One of the more popular articles making the rounds today concerns the rally in Hong Kong equities and the scope of the rally in its Hang Seng Index. According to the article, the Hang Seng’s rally has been concentrated among just a handful of names. For example, Tencent Holdings 69 percent gain this year “has accounted for about a quarter of the index’s gain.” The article goes on to quote strategists warning that the “lack of breadth” in the Hang Seng is a red flag for the index.
We’ll be the first to agree that any rally showing a lack of breadth is a warning sign to the overall rally’s sustainability. The only issue we have with critiques of breadth in the Hang Seng is that breadth has actually been strong. The chart below compares the price of the Hang Seng to its cumulative A/D line, which is simply a cumulative measure of the number of stocks in the index rising on a daily basis minus the number of stocks falling on a daily basis. As shown in the chart, price and breadth in the index have been tracking each other very closely over the last twelve months, and just today, as the index’s price hit a new high, so too did the cumulative A/D line. The fact that breadth in the Hang Seng has been confirming the new highs in the price of the index illustrates the fact that breadth has been solid and not narrow.
The argument regarding Tencent and its impact on the performance of the Hang Seng reminds us of one we have been hearing all year with regards to the S&P 500 and the disproportionate impact that the largest stocks in the index have had on its performance. We can’t and won’t dispute the fact that in both cases these largest stocks are accounting for a large share of the gains, but the reason we aren’t overly concerned is that other smaller stocks in the index have been participating as well. If a situation arises where the largest stocks continue to rally while the rest of the market falters, we would be worried, but at this point, that is not the case.