Why the Hong Kong rally is bullish for US stocks

The stock market of Hong Kong is hot. Hong Kong’s Hang Seng Index recently rallied 6.4% on April 9th.

What could that mean for US stocks?

Here is a little historical correlation analysis.


Ties that Bind

The chart below shows the 40-week correlation between American and Hong Kong stocks.

Arold Chart

The key is that both markets are usually highly correlated–that is, when one goes up the other one follows.

In the last ten years (prior to 2015), there had been three periods, when this correlation broke down, but only for a short time.

In 2007, the US was leading international stocks south. Hong Kong could manage to rally for a couple of months, but quickly joined America’s decline.

More Gains?

In 2011, Asian stocks showed weakness months before the US corrected by over ten percent. In 2013, Hong Kong struggled, but only briefly and was pulled back up by the US.

The situation looks similar now: the correlation broke down due to weakness in Asia, but Hong Kong played catch up in recent days and joined the US uptrend.

If we assume that correlated markets are the norm, we expect that US equities should continue their uptrend.

Photo Credit: Barbara Willi via Flickr Creative Commons