Technical and fundamental analysis seems to indicate that the market has already stabilized in the short term.
However, the weakness has not changed in the medium term.
Investors should switch their bets constantly, and it may not be a good time for bargain hunting.
The Hang Seng Index hit the peak of 28,542 points on May 26 last year, and tumbled to a trough of 18,278 points in mid-February this year.
As such, the market should break above 22,192 points in order to stabilize in the medium term, and soar over 23,401 points to reverse the downtrend.
It’s still too early to say the market is turning around.
Investors could use short-term corrections to collect stocks. They can also take the moving average and the Relative Strength Index (RSI) as references.
For example, the 100-day moving average of 21,140 points might be the biggest resistance level for a future rebound. The market uptick might take a pause if the RSI reverses the trend.
Meanwhile, the China Enterprise Index has outperformed the benchmark in the past two weeks. That reflected a rebound after fund managers dumped Chinese shares previously.
It’s quite obvious in commodity sectors, like oil, steel, cement plays, as well as infrastructure stocks.
Many policy-driven stocks also benefited from the annual “Two Sessions” in Beijing.
Global political and economic factors will help stabilize the market in the short term.
The National People’s Congress failed to surprise investors. However, the latest government report has sent a clear signal that Beijing is keen to stabilize growth and defuse fears of a hard landing.
The authorities decided to postpone the registration system for initial public offerings following the failure in the circuit breaker mechanism early this year.
The government has also resorted to its long-time approach of relying on property and infrastructure spending to stimulate growth and achieve its GDP growth target of 6.5 percent to 7 percent this year.
The Chinese central bank has adopted loose monetary policy to provide room for supply-side reforms. It remains unclear how these pledges can be turned into detailed measures.
In the meantime, the government has unveiled measures to avert excessive stimulus. For example, it tightens rules on the use of financial products for housing down payments while trying to clear the high inventory of homes.
The government has also enhanced oversight on large companies as it tries to phase out overcapacity in some sectors such as cement and steel, cement.
Currently, the market is expecting two or three rate hikes from the United States this year, instead of three to four times previously, given that the job figures are better than expected while hourly wages have fallen back.
A weaker US dollar would benefit both Hong Kong and mainland markets.
The global oil price has hovered around US$30 per barrel, although it has shown signs of recovery.
That would ease concerns over spiking bad loans in financial system, and mitigate redemption pressure for sovereign funds in oil-producing nations.
The result is a temporary uptick in the Hong Kong market recently.
Nevertheless, it remains unclear whether the market rally will sustain. Most fund managers have reported losses or stayed conservative for the past two months, and hedge funds have already built up short-covering positions.
I’ve noted earlier this year that investors should take advantage of deep correction to collect defensive stocks, such as telecom operators like Smartone (00315.HK) and HKT Trust and HKT Ltd (06823.HK), as well as those dividend-paying stocks like AIA Group (01299.HK).
The Hang Seng Index has gained more than 2,000 points, and some laggard stocks have posted substantial upticks.
Investors should stay on the sidelines for now rather than jumping into the market.
This article appeared in the Hong Kong Economic Journal on March 8.
Translation by Julie Zhu
[Chinese version 中文版]
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