Market remains sluggish in Q2 amid security fears

The share market still remains inside a wide range that stated in January this year soon after retracing from last November’s high mark at 5,101 points, a level which now represents an important resistance level and finding support at the 4,856 area.

Recent Capital Markets Authority (CMA) second quarter 2014 report shows little movement in the three investor categories with respect to their investment positions.

Perhaps the current difficulties facing the economy; the multiple travel advisories, insecurity and the ongoing political exchange amongst politicians could explain much of the indecision that is holding the market hostage.

Nonetheless, most listed companies have continued to post stellar performances thanks largely to a stable macro-economic environment and firm business confidence. Obviously the success of the present price support in buck stopping most of the selling pressure has benefited immensely from this strong fundamental performance.

Positive underlying results also supported some stocks buck the trend of falling prices notably Equity Bank and CfC Bank which posted 44 per cent each in price returns in the second quarter.

The quarter ending June also showed the NSE 20 Share Index flat at one per cent compared to the previous quarter while average equity turnover increased by 30 per cent in the same period. Bonds turnover registered a 22 per cent improvement.

What’s also interesting to note is that the current resistant level coincides with the support levels seen back in 2007 just before the market cracked under the weight of the global crisis.

This is important because former support levels-turned-resistance levels always form significant psychological levels. Moreover, once prices break-out through these major price ceilings and resume upward trends, they often last for a long while of course supported by the necessary buying pressure.

An upward price break-out in the local market is a highly probable event since price patterns necessary for this to happen have been in development since the establishment of the 4,598 low in June 2013 to date. Price break-outs typically require a formation of lower lows and flat tops which act as price ceilings.

All that may be needed now is a strong catalyst to cause the initial price break out from the range. Whether this will come from increased dividend payouts, initial success of the now completed NSE initial offer, improving national security or increased participation from foreign investors will remain to be seen.

In my view, the latter is stronger catalyst to revive momentum owing to its direct effect on the market. Unfortunately, foreign investors have been net sellers in the first half of the year for the first time in five years. Total net sales stood at a negative Sh1.36 billion. Unless there is a trend reversal it is possible that we could close the year flat.

If the above scenario does not pan out perhaps due to a false break out, traders (especially short term ones) could still benefit by exploiting the range through buying at the range lows and selling at the range highs.

This is a viable trading system since the NSE has enough stocks exhibiting similar price moves as the overall market.

Trend traders, on the other hand, are well advised to limit their movements in this “flat-environment” to avoid unnecessary short term losses.

Mr Mwanyasi is investment manager at African Asset Management.