What’s next for the UAE stock market?

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With the UAE equity markets staging a stellar performance since the beginning of the year, some are looking at the most recent pull-back as a buying opportunity especially in leading stocks that are now trading well off their highs – think Emaar.

As interesting as the medium-term outlook for the market appears to look, I am afraid investors and traders should be more open to a further drop in the short-run.

Allow me to explain a little here by using an excerpt from a newsletter we issued to our clients on March 25 and that may help better describe our view of the current situation:

“Right now, our main fear is for the market to fall into a dull sideways range that will later be followed by a corrective wave downward. To make matters simple, let us highlight the different market stages:

- Stage one was the initial broad market rally that had most underlying stocks rising,

- Stage two was the shift and the disconnect we referred to earlier where the market becomes dependent on a few stocks for its performance (think Du and Emaar),

- Stage three is the dull range that could eventually set the stage for a new directional move – very possibly a correction.” From TradeYourMarket.com’s newsletter dated March 25, 2013.

Of course, every stage is defined by a set of supply and demand dynamics but that is a topic for another time.

For now, suffice it to say that judging by the markets’ most recent performance, the corrective wave mentioned in stage three appears to be unfolding and will likely push the Dubai Financial Market General Index (DFMGI) back to the 1700-1750 zone.

Here is the catch: many could take this view as being negative and they will be right to think so but only if they fail to realize the opportunities that a market pull-back can unravel.

See, the last thing investors or traders should wish for is an uninterrupted market rally because the steeper the run-up, the harder the ensuing fall. The lack of a healthy correction will only mean that a bigger fall will follow at a later stage.

A return to 1700 would be considered negative only if the market falls back and fails to move again. However, the way we see it is that such a corrective wave, if it were to happen as we expect, will likely set the stage for new buying opportunities and a more sustainable rally in the medium term. It could induce interest by those who were left chasing the run up in the market.

Understanding the different timeframes is crucial for any market participant and it is important that traders and investors position themselves accordingly. What may be a bad trade or investment over a span of weeks could prove very successful over a longer stretch of time and Vice Versa.

* Adel Merheb is Managing Partner of www.tradeyourmarket.com

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