Hang Seng Index and Singapore Index Futures SiMSCI share a high level of positive correlation. This was evident as early as 2010 (chart↓) if not earlier. Therefore when the two of them move apart, it is more likely to be a temporary divergence unless there is a strong fundamental reason.
Back in August last year, I pointed out that the Shenzhen Hong Kong Connect ‘fever’ has taken over the Hang Seng Index again driving it to diverge from SiMSCI.
Hang Seng Index is carried away again by excitement over Shenzhen Hong Kong Connect or SZ-HK Connect. Again? Because the chart looks remarkably similar to H1 2015 when it was carried by Shanghai Hong Kong Connect or SHHK. History is repeating – without fundamentals to drive, speculation pumped the market up, speculation let the market down. We saw that from the SHHK action. This time the Hong Kong market is again driven by talk of SZ-HK. This is looking the same like last year. There is no explanation why the fundamentals are different/better this time. So again speculation will drive the market up and in time, speculation will let the market down all over again.
Hang Seng Futures, SiMSCI overlay weekly chart from 2010 – 30 August 2016
Was there a strong fundamental driver? In my opinion there was none. Besides, the Shenzhen market is a smaller one than Shanghai and if Shanghai could not do it, I do not think that the smaller bourse can.
Speculation can push indices to feverish levels but for this time to be different, for Hang Seng to permanently divorce itself from it’s correlation to SiMSCI, there has to be really good fundamental reasons. If there are good reasons, I have not encountered yet.
Hang Seng fever over
Well here we are. Since December 2016, Hang Seng Index and SiMSCI has converged, realigned their highly correlated movement.
Can we call it the SGHK re-Connect or something?
SiMSCI, HSI overlay
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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