I’ve discussed four pre-conditions for A shares to wind up the bull cycle last week. However, A shares have tumbled dramatically since last week and met all the metrics for ending the bull cycle.
In addition, investors were not impressed with the various measures rolled out by Beijing to rescue the market.
It’s quite clear the bull cycle for A shares has ended, but the question is how long the market correction will go on.
That mainly depends on the pace of deleveraging in A shares and external developments like the situation in Greece.
The outstanding margin financing for A shares has slumped more than 20 percent from its peak of 2.2 trillion yuan (US$354.3 billion). It currently accounts for 4.5 percent of the entire floating market capitalization, still above the historical high levels of 1.5 to 3 percent in the United States and Japan.
In this case, the deleveraging process may take a bit longer despite the winding up of the A-share bull market.
Looking at the Hong Kong market, shares have posted an even steeper fall in recent days. In less than two weeks, the market has frequently witnessed up to 90 percent of more than 1,700 stocks falling back.
It’s a very rare scenario. Since 1995, there were only 92 times when the market experienced such a broad market drop over the course of more than 5,000 trading days. The odds are less than 2 percent.
And there were only 29 times when the same situation occurred thrice within one month. The odds are lower than 0.6 percent.
So what does the frequent occurrence of this scenario mean? Does it give us any clues to what will happen in the future?
It shows that the market has suffered a massive sell-off within a short period, and even experienced panic selling.
Also, it may suggest that the financial market is in the middle of a crisis. If not, why are investors in such a panic mode to sell their shares?
Historical experience shows that the scenario usually occurs in the middle or last part of a bull market amid a bear market cycle.
If the market is in a bull cycle, it usually happens in the last part of the deep correction.
Does this mean that we have entered the bear market? Or have we just gone through a correction amid a bull cycle?
The answer remains unclear at the moment.
Records show that the Hang Seng Index usually posts remarkable gains within the following month and six months after a massive sell-off. The market goes into a technical rebound after a round of panic selling.
Therefore, the Hong Kong market may post a decent upturn in the short term if a financial crisis is not in sight.
This article appeared in the Hong Kong Economic Journal on July 9.
Translation by Julie Zhu
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