Monday, June 19, 2006

Dubai Stocks (Yawn)

Dubai stocks haven't done anything for the last seven or so weeks. A very old version of technical analysis says this might be a base.

The notion of bases and plateaus applies to stocks (or stock markets) that are largely ignored (which used to be true of about 90% of the stocks on the New York Stock Exchange, before the Information Age).

The theory is based on an analogy with plate tectonics: San Francisco (e.g.) is sitting quietly while pressure builds on the plates, but, at some point in the future, it must suddenly move by several meters; similarly, some stocks sit unnoticed and stationary while pressure builds, then suddenly move up (or down). My problem with this analogy is that stock markets have no tectonic plates, but one does sometimes see something like this happen to stocks (or stock markets) that are not under intense scrutiny.

Basically, the base/plateau theory states that these stocks (or stock markets) tend to be ignored, and sit at the same price, while conditions change. An example is a company with lots of property but small earnings that haven't changed for years. No one pays any attention to the stock, and it sits at the same level while the same boring earnings reports come out quarter after quarter. These quarterly (and annual) reports give the book value based on accounting principles: the properties are valued at their purchase price less 5% annual depreciation, so book value stays about the same. Meanwhile, the real value of its properties has drastically gone up. The stock is said to be at a base. Then someone notices, and begins to buy. Others notice the movement, figure out why, and the stock suddenly jumps up to a level well above its current worth, just like San Francisco when 'the big one' comes. This excessively high level is called a plateau. Then it sits at the plateau for awhile, until someone notices and starts to sell, after which the stock plunges back to a new base.

In more modern terms, bases and plateaus occur when the stock trades in a narrow range. The top of the range is called resistance, and the bottom support. For a base or plateau, the resistance and support must stay constant for a (relatively) long period. Day traders can safely buy at the support level and sell at the resistance level. Until the stock breaks out of its range.

Since the Dubai stock market hasn't really moved for seven weeks, are we seeing a base? Has everyone forgotten about Dubai, one of the few markets open to any and all investors, Citizens and ex-pats alike (not all the stocks, but all the actively traded ones)? When the Dubai stock market gets included in the Dow Jones Asian index, will the index funds suddenly plunge in with quantities of capital that overwhelm the market?

One problem with applying the theory of bases and plateaus to Dubai is that there was no plateau. Stocks went up by 40% to 50% a year for several years, then, in 2005, rose by more than 300%. Then fell from the peak by more than 60%. The pattern looks like the US in 1929, but the Dubai stock market has little in common with the US in 1929, when the US had the world's largest domestic economy and no single person or group could manipulate the entire market. In fact, very few individuals could even manipulate a single stock on the NYSE back in 1929.

Based on the US 1929 experience, the Dubai Financial Market could drop to about 150, from its current level of 456.

But Dubai is not the US. So far, the government has tried to reverse the downward trend with jawbones (of asses?), but with little effect.

First legalizing stock buybacks, then promising stock buybacks (but, so far, no actual stock buybacks) hasn't helped. Yet.

No one, not even the US government, had the resources to prop up the NYSE in 1929, but the Dubai Financial Market is miniscule by comparison. The DFM is also about fairly valued now, which is not particularly encouraging, since bear markets usually last until stocks are drastically undervalued.

But either a) the Dubai Government, or the Dow Jones Index Funds, could put in enough money to push it back over its 1,300 peak, and do so over a very short time span.

Or b) it could continue to build a base for the foreseeable future before starting to trend upward again at a rate of about 40%.

Or c) it could continue to slowly, slowly drop down to the 150 level like the NYSE from 1929 - 1932.

I'm guessing about a 15% chance of a), a 40% chance of b), and a 10% chance of c).

Which doesn't even add up to 100%, so take it for what it's worth.

4 Comments:

Blogger CG said...

Wow...that was interesting reading. Probably the closest I have ever come to understanding the ways and whys of the markets movements, although I have to admit, I am still lost.
I have stock, and I have no idea why. I followed advice and bought as instructed, I also sell when told. I have never made much, but have not lost either.
Keep on, one day I may grasp it.

9:33 am  
Blogger Dubai@Random said...

1) There's a reason why they are called 'brokers.'

2) The Brokerage made money, the broker made money. Two out of three ain't bad.

3) 'There's the Merril Lynch yacht, the EBI yacht, the Dubai Bank yacht, and the DFM yacht.'
'But where are the customers' yachts?'

4:26 pm  
Blogger jony said...

An impressive share, I just given this onto a colleague who was doing a little analysis on this. You have done nice job. Yacht charter dubai

3:00 pm  
Blogger jony said...

Yacht charter dubai is a nice attractive place for the tourists. They really enjoyed their trip traveling on yacht charter dubai .

11:25 am  

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