Ideas & Debate

Recent stock falls at the NSE signal time to buy cheaper

nse

A Nairobi Securities Exchange (NSE) staff monitors online trading through a digital screen. The decline at the bourse signals time to buy cheaper for long term investors. FILE PHOTO | NMG

After a blistering start to trading in 2019 – paced by big cap stalwarts such as KCB, Equity and Safaricom, and the breaking of a four-month resistance level – the stock market has hit its first rough patch of the year.

The NSE 20 Share Index has dropped about six percent or about 180 points since peaking in mid-February. How much longer will the correction last? Is the bull market still alive? If not, is there anywhere to hide?

To understand the story better. Let’s start from the beginning. The year rally began in February. The month was full of excitement, which helped the markets mark their best performance since August of 2017.

From the lows of 2,780 points (January), the market gains of 10 percent in the subsequent four weeks was nothing short of incredible.

However, shortly after, a wave of profit took over and markets have soured since then. And as usual, congenital pessimists have taken to the ring preaching doom. But I come with good news.

One, pullbacks don’t necessarily mean that a bear market is lurking around the corner. In fact, history and data make for a strong case that this recent spate of selloffs/consolidation is nothing out of the norm.

But why I am specifically doubtful is that the swing low has yet to be validated by any actual weakness in earnings, rising inflation or increases in interest rates.

For that reason, the correction should fade easily. More importantly, people who like to invest for the long haul should stay the course instead of trying to time the market.

Two, according to several technical indicators - Stochastics RSI (14), Williams %R and Ultimate Oscillator -, the NSE is shown to have reached so-called oversold conditions in the medium term. These conditions promise at least a trading rally as the current pullback cycle has ran its course.

Several oversold reads mean that the potential for a buy or upside is high. In fact, as a general rule of thumb, whenever the broad market is showing overwhelming momentum to the down-side, it’s often a sign to act in the contrary, in this case, to “buy”.

Levels of resistance

Three, the fact that the current market still trades above several levels of resistance - 2,833, 2899 and 2,842 – is a sure sign of technical strength.

If the markets continue to hold above these levels, skittish dip buyers could possibly start re-testing the waters and putting bids back into market.

Furthermore, seeing that lots of volume has traded hands in these areas, and big volume often acts as a magnet for the market when conditions become overbought or oversold, it’s possible that these levels will become the new support.

The month of March is certainly going to be a real test for equities. That said, there are good reasons to remain confident. Key indicators – as stated above – could see the 120-point rally the market has already handed the bulls so far widen even further.

This means the 2.9 percent erased in recent trading sessions could well be the opportunity for eager bulls to venture in at the lower prices.