Dubai's Default Risk: Better than Portugal, Worse than Egypt

Sheikh Mohammed believes that Dubai has recovered from the impact of the global economic crisis. However, it seems that finincial markets aren't as convinced.

The table below (via the Think Big blog) ranks sovereign credit deafult swap (CDS) prices. CDS's are like insurance policies against a default with higher CDS prices reflecting a higher chance of default.

As you can see, Dubai has a high risk of default ranking.  The fact that Dubai sits between Portugal and Egypt in the rankings says it all.

Of course, markets have been known to be wrong when it comes to pricing risk.  On the other hand leaders and politicians are almost never correct when it comes to making economic predictions (Sheikh Mohammed certainly didn't forsee the meltdown that Dubai's economy experienced over the past two or three years).

The problem for Dubai is that, just like Greece and Ireland, it now has a mountain of debt to service and repay.  That debt is going to be a serious drag on the economy going forward. And judging by the CDS price some investors are predicting that Dubai, in the end, won't be able to pay those debts back in full.

Enjoy.

Dubai Stocks Make New Bear Market Low

Bad day for the Dubai market yesterday. The DFM General Index was down 3.83% for the day, finished down 8% for the month and made a new barket market low.

The Index closed at 1410.70.  That's the lowest level since the previous bear market low was made in Februrary 2009.  The first time the Index was trading at the current level was.........wait for it.........back in June 2004! 

The good news is that the DFM General Index can only go down another 1,410 points before it hits the zero level.  I'm fairly confident that it can't go any lower than that.

Enjoy.

UAE Stocks: 2010 Winners & Losers

The average stock in the UAE declined by about 9% in 2010 with falling stocks outnumbering rising stocks by two to one.

The table below (click to enlarge) shows the 2010 percentage returns for UAE stocks.

Enjoy.

DFM General Index: 9 Higher Closes in the Last 10 Trading Sessions

Monday's DFM General Index close was the ninth higher close out of the last ten trading sessions. The chart below shows the previous 138 occurrences of nine out of ten higher closes.

As you can see, most of the previous occurrences were in 2004 and 2005.  Recently, however, there have been fewer and fewer instances.

Historically, the DFM General Index has closed higher five trading sessions later 64% of the time following days when nine of the last ten trading sessions yielded nine higher closes.  The average gain was 0.70%.

When the market did closer higher five days later it do so by an average of 1.76%.  When is closed lower it lost an average of -1.22%.

In conclusion, when the DFM General Index has closed higher for nine of the last ten trading sessions this has been broadly positive for the market over the next five trading sessions.  It certainly hasn't foreshadowed any significant market sell-off in the week following such occurrences. 

Enjoy

Highest Relative Strength UAE Stocks

It has been a good start to September for stock holders in the UAE with the Dubai market advancing 11% and the Abu Dhabi market 4.3%.

Below are two tables showing the top ranked Dubai and Abu Dhabi stock by relative strength.  For information on how to interpret these tables please refer to this previous post.

In Dubai it's Aramex and DFM that have best combined relative strength across the 20, 50 and 100 day time frames.  In Abu Dhabi, ADCB, Dana Gas, RAK White Cement and United Arab Bank are all at the top of their 20, 50 and 100 day trading ranges.

Also provided below are the complete relative strength rankings for all UAE stocks.

[ Click to enlarge ]

Enjoy.

Price Projections Using Pattern Matching

When analysing markets and trying to predict future price action there are certain techniques and studies that I pay a lot of attention to (here and here for example).  There are other studies, however, that I don't assign any great weight to but still look at regularly because they're, you know, fun and interesting.  The pattern matching and price projection study I'll describe in this post falls into this category.

Here's how it works.  Let's take the cumulative percentage return of the DFM General Index over the previous 25 trading days:

This 25 day price action can compared with all other historical 25 day periods for the DFM General Index.  In doing so we can identify which past 25 day price periods most closely match the current 25 day price action (note: the matching algorithm I used has been adapted from the gummy-stuff.org website.  It uses a Pearson correlation to determine the level of similarity between the current 25 day cumulative returns and the historical 25 day cumulative returns).

As an example, the chart below shows the current 25 day price return (dark blue line) versus the best historical 25 day match (light blue line):

As you can see, the cumulative 25 day return of the best historical match closely tracks the the current 25 day price returns.  The smaller chart shows at what point the best historical match occurred on the DFM General Index.  In this example the the 25 day period that most closely matched the current 25 day price movement was in September 2007.

Next, we can use the price action that followed the best historical match to make a price projection for the current market.  The chart below shows three such price projections:

 

Rather than rely on the price projection of the single best historical match I've also included the second and third best matches.  Each projection extends for 20 trading days into the future and is determined by the price action that followed the corresponding best match period.

For example, the dotted red line shows the 20 day projected price action, from the current market level, based on the price action that followed the best historical match back in October 2007.  The dotted green line is another 20 day projection but based on the second best historical match (Jan 2005) and the orange line is the projection based on the third best historical match (Aug 2004).

The red, green and orange markers on the smaller chart highlight the three best historical match periods on the DFM General Index.

In the example above we can see that the price action that followed both the best historical match (dotted red line) and second best historical match (dotted green line) was bullish, extremely so for the best match.  However, the price action that followed the third best match (dotted orange line) was bearish.

The rationale underlying this analysis is that periods of similar price action will also share similar future price action.  Of course, the future is unlikely to unfold exactly as it did in the past.  Nonetheless, it's informative to know how similar price movements to the one forming currently played out in the past.

In the next post I'll provide the price projections for other GCC indices based on this pattern matching analysis.

Let me know what you think.

Enjoy.

What Stocks Are Leading the DFM General Index Higher?

The DFM General Index closed up another 2% on Monday following a 2.69% increase on Sunday.

In yesterday's post I looked at historical market action following +2.50% daily Index moves. The conclusion was that the DFM General Index tended to fall in value after such increases (about 68% of the time).  However, when the Index failed to fall it usually resulted in another strong up day and it looks like this is what occurred on Monday's trading session.

The DFM General Index has now risen for four consecutive sessions. The chart below shows the percentage returns for individual Dubai stocks since the beginning of the four day rise (31st August):

The DFM General Index has risen 5.74% since August 31st.  DFM, Emaar and Arabtec are the notable out performers over this period whilst DIC and Aramex are the biggest under performers.

Interesting to note that Aramex, the best performing Dubai Stock this year, has been one of the biggest under performers during the recent market strength.

Of course, we all want to know whether the recent short-term Dubai strength will develop into something more long-term and substantial.  From my analysis short-term rallies don't really reveal much about what's going to happen three months or even one month down the line.  From my perspective the Dubai market will have to show strength over a much longer period to persuade me that this bear market is turning bullish.  

With the Eid holiday approaching it will be interesting to see how the Dubai market trades over the next couple of sessions.  Will everyone try and bag their profits and run for the exits? Or is there a new found confidence amongst traders that will propel the market higher into the holiday break?

What do you think?

Enjoy.

Dubai Index Increases +2.69%. What Next?

The DFM General Index increased by 2.69% today. The last time the Index moved up by more than 2.50% in a single trading session was way back on June 20th (that was 55 trading days ago).  Today's close also represents a 50-day high for the DFM Index.

On the chart below I've highlighted all previous instances of +2.50% daily Index moves going back to October 2008 (yellow diamonds).  The larger blue diamonds represent +2.50% daily moves which coincided with 50-day closing highs.

As you can see, it's been quite a long time since a +2.50% daily move and even longer for one that coincided with a 50-day Index closing high.

I did a quick study of next day DFM General Index returns following +2.50% daily moves, going back to late 2005.  If you had systematically bought the Index (hypothetically speaking, that is) at the close on a +2.50% up day and then sold at the close on the following day you'd be down about 50% by now:

This represents quite a strong downside effect following +2.50% daily Index rises.

Looking at the data in a bit more detail we find that 68% of days following +2.50% moves have been negative whilst 32% of days have resulted in another Index increase.  When the Index has fallen in value following a +2.50% move it has lost -1.94%, on average.  When a +2.50% day has been followed by another Index increase it has tended to rise by +2.40%, on average.

In short, the probabilities suggest a down day tomorrow.  However, if the DFM General Index can overcome these odds we could be in for another sizable increase tomorrow.

I took an even quicker look at how the DFM General Index performed in the five and ten days following a +2.50% daily move but didn't find anything that pointed to a significant upside or downside price move.

It's also worth bearing in mind that the outlook for the DFM General Index is bearish in both the Weekly GCC Index Analysis and Weekly GCC Trend Analysis.

It's a pleasant change to see the DFM General Index putting in a nice daily increase but remember: "one swallow does not a summer make."

Enjoy.

DFM Stocks: Year-to-Date & Weekly Returns

A quick data visualisation of the returns for DFM stock returns last week compared with their year-to-date returns.

Although it fell 1.7% last Aramex has been best performer so far this year with a 8.9% return.  Deyaar fell 3.2% last week and is down a miserable 48% for the year.

Enjoy.

DFM Index Approaches Bear Market Lows. Again.

Like the Saudi Tadawul Index, the DFM General Index is currently trading close to a long-term support area.   It will be interesting to see what happens over the next few days and weeks. Will the Index break the support level and set a new bear market low?  If so, will this lead to significantly lower levels in the coming months?  Or will thew Index find support around the current levels and begin to trade higher?

What do you think?

Enjoy.

What Next for the DFM General Index?

In my last post I tested a number of dual moving average strategies on the DFM General Index to determine the most profitable performers.  Using the test results I selected three of the highest returning strategies whose moving average lengths were reasonably distinct.

In this post I want to take a quick look at what these dual moving average strategies are signaling right now and what this might mean for the DFM General Index over the coming weeks.

Here are the three dual moving average strategies overlayed on the DFM General Index price chart:

The Bad News

As you can see from the charts above all three short-term moving averages (red lines) are below the long-term moving averages (green lines). 

As a reminder, a dual moving average strategy initiates long positions (i.e, predicts prices will rise) when the short-term moving average crosses above the long-term moving average.  Long positions are maintained whilst the short-term moving average remains above the long-term moving average. 

Given that the short-term moving averages are below the long-term moving averages in all the strategies above this doesn't look particularly bullish for the DFM General Index.  And historically it hasn't.  In fact, when this has happened in the past it's been particularly bearish for the market.

The chart above show the result of buying the DFM General Index when the short-term moving averages for all three strategies were below the long-term moving averages.  As you can see, pretty ugly results. You'd have lost over 80% of your capital doing this with an average daily return of -0.34% compared with +0.01%  for all DFM trading days.

So, from a historical perspective, with all the three dual moving average strategies like they are at the moment, we have to be very cautious about the prospects for rising prices on the DFM General Index.

The Good News?

As you may have spotted already, the short-term moving averages in two of the three strategies above are very close to crossing over the long-term moving averages.  In both the 10/55-day and 115/150-day dual moving average strategies buy signals could be generated in the near future.  If this happens (with the emphasis on "if"), then things would start to look better.

The red line in the chart above shows the resulting P&L of buying the DFM General Index when the short-term moving averages are greater than the long-term moving averages for both the 10/55-day and 115/15-day dual moving average strategies.  Much better than the previous chart I'm sure you'll agree.

I'll update this on a weekly basis or sooner if there's one or more dual moving average crossover signals.

Enjoy.