Dubai Will Test the Bulls' Mettle Today

by Bryan McCormick

As we woke up on Thanksgiving morning, news that Dubai was seeking to delay debt payments rocked the financial world. Though the reaction was nothing like the extremes we've experienced in the past year, the event appeared more severe than anything we have seen in quite some time.

European markets plunged 2.5 percent or more at time of writing, following still more pronounced response in Asian markets. Futures trading in the U.S. markets reacted more mildly, taking us down to the support levels in the S&P 500 I had mentioned in my index review piece on Wednesday: the 1090 area. The U.S. dollar also climbed higher, and only a much stronger Japanese yen kept it from breaking harder to the upside. As we know, a strong dollar and a strong yen have become the hallmarks of bearish market conditions for U.S. stocks.

Is this the undoing of the rally? Until we see the reactions and counter-reactions on Friday, there is no way to know, but there is that risk. 'Black Friday' could contribute to a volatile mix.

It is possible a better-than-expected retail outcome could help soften this blow. It is more probable that risk aversion will come to the fore, and that is rarely a good thing for stock prices.

At the very least, we are likely to see action that tests the mettle of the bulls.

By the time U.S. markets open on Friday, authorities may have already prepared a package or response to the crisis that could lessen the damage. After having spent so much time and money this year propping up and repairing financial entities, it doesn't seem likely they will allow this event to derail the markets for long. But the quality of that response will be critically important.

It is hard to conceive that any initial response would immediately be deemed good enough for banking stocks. In Europe Thursday, some of the the banks sold down over 7 percent. Their U.S. counterparts can be expected to feel similar pressure. This sector, which under-performed on Wednesday, should be watched very closely.

The broader tape cannot go far without the sector's participation. Some time ago, I had mentioned a potential bearish pattern in JP Morgan (JPM). If we see that stock break down through the $40.50 area, that head and shoulders pattern will trigger, with downside potential to the $36 area. If traders and investors do not get assurances on Friday, that is indicative but not the extent of trouble confronting banking stocks.

(Chart data provided by Thomson Reuters)

Comments

[enigmaman]

CNBC pundits have stated that investors should not fret about the Dubai situation, they have plenty of reasons for why they believe its a non event, so we should all just relax and take it in stride, because we all know what goes on with other nations has no effect on us, Oh and Japans concern that Dubai problems is pushing the Yen up against the dollar, is of no concern to us because a falling dollar helps our exports and really helps our markets to rise, I mean that what has been happening since March, falling dollar rising markets, so I would expect the same today because you know its Dubai problems are not ours, Japans Yen appreciation is not our problem, Chinas real concern of our falling dollar is not our problem and Bernanke paying lip service tho these concerns is just that lip service, does anybody really think he is serious, just continue to rely on the charts and pay no attention to what is going on in the world, if the dollar goes up today dont worry its not for long, I mean the trend is your friend and the trend for the dollar seems safe

2009 Nov 27 07:36 AM

[uhuh]

Strangely enough I agree with the media - this is a non event for the USA.There is so much stimulus money ripping thru wall street right now this Dubai event will only cause a buying opportunity for the next leg up ...nothing more.

2009 Nov 27 07:54 AM

[bartpr]

enigmaman, are we all living in a fur lined shell. there is a world out there.

2009 Nov 27 07:56 AM

[Will.i.am]

This is the beginning (hopefully) of a bright light beginning to shine on Sovereign Finance and liability linkage. The US should look good relatively speaking. The real question is how many more DW's are out there?

People, corporations of all sizes, and now governments (who don't have unlimited printing power) are realizing this depression is about collapsing cash flows and the struggle to right-size.

Dollar unwind? Flight to safety? Bond haircuts? Contagion?

2009 Nov 27 08:57 AM

[AxIt]

This Dubai thing will not tear down the world. There is no rational reason for this. It will provide a good opportunity to buy good stocks at good value as panic temporarily drives the market. I was just waiting to pyramid positions on some equities but price were still out of my buying zone. May be today I'll have the opportunity buy something.

2009 Nov 27 09:27 AM

[Alex Bernstein]

The domino effect after Dubai does not apply to US market. Obviously we should see small decline in US market after "Dubai concern" American banks has almost no exposure in Dubai, this Black Friday looks very good for retailers. Heavy industries outperforming today oils and gold stocks. We needed a catalyst to have 2 to 3 % correction that happening now. Abu Dabi prince will come to help Dubai after teaching it a lesson by delaying their help. I would not be surprised that Monday or Tuesday next week Abu Dabi will come to Dubai rescue. Therefore, next few days is an opportunity to buy stocks cheep. I bought Apple, Emerson Electric, and Marathon today on opening. I stand by my words.

2009 Nov 27 09:54 AM

[enigmaman]

they said the same about the subprime problem, it represented only 1/2 of 1% of the total mortgage market which the market could absorb without concern, but as we found out soon after it was just one piece to the puzzle


On Nov 27 07:54 AM User 514297 wrote:

> Strangely enough I agree with the media - this is a non event for
> the USA.There is so much stimulus money ripping thru wall street
> right now this Dubai event will only cause a buying opportunity for
> the next leg up ...nothing more.

2009 Nov 27 10:36 AM

[Alex Bernstein]

Every time there is an event that looks negative in the world financial picture, it is not mean that we will have depression or saver recession. Look at positive things - current economic recovery in US, less people need unemployment benefits this month verses last month, strong beginning for retail Christmas sale, etc. We have over 10% unemployment, but does not mean it will stay this way for a long time. We are at the end of financial problems. I am sorry, I am incorrect - worry always exist, just they have to be balanced with optimism.


On Nov 27 10:36 AM enigmaman wrote:

> they said the same about the subprime problem, it represented only
> 1/2 of 1% of the total mortgage market which the market could absorb
> without concern, but as we found out soon after it was just one piece
> to the puzzle

2009 Nov 28 06:11 PM

[Alex Bernstein]

This article confirms my theses. Today in the news, "United Arab Emirates – The United Arab Emirates' central bank said Sunday it would offer additional liquidity to banks, signaling a push by the federal government to reassure investors worried about the country's banking sector and its exposure to Dubai's crushing debt."

2009 Nov 29 11:08 AM