The Hang Seng Index has fared well in recent months, but the rally has been mainly driven by a handful of heavyweight stocks.
In numerous cases, we’ve seen less than half of the stocks rise while the benchmark moves up, which may offer some insight for future market development.
The benchmark has hit above 25,000 points, the highest in 21 months. However, the increase was mainly supported by several blue-chip stocks like Tencent Holdings (00700.HK) and HSBC Holdings (00005.HK).
The index has registered a gain of 38 percent since it tumbled to a trough of 18,319 points on February 12, 2016. Unfortunately, there are only 10 trading days on which over 70 percent of stocks have risen simultaneously over the past 15 months.
This kind of inconsistency is rare and quite often indicates an underlying weakness in the market.
If we define market inconsistency as less than 48 percent of all stock gains while the Hang Seng Index rises 0.3 percent or more, we’ve only seen such a phenomenon in 280 days out of more than 5,500 days of trading from 1995 till now, which is 5 percent only.
Going over the periods when such inconsistency happens frequently, they often herald big trouble such as 1997 Asian crisis and the 2008 financial crisis.
Historical patterns suggest that within one year when market inconsistency happened frequently, (defined as eight times within 50 trading days), the market usually showed a steep fall.
The Hang Seng Index has already registered four inconsistencies as defined since April 24. Therefore, we should watch closely whether there will be another four such inconsistencies in the next two months.
This article appeared in the Hong Kong Economic Journal on May 17
Translation by Julie Zhu
[Chinese version 中文版]
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