August 10, 2009 4392 VIEWS


As at the close of trading on July 30, 2009, the NSE all share index for the first time in the last 30 trading days have broken above its 20 day moving average as indicated in the graph below.


This is probably a relief for many traders and investors especially since the NSE all share index has been in the dungeon for 30 trading days. Nevertheless, I do not believe it is really a period for jubilation just yet; considering that the Nigeria stock exchange has been in a relentless bear hold since March of 2008 with the exception of the six weeks rally in May/June of 2009.


For example as at the close of the trading day on July 30, 2009, the NSE all share index is 6,189, or 19.7% below its January 1, 2009 opening level of 31,357. Additionally, as shown in the graph below, the all share index has traded below its 20 day CSMA for most of 2009, which does not reflect a healthy market picture. The trend basically indicates that the market has very low relative strength and the bears essentially have dominated the market.



In the above graph, the points below the zero line indicates the number of days the NSE all share index has traded below its 20 day CSMA. In this bearish environment, traders and investors should think introspectively about their investment philosophy. Current environment requires very close and hands on approach to an investor’s portfolio management. Investors can either use fundamental analysis or technical analysis (i.e., charting) to navigate the current market environment and manage their portfolio.



For fundamental analysts, valuation plays a pertinent role in their portfolio management strategy, but it only plays a peripheral role for most technical analysts. Valuation plays a minimal role in portfolio management for a passive investor, whereas it plays a larger role for an active investor. Even among active investors, the nature and the role of valuation is different for different types of active investment.

Fundamental Analysts:
The underlying theme in fundamental analysis is that the true value of the firm can be related to its financial characteristics - its growth prospects, risk profile and cash flow. Any deviation from this true value is a sign that a stock is under or overvalued. It is a long-term investment strategy, and the assumptions underlying it are that:
(a) The relationship between value and the underlying financial factors can be measured.
(b) The relationship is stable over time.
(c) Deviations from the relationship are corrected in a reasonable time period.


Fundamental analysts include both value and growth investors. The key difference between the two is in where the valuation focus lies. Growth investors, on the other hand, are far more focused on valuing growth stocks and buying them at a discount. While valuation is the central focus in fundamental analysis, the method used depends on how conversant the analysts are with the various valuation methods. For example, I prepare discounted cash flow, earnings multiple, constant growth, and enterprise valuation methods. Investors using these fundamental approaches hold a large number of 'undervalued' stocks in their portfolios with the hope that on average, their portfolios will do better than the market.


Technical Analysts (i.e., Chartists):
Technical Analysts believe that prices are driven as much by investor psychology as by any underlying financial variables. The information available from trading measures price movements and trading volume giving the analyst an indication of investor psychology and future price movements. The assumptions here are that prices move in predictable patterns and that there are not enough marginal investors taking advantage of these patterns to eliminate them. Additionally, technical analysis assumes that the average investor in the market is driven more by emotion than by rational analysis. While valuation does not play much of a role in charting, there are ways in which an enterprising chartist can incorporate it into analysis. For instance, valuation can be used to determine support and resistance lines] on price charts.


I recommend the use of fundamental and technical analysis in unison.
Let us take the case of Access Bank Plc who has been in the news of late. It gained N7.31, or 206.5% through June 1, 2009 from its 2009 low of N3.54k. However by June 17, 2009 the stock had lost N1.46K or 13.5% falling below its 20 day cumulative simple moving average (CSMA) for the first time since April 22, 2009. Additionally, using two fast dual moving averages of 9-day and 18-day, it showed that the 9-day average was almost crossing below the 18-day average, usually the first sell signal. Although, fundamentally, the stock price was trading below its fair value of N10.63k based on the reported net profit of N22.9 billion, EPS of 141k, and proposed DPS of 70k for the fiscal year ended March 30, 2009. Subsequently, on July 2, 2009, the stock closed at N7.99K, falling below its 50 day CSMA and indicating it was time to bid the stock "Good Bye". On July 30, 2009, the stock closed at N6.41k, representing a N2.98k or 31.7% decline from the first time the charts gave the first sell signal. Yet, Access Bank is widely seen as a bank with prospects and value.


Therefore, it is pertinent that investors use both methods and base their hold or sell decision on the market condition or market news relating to the company. Although, fundamentally a stock may be undervalued, they can still sell or trade below their fair value due to panic selling.


Prepared by Chukwumah Biosah, President CEBAL Audit Group, USA and InvestIQ, Technical Analysts to Proshare. All opinions on this page/site constitute our best estimate judgement as of this date and are subject to change without notice. Investors should see the content of this page as one of the factors to consider in making their investment decision. Proshare Limited, its employees and analysts accept no liability for any loss arising from the use of this information. All enquiries should be directed to

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