I mentioned last week that the volatility would really hit home this week from a technical perspective alone. I hate being right and wish it didn’t apply to the world as a whole (Hong Kong has actually been remarkably stable in that perspective)! I will get back to that more a bit later, probably around this time tomorrow, with a full technical analysis outlook in Mandarin Chinese. In the mean time I quickly put together a little chart I think you should see.
it’s a quick return to the Closing Aggregate Balances (C.A.B.’s) in Hong Kong, posted by the Hong Kong Monetary Authority, done on a month-end basis since I stopped compiling the data daily. This is to provide you a “quick-and-dirty” view, and I am currently working on updating the full daily spreadsheet used previously for more thorough quantitative analysis.
Closing Aggregate Balances in Hong Kong
The last round of added balances coincides with an incredible strength in the US$ which has surprisingly been risk-positive on a global scale for I think the first time in my memory.
Lets have a brief look at the past C.A.B. increase I posted on for comparison at much better resolution:
This started in late October 2012, and drove the CAB from slightly less than HK$150 billion to more than HK$250 billion in the span of less than two and a half months (about 65% increase). The current blowout went from a bit above HK$160 billion to HK$240 billion, or a 49% increase. What did the Hang Seng Index do in the similar time periods?
Hang Seng Index, daily 3-year chart (click to enlarge to full-screen size)
In the first round, it added nearly 1600 points (7.6% at the time) when the CABs went up. In the last push, it added 1700 points during the CAB run-up, (7.2% at the time). 25% smaller CAB increase resulted in roughly 6% smaller equity index increase, but the difference can be explained by the currently much frothier equity markets globally. (I should run regression on this if I didn’t hate cleaning the data so badly… anyone know a good data cleaning and date-matching system that takes less than 15 minutes of work if I have the data in .csv files already? Comments welcome!)
The worrying thing is that this very likely implies that the actual value of the HSI without CAB blowout would be somewhere in the 21 800 – 22 000 point range, which is pretty scary to contemplate but pretty much matches beta-related performance of larger global equity indices (the HSI is more volatile and requires a 20-50% beta premium depending on the comparison index).
Thankfully, I do expect CAB’s to increase, potentially past HK$300 billion, with the move beginning slightly before and one to two months after the Hong Kong-Shanghai Stock Connect goes live at the end of the month (just 11 more days!) and the stock connect performance effects taking the reins from there. I should have more comprehensive data out by then, but no promises. Again, keep an eye out for the Fourth Plenum at the end of next week.
Technical Analysis Checkup:
Where are we technically then? Well, click the chart above first (the daily details are visible on the full-screen resolution) but today was pretty much a technical nightmare repeating. My predictions of failing to significantly cross the 23 100 level has been proving correct in the riskiest way possible, in that neither closings nor openings are above it, but that the daily high is always above there before a violent rejection takes place. The rebound is strong with the 252- and 189SMA’s! Now the gap-down doji candlestick with the massive rejected upwards leg is really adding pressure downwards, and the first stop down with serious resistance would be 22 800, followed by 22 500. Before that however, the market looks very thin with significant support levels before 21 800!
Going in at that price will probably be a steal if CABs turn up again, but at the moment I really wouldn’t want to be long Hong Kong. It has outperformed other global indices on a relative basis by virtue of simply falling less during a volatility blowout, when it normally swings more, and the CAB’s have been relatively instrumental in supporting the market. Here’s hoping we’ll get better news this time next week, and that a fall to below 22 000 will leave the shorts satisfied and open up a squeeze probability after that.
Until then, selling puts at 21 000 to 20 000 feels like a good plan to me!