Please be skeptical, as I do the same. I’m not even fully on board with a lot of technical analysis, especially bad technical analysis. I like fundamentals more than anything else, but enjoy the idea of backing up fundamentals with some technical analysis at times. I also believe that technical analysis often is reflective of what is occurring fundamentally in markets, but that depends on how you look at things. With that said, I happened across this and wanted to share it due to how uncanny it was.
The Hong Kong Market Timer
So for anybody who has seen my posts, you may note that I’ve been pretty bearish on China overall. The other day, I got around to looking into charts for the Hang Seng Index (Hong Kong) and I happened to discover a really interesting timing indicator when I found that the Hang Seng index has largely traded within a channel since 1997.
In short, every time the Hang Seng Index has hit the top end of the channel, it marks the top of a major worldwide market event. The interesting thing is that this doesn’t seem to be particularly specific to any one market. Hitting the top of this range almost perfectly timed the tops of all the following crises within their respective markets:
- 1997 Asian Contagion Crisis
- 2000 Dotcom Bust
- 2008 Great Financial Crisis
- 2011 Euro Crisis (didn’t time this one quite as well, but still was close)
- 2015 Chinese market crash / commodity bust
- 2018 ????
The weird thing is it not only has timed the top, there is also a bottom of the range within which HSI trades. Just as hitting the top of this range perfectly times the top of a crisis, hitting the bottom seems to almost perfectly mark when to buy back in.
There are two times in which HSI has gone above the top channel, once being in 2008 as it had a blowoff top, and more recently in January 2018. Regardless, in both instances, it reverted back below the channel, and independent of the blowoff top, the initial touch of the channel marked the top in another market where the given crisis was originating from. In 2008 specifically, I believe a lot of people were moving their money from the USA at the time to Chinese equities and commodities in light of the worsening USA economic picture, so this could partially explain the blowoff here.
I get it, this sounds too good to be true, and a bit crazy, and I sort of agree… But you can look at the chart for yourself here if you haven’t already. I’m not even crazy enough to believe that this will continue to work indefinitely in the future, but we do have a 20+ year track record of this calling financial crises almost on a dime. The only item that wasn’t called precisely is the bottom of the euro crisis, in which the HSI never hit the bottom of the range. The amazing thing is how precise this has been at calling market tops and bottoms almost right on at the moment a market does in fact hit a top.
Historical Long-Short Gameplan?
So with this knowledge, if you knew what to do in hindsight, then you could have made a killing off this. Obviously that’s not possible, but doing a bit of backward looking analysis, here is the return you would have gained if you went short the Hang Seng Index during times of crises.
- 1997 Asian Contagion Crisis – 58% Gain (08/97 to 08/98)
- 2000 Dotcom Bust – 50% gain (04/00 to 03/03)
- 2008 Great Financial Crisis – 45% gain (07/07 to 03/09)
- 2011 Euro Crisis (didn’t time this one quite as well, but still was close) – 35% gain (10/10 to 11/10)
- 2015 Chinese market crash / commodity bust – 36% gain (04/15 to 01/16)
- 2018 ????
As you can see, we currently hit the top end of the range at the start of 2018 right before the VIX blew up. I can’t tell you where, what or when things will possibly get worse, or if this will continue to hold true. With that said, if we are to assume that the previous history remains true, we should expect to see a drawdown of over 30% from the Hang Seng Index until it hits the bottom of the green range, in which case it will possibly even out.
Obviously, draw your own conclusions here and don’t use this indicator as gospel, but I figured it was at least worth sharing. Additionally, I encourage people who DO want to use this to perform proper fundamental analysis to see where they stand on things. Remember that this doesn’t necessarily mean a bear market is coming in the USA – it seems like it indicates issues on a more global basis when true.
Disclaimer: Consult your financial professional before making any investment decision.