Today is going to be a doozy, and honestly this should have been out earlier for your perusal, but then again there were a lot of important information that came out just over the last few hours, and there were girls and gin to attend to to ring out the New Year’s celebrations here in Taiwan. Rest assured, there’s nothing too drastic coming out here, you will know this yourself.
Hang Seng Index forecast to take flight, here’s why:
I like volume and I have written about it extensively before. Simply put, More volume = inflow = rally. Volume fell away during the lead-up to the calendar new year nearly a month ago, and now we’re looking at normal volumes again in the vicinity of HK$ 70-80 bn (steadily rising from the low marks near HK$ 40-45 bn near the NY break). I’ll leave it to you to check it closer yourself, and how important this is for the general increase in the value of the index.
What’s the second reason to be bullish volume? That the volume push will be even greater following the Chinese New Year. First of all, there’s the after-holiday entry effect, which given the stock curve so far pretty much ensures a volume-pushed high-turnover-and-participation rally. Like inflation, these things are prone to spiral out of control, and send things unduly far in a particular direction before they can be sensibly arrested. Add a larger proportion of dry powder, and the liquidity x-factor (I’ll get there later, don’t worry) and this could have some serious legs. Word of caution: get out earlier rather than later, the whipsaw is going to be wild! Still, you have two days before the true volume rally goes out, take them!
The next thing on the agenda for volume? Why, of course the Fed announcement that they’re holding rates back further. And that there is consideration to push more bond buying potentially down the line. Surprise! Ben in the box jumps out again! With European politics being in tatters, I guess he pretty much had to follow China’s pipe and go out and try to shore up the economy, especially given the diversification picture out of both China and Japan’s reserves *cough*tradedeficit*cough* it would be pretty stupid not to follow the leaders. Differential equations and whatnot. Hot money inflows with Chinese easing which has suppressed the stock market there and Hong Kong, plus more easy money just begging for some better returns? Sure! Expect follow up investment frenzies as well, and just take a look at the way Melco Crown has been trading over in the US to get an idea of what will happen when the markets open. (Macau spillover effects will be large for other players in the same boat, Sands mostly given their further expansion plans and consistently superior results.)
What’s the x-factor? Hong bao, or red envelopes, otherwise known as year end bonuses. These can for more senior salarymen (who have the means to invest in the stock market to begin with) be somewhere in the region of 2-3 months worth of salary right there. This is a major reason why a lot of Chinese hiring happens in spring, they collect their hong bao first. Now, you effectively have somewhere around 5-8 times (using a rough estimate of 60-70% monthly salary is fixed expenses of different kinds) an increase in disposable income! Dow January effect? Why drink beer when you can get it distilled, aged and poured into a dragon flask of potent, volatile, golden colored whiskey? Market goes up on the easing hopes, and other markets already ran off in the New Year break, and you’ll see a few days on the Hong Kong market that will make most people feel guilty about sidelining their cash! Now expect the high participation and volume frenzied trading to begin!
Is there anything else to back up this idea that the markets will rally? Do you need more?
The Lunar Bunny left with a great jump, it might be that the Dragon is the only creature capable of taking flight
The HSI closed at its highest closing level since the first of September last Friday. Read that sentence again. The HSI closed at its highest closing level since the first of September last Friday. It didn’t break the 20 160 level which has since been in force as the intraday highs, which has some strong volume candles working with it (End August HK$ 90 bn doji! End October HK$ 100+ bn bearish gap-up rejection candle!), but the futures did in after hours trading. The last time this happened, there was a push from 20 160 to 20 960 (800 points!) on two days worth of intraday lows to highs, only to be retreated back towards the 20 700 level on the same day and then crash further down afterwards. The jump was mostly looking like an attempt at a reentry rally after the fall from the US sovereign debt downgrade, but it’s still pretty remarkable how intense the short-term market action was back then. Volatility was arguably much higher as well, but see above for why there will be positive volatility effects with the Hang Seng now.
Ask yourself if something tingled technically when you read the last sentence. Try to block out the fundamentals, and ask yourself, what was the technical important thing that was mentioned in that last paragraph but not expressed.
The high level of that reversal candle. As mentioned before, it’s a high that has yet to be taken out, and in one month and two days following that candle, the index had what in other terms would best be stated as a crash. 20 960 to 16 060. -23.4%.
20 960 for that reason alone has a pretty high significance as the next target, 850 points away, but it should not be strong enough direct a paradigm change in the way the market should be traded. What follows will provide that strength. The candle that gave us 20 960 was the post-US downgrade candle. Volume on that day represented HK$ 135 bn in turnover on the exchange, and it followed the gap lower + strong fall + slight rise vs close crisis pattern, with nearly 1000 points as an intraday fall. On the turnover itself, only on 5 trading days since January 2009 (about 750 trading days!) has turnover been higher. It is the single highest turnover between now and November 2010, and the single one that was not indicative of extreme market inflow or traded during a steep rally in that group. Thus, the post-US downgrade candle provided a paradigm shift both fundamentally and technically to force the Hong Kong market down and start focusing on the negative aspects of the current world economy.
Thus, breaking 20 960, even intraday, is not something I expect to happen lightly. Volumes need to be significantly pushed upwards, and I honestly do not believe that a simple extend-and-pretend in its purest form from the Fed will help that much. New years effects might kick in, but I’m talking about at least HK$ 100 bn turnover, questionably HK$ 120 bn, but preferably HK$ 140+ to take the index above this level. It needs not happen in one day, but I do expect the top range or possibly a cumulative double that to be needed to induce a reversal of the market paradigm shift if one day is not enough. My displayed scenario could easily happen if the market is left to its own devices without too much news given the current highly bullish sentiment.
If it does break, the next effective target would be the July triple bottom trend which is now at roughly 22 500, or the market action prior to the US downgrade, sitting pretty at 21 850. That’s a tall order, and I do expect euro-troubles to more likely push the index down towards the bottom of the triangle that was recently broken out of at slightly below 19 000, or retesting market bottoms at around 16 000 should Greece go up in flames. The previously mentioned bullish sentiment could easily return to being bearish if contagion from Greece is not averted.
Tangential eurozone comment, skippable in its entirety:
Italy and Spain for now appear safe, and there is a reliance on printing from the Fed not to induce another total meltdown in US public finances – or politics thereof – in an election year, but contagion can come in many forms and Portugal is not yet out of the danger zone, and the potential hazmat restriction area surrounding Portugal includes – naturally – Spain… Markets, especially their bond arms, are much calmer on these matters, but I think that’s an effect of cheap LTRO cash sloshing around the system and providing a lifeline to the banks that might actually need to sell off their worst-performing bond assets to cover losses in other areas. Adding liquidity to a solvency crisis is like splashing rubbing alcohol on the skin of the leg near a fractured bone: it might cool the pain for a moment, and if the patient is delirious, it could help that aspect in getting it to take time to recompose its thoughts, but rubbing alcohol is horribly ineffective at regrowing bone tissue! LTRO might be the least scary name for something that might come back to haunt you one day… For the record, Dr. Merkel seems to be ordering the patient to walk it off and will cut off medicine supply if the patient doesn’t start recording personal bests of running tomorrow.
Sorry about the lack of charts, but there’s not that much graphical information to go on here, simply rather strict following of previously outlined trade strategies or favored companies, and enough leeway in the numbers that I find it unlikely that this analysis will have to be urgently amended.