Anatomy Of A Holiday Panic: Dubai vs Libya

Last weekend I wrote about the fact that the Libyan conflict could lead to accelerated selling.  Since Mideast countries have made a small cottage industry of riling world markets over US bank holidays in recent years, it pays to look at the way the market reacts to these distinct events.

Dubai, November 2009.  Holiday weekend: Thanksgiving Thursday. A badly damaged Dubai real estate market forces the highly levered emirate to announce it’s at risk of defaulting on its debt.  This sends the world into a panic over a potential double dip recession and need for further bailouts for the financial institutions exposed to Dubai.

Libya, Febrauary 2011.  Holiday weekend: President’s Day Monday. After a string of autocratic regimes are being challenged by popular uprisings, the Libyan leader looks to be the first to dig in his heels and fight to stay in power.  This is the trouble with a dictator who is likely to face a war crimes tribunal if he is ever ousted from power.  Instead of doing the noble thing and looting the treasury and heading for Switzerland, they are forced to “paint the streets red” with their people’s blood.  They have no exit strategy.  The market fears that Qaddafi will resort to torching oil and gas facilities, or engage in a prolonged civil war which in turn will spike the price of crude, leading to an economic slowdown due to insane energy prices.

While these events are very distinct and different, they manifest themselves very similarly in a chart.  A big gap down post-holiday.

S&P 500 futures — Dubai panic 2009:

S&P 500 futures — Libya panic 2011:

In a post-holiday event-driven gap you can tell quite quickly if you are in for more selling.  If there isn’t enthusiastic and sustained buying at the gap open price levels, the market is probable to auction lower to flush out weak or opportunistic longs and find a price area of sustained long-term buyers.  Compare the opening 15 min range (first 3 bars) of each gap open and you should be able to identify the enthusiastic and sustained buying vs the uninspired bracketing price action.  This is the tell.


President’s Day Sneak-Attack (Dynamic Hedge)

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