Technical Analysis | Are US stock valuations too high, but with limited downside potential? Southbound funds may start bottom fishing in Hong Kong stocks!
The 120-day moving average is the target for the current correction in the US stock market, corresponding to 4250-4300 points for the S&P 500 and 14100-14300 points for the Nasdaq 100. As for the Hong Kong stock market, the possibility of a retracement between 16900-17000 points is diminishing.
US Stocks: Earnings Continue to Improve, but Valuation Pressure Persists
Last week, there was a brief reversal in the US stock market: the S&P 500 and Nasdaq 100 indexes temporarily broke above the 60-day moving average, but quickly fell back below it, forming a false breakout.
From a fundamental perspective, the EPS of the S&P 500 and Nasdaq 100 remain in an upward trend. However, the valuation pressure on US stocks cannot be ignored. The risk premium of these two indexes has deviated significantly from the historical range and is at an absolute low, indicating that valuations have reached unprecedented levels.
Looking at the indicators of US dollar liquidity, the 10-year US Treasury yield reached a high this week, surpassing the level at the end of October last year. Meanwhile, the US dollar index is in a smooth upward trend, both indicators suggesting that the valuation pressure on US stocks needs further adjustment.
Considering that US stocks are in a strong phase of fundamental improvement, we believe that the downside potential for stock prices will not be significant. Based on historical experience, we still consider the 120-day moving average as the target for the current correction in the US stock market, corresponding to the range of 4250-4300 points for the S&P 500 and 14100-14300 points for the Nasdaq 100.
Hong Kong Stocks: Southbound Capital Bottom Fishing May Repeat Last October's Pattern
Last week, there were signs of a bottom reversal in Hong Kong stocks, but further confirmation is needed. According to our risk premium model, the price of the Hang Seng Index has entered the "mildly undervalued" range, with a corresponding bullish win rate of about 64%. However, we do not believe that this degree of undervaluation has a high probability of triggering immediate valuation recovery.
From a capital perspective, there have been 5 consecutive days of net inflows of southbound capital this week, indicating that domestic investors may enter a "buy on the dip" mode in Hong Kong stocks. The next step is to further observe whether southbound capital accelerates its net inflows and whether there is an increase in the premium/discount rate of Hang Seng Index ETF/Hang Seng Tech ETF. If the net inflows of southbound capital increase while the premium/discount rate rises, the confidence in increasing long positions in Hong Kong stocks will be greater.
Currently, we recommend buying in the range of 16900-17000 (with an approximately 85% bullish win rate). However, based on the latest developments, we believe that the likelihood of Hong Kong stocks retracing to this level is decreasing.
