The Hang Seng Index showed two rare phenomena last month: it marked its sixth consecutive month of gains, and its monthly volatility hit a record low.
Can these tell us anything about the market’s future direction?
Historical data shows that a long winning streak of six months or longer for Hang Seng has happened only 11 times since 1970, or less than 2 percent of all the trading months.
If a six-month winning streak is followed by another six-month-long rally within a time span of nine months, that would usually mean trouble. According to historical data, the market plunged 55 percent when this happened in 1973 and 76 percent in 2007.
This is not hard to understand. The market is typically extremely overbought after two rounds of a six-month-long rally. As a result, it becomes prone to a deep correction.
But what usually happens is that the market enters a consolidation period after a six-month rally, usually lasting one to three months or even six to eight months, before another uptrend starts. This second scenario is probably going to happen again this time.
In that sense, the Hang Seng Index may resume an uptrend in the fourth quarter or early next year.
Meanwhile, the monthly volatility dropped to 2.1 percent, the lowest level since 1970.
Historical data shows that the monthly volatility of the Hang Seng Index ranged between 2.1 percent and 4.1 percent in the 30 months of lowest volatility, out of a total of 570 trading months since 1970.
The current low volatility suggests that either the market lacks direction or bulls and bears are still battling each other, pending a breakout.
This article appeared in the Hong Kong Economic Journal on July 6
Translation by Julie Zhu
[Chinese version 中文版]
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