Hao Hong: A Deadcat, or A New Bull?

  • The Hang Seng rally stalled at 22,700, vs. our price target of 23,000 set in late October 2022 and our 850-Cycle line of 22,500.
  • After a 50% rally in three months, the itch to take profit cannot be denied. Onshore market has yet to respond in full to China’s PMI re-expansion.
  • But – the market bottom we called in late October 2022 is indeed a secular turning point, as shown by our leading indicator, valuation and China’s market cap.

Rally Stalled at 850-Cycle Line

Last week, the Hang Seng index suffered the largest weekly decline of more than four percent in 14 weeks — since it bottomed in late October 2022. Other China-related indices met a similar fate. It has shaken a few, and we were also caught off guard. Many are asking whether it is time to take profits. After all, the Hang Seng has rallied ~50% from its bottom, and the Hang Seng Tech index ~80%.

When we turned bullish in late October last year from a contrarian and bearish stance, we set the price target for the Hang Seng index at 23,000, when the index was at just above 14,000. It was an audacious and contrarian call then. The peak of the current rally was 22,700, just 1% from our price target.

Further, we note that this rally stalled right at the the 850-cycle Line of ~22,500. (For detailed discussion of our 850-Cycle Line, please refer to our best-selling book “Forecast: the Economy, Cycle and Market Bubble” in Chinese published by the CITIC Press.) This line has been touched a number of times — first as a support level in late March, 2020 when the pandemic was unravelling; then twice as resistance level in mid March and July 2022 as the Hang Seng Index could not halt its decline (Figure 1).

Figure 1: Hang Seng rally stalls at 850-cycle line.

Source: Bloomberg, GROW Research

Splits Emerging

Despite a general recovery in sentiment towards China and an epic rally, data are still suggesting fund outflows from the Hang Heng Trackers Fund (2800.HK), the largest ETF tracking the Hang Seng Index (Figure 1). The cumulative fund flow for this fund has actually declined as the Hang Seng surged. It is surprising, given the the bullish sentiment now and record buying by the southbound money via the Connect Program.

In Figure 2, we show the performance divergence between metals and energy since the “China re-open trade” started late October last year. It is perplexing, since the argument for continuing performance of oil has been that China would consume more oil as it reopens and recovers. Metals, on the other hand, have fared much better and are running away from its historically close correlation with energy.

Figure 2: The performance divergence between metal and energy.

Source: Bloomberg, GROW Research

Overall, the commodity index has been largely flat in the past three months, despite a general risk-on sentment in equities and improving economic outlook as China reopens. As commodities are more sensitive to the physical economic conditions while stocks are more tuned to sentiments and fundflows, it would appear that stocks are convinced that an economic recovery will come sooner or later, while commodities are hesitant to participate and instead opt to wait for further evidence of a recovery.

In sum, funds are still flowing out of Hong Kong ETF despite bullish sentiment, and energy paints a different picture from metals regarding economic outlook. These significant divergences, amongst many other rifts such as the inverted yield curve but strong US payrolls, suggest that we are at a critical market juncture. A call here will have to determine whether the rally is just another deadcat bear market rebound, or it is a genuine trend reversal heralding an eventual economic recovery.

A Deadcat, or A New Bull?

We are in the recovery camp, but believe that the journey will be tortuous. In Figure 3, we compare our proprietary long economic leading indicator, one derived from cyclical performance divergence of the important commodities, with US IP. The correlation between our long economic leading indicator (LLEI) and the US IP is palpable, and our LLEI leads the US economy by about 12 months or more.

Figure 3: Commodities suggest further deceleration in the US economy.

Source: Bloomberg, GROW Research

Our LLEI has been consistent in pinpointing economic turning points in the US economy, including the 2001 recession, the 2008 global financial crisis, the COVID recession in 2020 and then “the US recession” in the first two quarters of 2022 (Figure 3). Of course, the US officials dismissed these two successive quarters of negative GDP growth as recession by alluding to technical reasons.

If historical relationship between our LLEI and the US economy holds, then the US economy is set for further deceleration in the months ahead. Of course, the current US data suggest that the economy is still strong, and thus the US market refuses to correct. But the Fed is sticking to its tightening stance and monetary policy works with a lag.

That said, our LLEI suggests that the second half of 2022 is indeed a turning point for the global economy. Although it tends to forecast economic turning points with a very long lead and hence the “long” in its name, it confirms what the stock market, which has a shorter lead, is seeing and reflecting.

Meanwhile, China PMI has returned to expansionary zone. But the onshore market represented by the Shanghai Composite has not responded in full (Figure 4). As such, while the Chinese markets have run into near-term resistance at the important technical hurdle of the 850-Cycle Line, the market recovery should resume after correction.

Figure 4: China PMI suggests economic recovery, but stocks have not reponded in full.

Source: Bloomberg, GROW Research

The market bottom witnessed in late October 2022 is significant. In Figure 5, we show that both the valuation of the Hang Seng Index and China’s total market value had bottomed around that time. In the past, these two indicators have a track records of pinpointing historical market bottoms in November 2008, June 2016, March 2020 and then October 2022.

We note that these measures, as well as our LLEI, are not meant to be precise and can vary from the actual market bottom by some months. As such, these indicators should be applied to gauge the market trend in a longer time window, instead of short-term market timing.

Figure 5: HSI valuation and China market cap change suggest the Oct 2022 bottom is significant.

Source: Bloomberg, GROW Research


After a 50% rally in the Hang Seng and much more in other major China market indices, rifts are starting to emerge. The rally stalled at the 850-Cycle Line — an important technical hurdle. Metals are diverging from energy, and funds continue to flow out of the largest Hang Seng tracker ETF despite a bullish chorus. The itch to take profit cannot be denied.

Our LLEI portends further US slowdown in the coming months, but also the significance in the market bottom we called in late October 2022. China’s PMI is re-expanding, but the onshore market has not yet responded in full. Both valuation and China’s market capitalization also suggest that the bottom in last October is indeed a secular turning point.

Hao Hong, CFA

Appendix 1: Performance of major asset classes (weekly)

Source: Bloomberg, GROW Research (Updated on 04/02/2023, same below)

Appendix 2: Performance of major asset classes (annual)

Source: Bloomberg, GROW Research

Appendix 3: Performance of major stock market sectors (weekly)

Source: Bloomberg, GROW Research

Appendix 4: Performance of major stock market sectors (annual)

Source: Bloomberg, GROW Research

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English Report: 《A Deadcat, or A New Bull?》



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