HSI-KLSE index diverge: structural differences, fear or complacency?

Visible strength in KLSE index, weakness in Hang Seng

If moving averages were used as a guide for market trend, the stock indices KLSE and HSI remain in up trend. This based on the fact that 50-day and 200-day moving averages have not made the ominous death cross yet.

See our story ‘STI technical analysis: Singapore Straits Times Index bear market yet?‘ where we discuss the use of moving averages to determine trend.

Apart from that, the technical picture of both are poles apart.


Malaysia KLSE Index

  1. KLSE Index bounces off 50-day moving average (red line) i.e. still in short term up trending mode
  2. It is above early 2013 high set in January and April
  3. Looking at the sequence of higher highs and lows, it is in fact making a bullish continuation pattern
  4. No bearish chart pattern is visible.


Hong Kong Hang Seng Index

  1. Hang Seng Index is sinking heavily below the 200-day moving average (black line) i.e. very bearish
  2. It looks a matter of time until a death cross emerges
  3. It is at its lowest point in 2013 and makes a lower high lower low sequence at the same time
  4. The moment mid-April low at around 21500 was crossed, a segment of traders and investors already consider a bearish reversal completed

Chart of KLSE - HSI stock indices

Structural differences or record levels of complacency, fear

At a time where there is increasing stock market correlations through the world, the charts printed by both stock indices are surprising.

Here are some possible interpretations:

  1. There should not be any correlation because Hong Kong and Malaysia is structurally different
  2. Positive correlation exists therefore we are going through a temporary period of divergence

If positive correlation exists, one market must be wrong. We don’t know which one is correct.

Either the Malaysia KLSE Index is not as strong as it should be and therefore very complacent or the Hong Kong Hang Seng Index HSI is over-reacting in fear.

Monthly line charts of KLSE - HSI  1986 - 2013

Long term positive correlation is present

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.   Soh's Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX.   Disclaimer notice: "I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."
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