GCC share charts turn down

Local stock markets have become crowded places in recent months in the Gulf States. Increasingly bullish investors have gathered to drive share prices higher and higher, battling for space on the floors of the local bourses.

This phenomenon of the madness of crowds is a part of human investment psychology. Nobody knows why this pattern of behavior is repeated time and again, but it certainly is, and no capital market is entirely immune. Even the savvy Americans were hoisted by their own petard by the Nasdaq crash in 2000.

The UAE stock markets 45% gain in April thus flashed a warning signal to the market professionals who had seen it all before. Indeed, not so long back in 1999 exactly the same thing happened in the UAE when oil prices plunged to $10 and some investors lost their shirts and even committed suicide.

Now market players are trying to weigh up whether the regional bourses will make another stab at record highs, or begin to slide further back to more realistic valuation levels. For current price-to-earnings ratios in the 40-50 range rather speak for themselves in terms of a market that has lost track with reality.

At these valuations this is pure momentum investing. Basically you work on the principle of the greater fool, hoping that you can always sell-out to a guy more stupid than yourself.

The problem comes when a sharply rising market turns down suddenly. The share price first looks like somebody climbing a cliff, and then like somebody falling off it.

The trick is make sure that you are not the greatest fool plunging downwards into the abyss; the guy that made a lot of money on the way up and hung around long enough to loose it on the way down.

For the record investor psychology at this point in the market is to return after each dip. The subsequent rally brings hope that the good times are back, but the highs never quite get to previous highs and gradually move lower and lower. Each mini-cycle leaves investors poorer.

Hence the logical thing to do is to sell-up and leave the market. A few do just that and affectionately remembers the good times. However, most investors find out that they are the greater fools and that only the brokers win in the end, and even they may come unstuck in a real market rout.