Panic among speculators and short-term investors yesterday created a wave of sharp negative corrections at the Dubai Financial Market (DFM) with the index losing 2.38 per cent of its value, or 114.66 points, and closing at 4706.25 points, just around its critical support level.

The index had already broken through the 4700-point level and reached 4680 points during intraday trading, triggering increasing expectations that it would continue its sharp losses until its next support level at 4300-4400 points.

Panic dominated trading in a hectic session as all blue chip stocks declined below their support levels, opening the way for further fall in prices after the market capitalisation of stocks dropped to Dh446.9 billion, Dh 8.2bn less than the market cap in the previous session. Investors were overloading stocks yesterday as if there was no tomorrow after the market broke through its support levels and all their expectations vanished. The turnover remained at moderate levels, which started at the end of last week. Around 159.5m shares were traded at a total value of Dh677.9m. Twenty-one stocks declined during the session, while four stocks advanced and two remained unchanged.

Analysts attributed the sharp decline and increasing panic in the market to psychological factors, rather than fundamental or technical factors in the market. They said the DFM is facing the second stage in its downturn trend, where we are witnessing mixed signals and increasing panic among investors.

"The market was giving negative indicators since it broke through its support level of 5200. Since then investors had high expectations that the market would rebound soon, but all these expectations failed and the index continued its downtrend. Now we face the second stage as investors have started panicking in their decisions and are selling their holdings at very low prices. This stage will take up a few sessions," said Mohamad Al Beheiri, head of trading at Amana Financial Services.

However, he cited negative indicators in the market, especially the rapid pace of the decline in the index. "The market is breaking through its support levels at a rapid pace and this is leading to more negative sentiment among investors. This situation will create more pressures on the index. We expect a rebound in the market very soon, but this negative sentiment will limit the rebound."

Hamam Al Shamaa, financial consultant of Al Fajr Securities said leading investors in the market are still there despite the wave of selling among speculators and short-term investors.

"Technical analysis has become very difficult in the current situation in UAE financial markets because of the increasing panic among investors. Major investors are still holding their stocks and this is clear in the low turnover," Shamaa said.

"There are several signals of this in both the DFM and Abu Dhabi Securities Exchange such as the selling pressures on selected stocks. The P/E of Emaar Properties declined to 8.14, while it reached less than five in other stock such as Aldar. Selling stocks at these prices is like distributing free stocks, this is meaningless," he said.

Shamaa said the current changes in the market movements made it very difficult to estimate the bottom of the market, despite a lot of estimates saying that the index is very close to the bottom. "The rapid decline in the index makes it difficult to assess where the market will stop losing because there are several local, regional and international factors."

He highlighted the decline in liquidity in the UAE markets in general during the last three months due to measures taken by the UAE Central Bank to control the money supply and inflation in the country.

"The decline in liquidity in stock markets is a results of these measures. Since the beginning of the year, there were increasing voices demanding the Central Bank to intervene to control inflation. After interest rate cuts, the Central Bank increased the obligatory reserves of banks and pressed on them to buy more certificates of deposits," Shamaa said.

He said the liquidity available with banks became tight and they increased their interest rates. "Investors now are more cautious to invest available liquidity with them because the liquidity in the whole UAE market is tightening and they preferred to wait for other investment opportunities, rather than entering the stock markets."

Shamaa also said developments in the global economy were pushing foreign institutional investors to change their investment strategies in local markets. "The increasing investment opportunities in the US and European markets, coupled with the tightness in liquidity in these markets are pushing institutional investors to liquefy their holdings in regional markets and redirect these investments to their markets. This is increasing the pressures in GCC markets."

Noor Al Zoaby, general manager of MAC Sharaf Securities, agreed that the increasing decline in liquidity has fuelled the negative sentiment in the markets.