Nigerian stocks which have rallied an eye-popping 30.2 percent so far this year, could be in for some profit taking as technical indicators signal a halt in the uptrend, for now.
The broad Nigerian Stock Exchange, All Share Index (NSE-ASI) relative strength index (RSI) is currently in overbought territory, according to MoneyCentral analysis.
The RSI is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
Extended momentum is not the only signal that Nigeria’s equity rally may have run too far too fast.
The NSE-ASI is trading at top of the positive Bollinger Band range, MoneyCentral analysis shows.
A Bollinger Band is a technical analysis tool defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of a security’s price.
The index is also trading 9,000 points above its 200-day moving average, a level used by technical analysts to determine whether a stock is in an uptrend.
Finally, Nigerian stocks may be largely running ahead of the country’s fundamentals.
Standard and Poor’s global ratings has forecast that the Nigerian economy (currently in recession) would contract by 3.8 percent this year, before rebounding by 1.9 percent in 2021.
Companies will struggle to grow earnings in an environment where purchasing power is low as over 50 percent of a population of 200 million live on less than $1.98 a day.