Hong Kong Stock Rally Reaching Its Speed Limit? (EWH)

From Dana Lyons: Hong Kong’s red hot stock market is running into potential chart resistance that may slow its pace of advance.

Following the global equity selloff of 2015-2016, many markets, foreign and domestic, rebounded with a vengeance. Unfortunately for Hong Kong, its benchmark Hang Seng Index (HSI) was not among them. After plummeting to begin 2016, the HSI did bounce back respectably into September. However, a late-year swoon left the Index with a minuscule +0.4% return for the year, and a dismal 2-year return of -6.8%, the 6th weakest among all the markets that we track around the world. 2017 has been a different story, however.

The Hang Seng is ahead by over 20% year-to-date, 6th best among all international stock markets. So things are certainly looking up for Hong Kong investors this year. That said, there is at least one reason to expect the HSI’s gains to slow down from this point.

If we scroll back to the HSI’s lows in 2008-2009, we can chart a well-defined Up trendline, supporting prices through the middle of 2015. In the August 2015 rout, prices broke down through the trendline decisively and has not revisited it since…until now.

The Hang Seng’s latest rally – a 6% jump here in July – has it testing the underside of that broken post-2008 Up trendline.

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If the old adage that former support becomes resistance holds true, the HSI’s pace of advance may be slowed here. Note that we aren’t saying the index cannot rise further. The trendline in question is still rising, so the HSI can as well, even if prices cannot surmount it. That’s why we say “the pace” of advance could be limited.

A good example of this dynamic was the Dow Jones Industrial Average bumping up against its post-2009 Up trendline back in March. While the DJIA has been able to make higher highs since, it has remained below the trendline, thus experiencing a slower rate of advance.

So does this “speed limit” remove any enticement to invest in Hong Kong now? Actually, for U.S. investors looking for exposure to Hong Kong equities, there just may be an attractive setup developing. In a Premium Post at The Lyons Share, we share with members how to access such exposure and lay out the specific setup in question.

The iShares MSCI Hong Kong Index Fund ETF (NYSE:EWH) was unchanged in premarket trading Thursday. Year-to-date, EWH has gained 25.75%, versus a 11.72% rise in the benchmark S&P 500 index during the same period.

EWH currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #9 of 75 ETFs in the Asia Pacific Equities Ex-China ETFs category.


If you want the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share.

Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.