The Hang Seng Index posted an impressive return of 17.1 percent in the first half of this year.
However, nearly 2,000 individual stocks failed to outperform and some of them even lagged behind the benchmark. That means the market rally is mainly driven by a handful of stocks.
How should investors adapt to such trend?
Despite the strong performance of the benchmark index, up to 900 individual stocks (almost half of total) actually reported losses during the first six months.
And among the 800 stocks with positive returns, almost half underperformed the benchmark. That is to say only one fourth of stocks beat the benchmark in the period.
If we divide all stocks into five groups based on their respective performances, we will notice that the best-performing group last year continued to lead the market gains in the first half this year, while the worst-performing group last year were still the laggards over the past six months.
That being the case, choose a portfolio of the strongest counters and rebalance them on a quarterly basis. That would be the most promising strategy in a rally dominated by a small number of counters.
We have built three portfolios with the 10 best-performing shares last year, and then assigned them different stop-loss rules.
All three portfolios have outperformed the Hong Kong Tracker Fund (02800.HK) based on back testing results using data from the past 11 years.
These portfolios continued to outperform the market in the latest quarter.
This article appeared in the Hong Kong Economic Journal on July 13
Translation by Julie Zhu
[Chinese version 中文版]
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