How sustainable is market recovery? Posted by: administrator (Feb-12-2009)
The Nigerian Stock Exchange summoned some nerve last week, closing higher on all key parameters. The All-Share Index logged up 2004 points, closing the week 9.19 percent higher. That was the result of price gains that saw some 69 stocks up, in contrast to 7 stocks in the preceding week (and just 2 during the upper week). Add also the corollary impact of the reduction in the number of depreciated stocks from 90 in the previous week to just 39 last week. With market capitalisation clawing its way up to N5.33 trillion from the N4.90 trillion it opened at, it was certainly a positive week for investors who had been on a mind-bending losing streak this year. Activity levels trended up in tune with the positive price drive, though real buying appetite is far from restored. Total trades rose to N8.71 billion in value for 1.8 billion shares in contrast to N6.6 billion for 1.2 billion shares done last week.
Investors would certainly be happy at the halt, at least for now, to the massive erosion of investment value that had been their lot, especially since January. The rapidly collapsing prices had reached a point that serious investors couldnít resist anymore. Now prices have inched up, in response to some demand pressure. What follows is the big question as to what this development portends for the immediate future. More precisely, is it the beginning of a sustainable recovery? Has the market bottomed out and is now pacing off from the trough? Or is this a bear trap to lure investors into more agony?
Youíd probably be more interested in answers than questions. Well, letís first recall that weíve had a few false starts since the market became bearish. Over four dead cat bounces can be counted, when you thought the cat was back to life, but it ended just a gasp. Each time, investors aiming to time the recovery moved in, expecting the market to gain more momentum. Unfortunately, those proved to be booby traps that merely locked more investorsí resources into the falling market that soon resumed its decline. The lesson in that: donít be too hasty.
No doubt, moving in early boosts investorsí chance of earning accelerated returns as the market rebounds. The difficulty is in knowing when the market is on the sure recovery path. For active traders, a week of significant upward trend is enough room to make a sizable profit. Think, for instance, of stocks that raced up over 25 percent last week alone. A trader that moved in at the onset can easily exit, with some good earnings in the kitty. If you are buying into the future, however, that calls for a little more restraint. Six straight days of market recovery is understandably inviting, but may not be sure-footed enough for comfortable entry. Hereís why. The weekís transaction volume at 1.8 billion units for N8.81 billion is encouraging, but doesnít reflect a massive return of investors to the market. Compare that to 7.62 billion shares (N115.44 billion) for week to February 15, 2008, about a year ago. Itís the sustained return of investors, which will reflect in increasing volumes, that can sustain the recovery. We need to watch the numbers closely, but some patience may not be misplaced. One other reason is the action of traders who speculate on price movements. As has happened over and over, some may soon move to take gains already made. If they mount sufficient pressure on supply, prices will slacken. Once some fear is triggered again, the slide could resume.
So, what if the recovery stays the course, leaving an undecided investor a loser for late entry? Thatís a possibility, but how much loss can we still afford at this point?. Thatís the reason for the extra care. Yet, there is a middle course. If you wish to jump in, consider a gradual approach that balances the odds. Instead of throwing in every kobo you have reserved for the market, you step in piecemeal. Buy a bit and watch. If recovery continues, you step in some more. If it changes course, the damage stays limited.
Even as we engage the market, we should allow the recent experience reflect in our approach. Thatís the only way to profit from the challenges we have encountered.
The interesting thing is that the stock market will ever remain an interesting place. How does that sound? Any way, the point is that the market has that elasticity of a rubber band. It gets pulled in directions, but will always return to a realistic position. The trend reversals, even when they prove temporary, keep reminding us of the marketís innate capacity to recover. Thatís good for investors to have at the back of their minds. It helps in keeping a balanced perspective, even in a powerfully bearish market.