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Talk about divergence

Posted: 10/18/2012 - 10:19 am

In prior commentaries, we highlighted the strong market performance in Dubai’s DFMGI since June of this year and we said that our general bias remained positive despite our shift to a cautious trading approach (read:Dubai: look for the break).

One stock that seems to resist the positive trend, however, is the former leader Arabtec. After being one of the very first, if not the first, stocks to rally late last year, Arabtec has failed to join the market’s latest upleg. While it remains one of the top market performers over a period of one year, the stock has been a clear underperformer since June marking a loss of 11% over the period against a gain of 11% for the market.

While the divergence in the price action between Arabtec and the general market was positive late last year, it has worked against the stock in the last few months. There are probably many reasons behind the disconnect in performance but Aabar’s becoming a primary shareholder tops our list.

With such a strong market player entering the game, the trading dynamics of the share price seem to have changed. The interesting bit is that the stock was unable to move up in recent days/weeks despite a strong market as well as positive company specific announcements such as new projects being awarded.

The price action is the ultimate deciding factor when it comes to buying or selling but in the case of obvious divergences, a contextual understanding of the price movement will help decide on the size of allocation to a trade. Please refer to our stock alert service for our trade ideas and updates.

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