% off the 16% to bring the YTD return to 4.9%.
Look for stocks that are showing bullish strength in the same period.
Sincerely, it is very risky to play in this type of market. If you do, you are already going against the first general trading principle. don’t trade against the trend, the trend is your friend, so why make the trend your enemy? If you insist, then don’t trade what you can’t afford to lose.
The NSE market index is down by 12% in the last 4 months (February – May), but here is a stock that had also increased in the same period.
BETA GLASS is a company that manufactures and sells glassware.
The stock, as of this writing, has gained close to 17% in the same 4-month period the NSE market index lost 12%. From the chart above, BETA GLASS has continued to post a positive monthly return since the start of the year, rising from N52 in January, crossed February, the exact month all-share index showed a sign of sell-off, to hit an all-time high of N87.
BETAGlass is currently trading for N83 per share with YTD return of 56.6%, a clear market-beating figure.
Check Fundamentals of the stock
Even though I employ technical analysis when picking stocks in a bearish market, it doesn’t mean that that the fundamentals of the stock doesn’t matter, at least, your selected stocks should be posting good numbers on key line items. This will help you avoid pump and dump stocks that are only growing on one-time news.
Read my guide on how to analyse the quarterly result of a company. You will have a better understanding of fundamental analysis.
Is this the time to buy?
BETAGLAS stock may be due for reversal; all indicators on the monthly chart point to an overbought stock; expect a sell-off as traders look to take profit soon.
On the daily chart, MACD bearish crossover is a warning sign that BETAGlass stock sell-off is imminent, so I would advise you to wait for a bullish sentiment as long as the fall doesn’t exceed the general market index.
Back to my question, is it the right time to buy? No, wait for a pullback and ride the next move once MACD bullish crossover surfaces on the daily chart.
In summary, this is how I pick stocks to buy in a bearish market and I hope you would find this guide useful for trade decisions. But like I said earlier, this strategy isn’t devoid of risk, you may lose you cash.