Whoa, whoa, whoa! What a day! Chinese indices were making new records in turnover, and volatility was completely through the roof today! Suffice to say, yesterday was a bad day to make bold predictions… Laundry list of data first:
- Hang Seng Index:
- Spot high-low-close-return: 23 934 / 23 400 / 23 486 / -2.34% (!!)
- Futures-implied spot HLC: 23 948 / 23 308 / 23 327
- Turnover, at HK$144.2 billion, nearly tangents Friday’s ~HK$148 billion.
- Implied volatility from the VHSI is only up by 4.34% to 17.79. This is mostly due to still being in the same range as the last 5-6 week range, where we have had pings on both the top and bottom.
- Down in the morning, up before lunch, up more… and then everyone hit the sell button after the afternoon open please!
- Hang Seng China Enterprises Index:
- Spot high-low-close-return: 11 799 / 11 276 / 11 333 / -4.55% (!!!)
- Futures-implied spot HLC: 11 771 / 11 220 / 11 231
- Turnover was very very high at HK$46.57 billion.
- Shanghai Composite:
- Spot high-low-close-return: 3 091 / 2 835 / 2 856 / -5.43% (!!!!)
- Shanghai A-Shares Top 50 HLCR: 10 578 / 9 331 / 9 497 / -6.60% (!!!!)
- Record-breaking turnover of RMB793.36 billion, which added to the more than RMB450 billion trade on the Shenzhen Stock Exchange, meant that the total Chinese market turnover, on Tuesday represented RMB1.245 trillion!
- Shanghai – Hong Kong Stock Connect:
- Northbound quota balance use at RMB1.16 billion.
- The market sold of RMB666 million of Chinese shares at the start of trading until roughly 10:40 am local time, before slowly falling into the lunch break to net sales of RMB200-300 million.
- Purchases of Chinese stocks accelerated during the start of trading, went flat, and then had a last spurt at the last few minutes.
- Southbound quota balance use at RMB763 million.
- The morning trade was predominant, indicating that Chinese traders were much more broadly positive during this period, and then slowly flat-lining into the afternoon.
- Northbound quota balance use at RMB1.16 billion.
- Hong Kong Monetary Base:
- The Hong Kong dollar fell to 7.7526 against the US dollar, or roughly 2 basis points.
- There were small changes in the monetary base overall, with bank-issued cash taking a fall of around HK$1 billion, but very little else worth writing about.
Now for the chart teaser, China A50:
For technical analysis of this and the HSI and HSCEI, plus general reflections, please read on after the “Continue Reading” tag!
That’s an about 12.4% (of previous close) swing we’re looking at on that chart! Wee! The particulars are even crazier.
The day starting with a quick and rather merciless drop of more than 3% which then later got reversed in an hour says quite a bit about what the day had in store for us. This led to a close around 10 400 (up 2.5%) for lunch, immediate pop higher to 10 500 after opening, and then a few minutes of sideways trading that at the most brought price to the peak resistance around 10 578.
The resulting drop to 9 331 then happened in roughly 105 minutes during the afternoon trade, leaving a quick and relatively insignificant bounce of around 1.7% in the last five-six minutes of trading and testing the peak level previously highlighted on the Fibonacci move, shown in the chart above as a solid white line at 9 369. None of this seemed disorderly: it was simply one-sided trading with the general minute-to-minute moves that has characterized the market over the last few days.
Beyond the Bollinger Band covering price again for the first time in about two weeks, and the resistance at 10 578 or support at 9 369, there is little to go on in technical analysis of momentum or indicators that provides any information. The moves over the last few weeks have simply been so big that a 12% swing in a stock index isn’t really that unexpected given these past data points.
We are then essentially left with looking at candlesticks. This might be the mother of all outside candles and so deserves a bit of attention.
- Just about 50% of total price action (in terms of time, price and volume) is the upside wick! Bearish, bearish!
- It closed below the Friday doji that came off massive Shanghai Composite turnover.
- But failed to make a low lower than that doji.
- Price also bounced up to above the Thursday close. There are plenty of buyers still waiting in the wings willing to go in to China, and it seems from the Shanghai – Hong Kong Stock Connect that at least some of these are in Hong Kong.
The general feeling I get from this day of trading is relatively ordered profit taking in a completely disordered market, largely distorted by humongous inflows and more liquidity from both the state and the saving retail investors of China. A better IPO outlook (consistent issuance without any major stock or set of companies needing liquidity) probably means that there will be more capital coming to market. If retail investors are shifting out of deposits to hold equity, this will probably cause funding pressures in China, and given the capital structure require even more liquidity provisions by the People’s Bank of China, thus probably resulting in even better prospects for equity gains. Surely this is awkward to watch with two or three differential equations in disequilibrium all pushing for higher price, but China’s capital structure can probably take it, as there is a lot of money to distribute into equities and it represents a better funding model for the country. As long as the liquidity in the market exists to get more Chinese enjoying this momentum, thus draining deposits and shifting this from bank loan financing to equity- or market-traded debt financing, then it really does represent a great positive overall shift in China’s general capital market development.
More firms need to come to the equity market to support the expansion in the overall capitalization. Particularly, it opens up a lot more opportunity for private equity firms to go in and completely restructure the funding sources of Chinese companies to better access capital when bank loans are likely to become more expensive relative the PBOC bench-mark or inflation as Chinese retail investors look towards other assets than deposits for their money management needs.
Oh, right, this was supposed to be a technical analysis post. Sorry…
Hang Seng China Enterprises Index:
Hitting right in the trend line! This will obviously be an important market test to see if we can establish support action at this line (which has previously solely been resistance). There is not very much else to go on except for the China connection and Hong Kong stock listing, as this is essentially a version of the A50 which is simply much, much milder. The first support action test will be tomorrow, and that will let us see if we can expect significant gains after this week and allow us to actually trade significantly off the triangle break, or if the resistances of prior peaks that formed that triangle will still hold the HSCEI back.
Hang Seng Index:
After the palate cleanser provided by the HSCEI, there comes the major difference: the Hang Seng Index refuses to lift, with traders instead winding it in coil after coil around the Fibonacci levels I have been taking about so much previously, and the sum of moving averages have barely budged during the last two weeks. This is done on ever higher volumes, probably indicating that stocks are simply shuffled around on the index more than bought or sold. We now will get a third test on the 23 270 level in the three weeks after the Shanghai – Hong Kong Stock Connect opened, to match the third test of the 24 200 region we got yesterday. (!)
I would put the chances of crossing below the 23 270 level and closing there tomorrow at very low, unless something drastic happens on the US markets tonight. The institutional investors in Hong Kong are holding on to their positions and not meaningfully getting into significant liquidity, and the overall cost of risk on the volatility index is still rather low relative to any comparative period within a 5-year time frame. The market simply isn’t moving, and probably the turnover needed to turn that paradigm over will be something completely different. Meanwhile, we still have big monetary base support, lots and lots of catch-up to have with China thanks to stock premia in China reaching near-unprecedented levels, and if nothing else than the Hong Kong-only listings should probably find a price floor given that the overall trend is to load up on as much China exposure as possible, no matter what you have to sell to get it. At one point or another, someone will realize that the economic fundamentals of strictly HK-exposure stocks aren’t that bad and definitely not deteriorating in a world where China is looking to become more financially advanced. When that day comes, the net China exposure alone will let the Chinese market pull the Hang Seng Index around, and you can guess which direction I am banking on!
After the initial US market opening (which is most often a momentum ignition key) things are moderating somewhat across global contracts, so the momentum push that New York gave Hong Kong shares even lower is likely to be reversed across the board tomorrow, and potentially lead to a marginally higher open if present data is anything to go by.
Thanks for reading this far! If you think you’re better than me at reading the market moves (because, let’s face it, getting much worse is hard) or have something interesting to contribute in terms of market forecasting or general insights, please feel free to drop by my posts on my overall December/year-end predictions or the reasoning I use to support them and toss your own ideas in the ring. Chances are you will get to laugh at me being horribly wrong at the end of the year, at least!
Here’s another little treat for reading this far. Expect a post soon.