Back at my desk today after two weeks of travel, it’s nice to be stationary for a bit. The major story late last week was of course the disaster that is Dubai. Capitalism has the ultimate learning curve. Back in the early 90′s the oil rich gulf nations had no clue what to do with their money, they were living in tents in the desert for god sake (no pun intended). The truth is, Dubai did exactly what they should have done. Instead of allow their very valuable and limited natural resource to be depleted without anything to show for it, they turned those petrodollars into an economy. They built THE tourism and banking hub of the region from nothing. Take a look at this post from @WeeklyTA which shows in pictures the rapid pace of development seen here over the past 20 years or so.

These desert dwellers understood that building a real economy was in their long term interest, when the oil runs out they would have something left.

And then the ugly side of capitalism took over.  Like a momentum trade in any commodity market, buying chased buying and the price of real estate skyrocketed without strong underlying fundamentals.  Investors poured cash into ridiculous projects like the palm island and monster sky scrapers which had no real tenants.  The government encouraged the excessive build out and developed a monster infrastructure to support a population that didn’t really exist with little in the way of tax income.  Dubai levered up and increased its sovereign debt to 100% of its GDP trying to ride the wave to a brighter future.

And then it all collapsed.  Real estate prices fell by more than 50% leaving investors running for the exits.  The whole economy was revealed for what it really was, a desert playground akin to Las Vegas with no real fundamental value.  Too much too fast, the dark side of capitalism with no reigns.  The Sheiks are learning a valuable and harsh lesson of capitalism right now as they are struggling to deal with financial leverage and building a REAL economy, not one dependent solely on petrodollars or a real estate boom.

For what it’s worth I believe they’re on the right track.  God damn they were living in tents in the desert only 25 years ago (I’m half joking).  The investment bankers who taught them how to walk, talk, and sing capitalism fell victim to the same juice they were giving the sheiks.  Banks like HSBC $HBC have significant exposure to Dubai.  At the end of the day though, I would rather have them as part of the drunk on capitalism world than living in the desert praying to gods that don’t exist (i’m don’t believe in any god).  Pick your evil I guess.  I hold a strong belief that capitalism brings connectivity, and connectivity brings peace and understanding.  We’ve all made mistakes, big and small learning how the free market works, hopefully they’ve now gotten theirs out of the way.

So how is this playing out in the markets.  Well, CDS prices surged on Dubai debt late last week and equity markets around the world took a smack in the face.  The market opened down 2+% on Friday before recovering to close well off the lows.  We came down again this morning to test a crucial 109 level on the $SPY and once again bounced.  Two important points here.  Neither the government nor the banks (one in the same at this point?) are going to let this thing fall apart all at once.  Institutions need time and price stability to distribute stock.  Second, financial shocks or singular events often occur at technical inflection points.  The reason we look at technicals is not to do voodoo magic and pontificate on indicators and moving averages for the fun of it.  Market internals and indicators including breadth and momentum are saying that this rally is running on fumes.

We’ve seen a higher low put in on the US Dollar with a major resistance level right here.  Everything is still about the dollar.

I still believe we fill both of the green boxes.

Stochastics are rolling over and it seems inevitable that we test the 200 day exponential moving average which is also coincident with a huge level of support.

Small caps continue to lag and look ugly.  As investors peel off risk to the faltering US economy they will sell smaller companies more leveraged to this sinking ship.  I will get short $IWM below 55.30 and add to my short position every 1/2 ATR until I am 4 lots short.

That 200 day moving average is the fire line.

I’m looking for a weak open and first hour tomorrow as $LQD and $TLT surged into the close with $JNK sitting tight.  The were large lots of $SPY that went off on the sell side at the close as the market tested the declining 5 day moving average.  I have to point out the crazy vertical rally in $IYR and $XLF into the close, it took me very off guard and I’ll be scanning some stuff in those two spaces tonight to see what went on.

I closed the $NFLX long position today for a great gain.  Still long $GLD and hugging it like a teddy bear, will stop out on a new 20 day low.

I’m still not trading as the market is just churning with no direction, when the opportunity presents itself I will put my chips back on the table believe you me ;)

Back to hockey tonight after traveling last week.  Unlike the Rangers, I’m healthy and able to put the puck in the back of the net.