How Sustainable Is The Stockmarket Recovery

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 couldn’t

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?


You’d probably be more interested in answers than questions. Well, let’s first recall

that we’ve 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 investors’ resources into the falling market that soon resumed

its decline. The lesson in that: don’t be too hasty.


No doubt, moving in early boosts investors’ 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. Here’s why. The week’s

transaction volume at 1.8 billion units for N8.81 billion is encouraging, but doesn’t

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. It’s 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? That’s a possibility, but how much loss can we still afford at this

point?. That’s 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. That’s 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 market’s innate capacity to recover. That’s good for investors to have

at the back of their minds. It helps in keeping a balanced perspective, even in a

powerfully bearish market. culled from businessday newspaper

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