“Twin Peaks?”

Two recent posts, “Oiling the Wheels for China” and Shanghai Socionomics,”expressed concerns over its main stock-index, the Shanghai Composite, observing that it was looking somewhat stretched against its 200-day moving average, whilst noting an interesting negative-correlation between the SH Comp and the Crude Oil price, going onto to suggest that if the oil price was ready for a bounce, it would likely be accompanied by a correction for the SH Comp.

 The “Socionomics” comment showed a close correlation between the stock-index and new share accounts opened, observing that investors’ do not buy low and sell high, as per the popular myth, but subconsciously herd, selling as prices fall and buying as prices rise.

The Shanghai Comp has added a further 13% since warning of an overvalued market and to this we can add another:

Step forward Hong Kong’s Hang Seng stock-index (HS):

 16 April 2015 Blog 1

A 10-year chart of the HS, showing monthly data points, reminds that it collapsed by 67% through the 2007-09 financial crisis, slightly worse than the US S&P 500 fall of 55% but better than the SH Comp’s 73% slump. Since then it has recouped about 2/3rd’s of the loss, as seen by the Fibonacci retracement toll and within the six-year parallel channel shown. The 12-month moving average is still rising, which is a positive, although you may note that the index has become stretched against it, just as highlighted with the SH Comp. Furthermore the RSI and Stochastic momentum indicators, at a respective 69 and 83, are starting to look toppy.

Despite maintaining some autonomy since being ceded to China in 1997, there has been an uncanny resemblance between the two stock-indices, as can be seen within the second chart:

16 April 2015 Blog 2

Both indices are up by 11% month to date, the same as year to date for the HS, whilst the SH Comp has jumped by 29% YTD, which appears to be more about catch-up with the HS looking at the chart above.

The Shanghai Composite has a price-to-earnings ratio of 20 versus the 12X accorded to the HS, but digging a little deeper reveals that the wider CSI 500 index is at 50 times reported earnings, with the pure smaller cap indices within both “areas” somewhat higher.

The Oil price is now 25% above its recent low, whilst the Chinese authorities have today launched index futures for the large-cap SSE 50 and the small-cap CSI 500 Index, making it far easier to short China. The HS will likely move with the SH Comp.

We may be seeing twin peaks.

 

 

 

 

 

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5 responses to this post.

  1. […] to comment but either way events such as this damage investor confidence and perhaps the “Twin Peaks” warning provided a month ago is […]

    Reply

  2. […] Events such as this damage investor confidence and perhaps the mid-April warning within our “Twin Peaks” post is now […]

    Reply

  3. […] free-fall for the main stock-indices of China and Hong-Kong, forewarned incidentally within our “Twin Peaks” blog ahead of the rout, the indices saw back-to-back rally days as we approached the weekend. We […]

    Reply

  4. […] of predictability, the April 2015 “Twin Peaks,” gave some further clues, which readers may be wish to […]

    Reply

  5. […] for China, we issued various observations and warnings, including the mid-April “Twin Peaks” post observing possible peaks for the Shanghai and Hong Kong stock-indices and then, following […]

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