By Talal Touqan, Al Ramz Securities, Equity Research Department

Al Ramz Securities, one of the UAE’s leading brokerage houses and fully licensed by the Emirates Securities and Commodities Authority (SCA) to conduct financial advisory and analyses, has prepared brief report on the uptrend observed in the Dubai Financial Market General Index (DFMGI). Results affirm signs of a medium-term rally, although Al Ramz recommends vigilance as the local markets are not yet ‘out of the woods.’ The details are as follows

Current standing

The Dubai Financial Market’s General Index (DFMGI) is up by 29.5 per cent (382 points) since January 17, 2012 to date (throughout 41 calendar days; retracing therefore, above 96 per cent of the last major drawdown. It is important to note that the market has lost 23.5 per cent or 397.5 points between April 20, 2011 and January 16, 2012 (last major drawdown of 271 calendar days). In terms of major breakouts, it has been confirmed that price levels are out of the transitory period of consolidation and establishing a medium-term bullish trend, holding other factors constant.

Reason behind DFM breaking its two-year downward trending channel (level 1552 points)

Major Drawdowns in 2010 to date:  A drawdown in a bearish market is defined here as the distance between the highest intra-day level before the drop starts and the lowest level before a countertrend starts.

Major Countertrends: A countertrend in a bearish market is defined here as the distance between the lowest intra-day level before the upward move starts and the highest level before a new drawdown starts.

Going back to the question at hand, breakouts usually stem from either the size of the correction, slope of the correction ‘speed,’ or both. By observing the numbers in both tables above, it is figured out that it was the relative slope of the correction supported by a notable increase in liquidity and sudden cash infusion rather than the absolute size of the correction. How did this come to be?

The first table shows that the first drawdown accounted for 431 points in 95 days, quite a fast pace when compared to the subsequent drawdown periods (123 days followed by 271 days). The latter period also caused the index to shed almost the same amount of points (an average of 400 points). In other words, since 2010, the selling pressure chronically persisted but with a flattening slope, making the pattern less steep amid draining liquidity.

However, the exact opposite is seen in the second table (major countertrends). It took the market around 122 days to recover 78 (337 points) from the first drawdown, while the second corrective wave lasted for 48 days, gaining the same number of points (a retracement of 78%, or 353 points). And now an upturn is occurring that is notably steeper compared to the former ones by adding back 382 points in 41 days, a retracement of 96.2 per cent when compared to the last drawdown.

What makes this countertrend different?

In the art of trading sentiments, the above pattern usually creates positive shocks that lead traders to slowly switch from the path of fear to regret, and then anxiety to a path that starts with hope, developing into aspiration, and then to a state of  greed.

This is exactly what is developing nowadays in the market, although conditions are still in the ‘hope’ stage, heading towards ‘aspiration’. Nonetheless, some solid fundamental factors are backing the anticipated euphoria:

–          Forceful cash dividends and high yields, an average that exceeds 5 per cent

–          Recovering corporate results, especially in the property sector

–          Cyclicality, low return on other asset classes (a state of exhaustion hit bond yields, cash deposits, as well as commodities except energy)

–          Indirect government support

–          Anticipated positive catalysts (short-selling, market making, support funds, global expansionary policies (China and Japan)

–          Improving liquidity

Red flags to watch out for  

The market is still in the mental state of switching from hope to aspiration. Technically, the strongest resistance fell at the Fibonacci Retracement 78 per cent as shown in the table above. This was successfully penetrated end of last week. The retracement happened to be in the zone 1598-1614 points, considering the location on the current countertrend.

With growing momentum, DFMGI managed to end last week above 1612 (1632.27). These additional twenty points are not that huge; however, they put the magic touch on confidence and sideliners’ attitude. Traders are revising their price targets upwards, and dormant accounts are being reactivated. These are early signs of a medium-term rally. Prices will most likely move back upwards targeting 1690 points, marking the start of an imminent upsurge as well as a medium-term upswing.

Although this partially enough for the markets to feel extremely comfortable, it does not mean that they are out of the woods already. Challenges remain big when it comes to Dubai GRE’s debts that mature this year as well as the negative impact of dividend gaps that will start taking place mid-March through April and May.

Furthermore, the sudden burst of a high risk appetite is overshooting small- to mid-cap stocks to the upside. And this is recreating some sort of imbalance in valuations. Holding costs are mostly now below market levels, which increases the possibility of profit taking anytime soon.

It is thus strongly recommend that a high turnover strategy coupled with trailing stop loss orders be adopted. A renewed demand force is anticipated when any of the following occurs:

–          Crossing above 1690, targeting 1800

–          Retracing once more from 1612 upwards

Overcoming the Brunt of the Crisis  

Al Ramz Securities’ weekly Market Monitor, which is basically designed to track corporate results, stock prices, and their cross relationships, represented by updated market multiples and financial ratios, is highly recommended to get reliable updates on market movements.

Aggregate profits (for the 75 UAE listed companies with results) in 2011 amounted to AED 32.65 billion compared to AED 16 billion in 2010, a growth of 103 per cent  thanks to the recovery of the property firms. The property sector, which took a major hit in 4Q 2010 – leading to FY 2010 losses of AED 14.4 billion, returned to positive territory with profits of AED 925 million in 4Q 11.

The point is that UAE was trading at an aggregate PE of above 15x due to these losses, while now it has dropped on a trailing basis to around 11.6x, taking into account the recent rally while the forward looking PE remains around 7.7x. This is compared to an average market PE of above 14x for global markets and above 13x for other GCC members.

Furthermore, with additional retained earnings, Price to Book Multiples dropped to an average of 1x, while average dividend yield remains above 5 per cent. Further details can be referenced at Al Ramz’s Dividend Chronology Report which is designed to spot eligible stocks with high income component besides demonstrating the amount of dividends anticipated, out of which a percentage is usually reinvested in stock markets depending on the level of confidence and available opportunities.