Strategy Report: Sell before May

With the HSI confirming a bearish technical pattern, a series of share placements over the past two weeks, and potentially weak economic data & corporate earnings/guidance, we reiterate that the HSI may fall again to form a “second leg” before really bottoming out. Tactically sell into this rally. Wait for better entry point (HSI at 22,000-23,000) to accumulate growth stocks and recovery plays.  

 

  • Bearish pattern “Rising Wedge”. Since bottoming at 21,139, the HSI has formed a bearish pattern “Rising Wedge”. The support line was broken yesterday, confirming the bearish pattern. Expect to fall to at least 22,800. A similar pattern has formed in the S&P 500 too.

 

  • Major shareholders are selling. Over the past two weeks when the HSI was hovering at 24,000, major shareholders of Sino Biopharm (1177 HK) (HSI constituent), China Gas (384 HK) (HSCEI constituent), among others, reduced stakes. The last time there were a series of share placements was in Jan 2020 when the HSI was peaking. Not a good omen.

 

  • Sectors outperforming the most may face profit-taking pressure. Internet, healthcare, property management are among the most resilient sectors during these volatile months, enjoying the biggest rebounds and returned to peaks. While they are less affected by the COVID-19 pandemic and have higher earnings visibility, the fact that they have outperformed so much might lead to profit-taking when the broad market retreats.

 

  • Sell before May, despite cheap valuations. While the HSI is still cheap (2020E P/E at 10.3x; P/B at 1.01x) and thus attractive for long-term investors, there could be further downside in earnings forecast as we enter Q1 earnings season. With the COVID-19 still posing huge uncertainties to global economy and corporate earnings, and the slump in oil prices adding risks of bankruptcies and defaults, the “Sell in May” seasonal weakness may well happen this year.

 

  • OW Capital Goods; Accumulate Internet/Healthcare/Auto/Consumer. For now, we prefer Capital Goods sector as infrastructure policy play. Wait for better entry point to accumulate growth stocks like Internet and Healthcare, and recovery plays such as Auto and Consumer Discretionary.
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