'The momentum is building, judging by the volume,' Core Pacific-Yamaichi head of institutional sales Marvin Pang said. 'The rally in the stock market is very much to do with liquidity and most funds are sitting on rather high cash levels, leaving ample liquidity to drive the market further.'

The Hang Seng Index jumped 214.72 points to a four-month high of 12,646.49, following a sharp index futures-led rally immediately after the lunch break. About $15 billion worth of shares changed hands, 30 per cent above the daily average of the past three months.

A dramatic pick-up saw the index crack its 200-day moving average at 12,500 points, a move that sent an abrupt signal to negatively biased investors and forced them to cut losses and buy stock.

'A lot of short positions were accumulated at around that level and once the index broke through, short covering by the bears pushed it even higher,' UOB Kay Hian Hong Kong director Steven Leung Wai-yuen said.

A dip in Nymex crude futures to below US$45 per barrel contributed to the regional feel-good factor, while the Taiwan market's closure due to a typhoon focused portfolio managers' attention on Hong Kong.

Demand was strong for all the index heavyweights. HSBC Holdings closed 1.27 per cent stronger at a five-month high of $119.50 and China Mobile climbed 3.52 per cent to $22. Sun Hung Kai Properties gained 2.15 per cent, Cheung Kong (Holdings) rose 3.54 per cent and Hang Lung Properties jumped 4.16 per cent.

Property counters have underpinned recent strength amid relatively strong residential sales volumes and unverified reports of rising prices.

Last Thursday, the Hang Seng property sub-index broke its 200-day moving average, another significant buy signal for those who trade according to chart movements.

Sheldon Lee, who heads hedge fund sales at CLSA, said the break was important since the index became stuck in a progressively narrower 'wedge' pattern since early June. A break either up or down had become inevitable, he added.

'There is intermediate resistance at 13,200 points, but the next real target for the [Hang Seng Index] is 14,000,' he said.

That level corresponds to the peak in May 2001 and at the beginning of this year.

'The market is full of false breaks, but what stands out [yesterday] is that it's a break in pretty good volumes and that makes me more confident that this is the real thing,' Mr Lee said, pointing to the 4.5 per cent increase in the property sub-index over the four days since he predicted the market could move to the next target level rapidly.

Data released after the market closed on Monday confirmed Hong Kong consumer prices edged up a higher than expected 0.9 per cent last month from July last year. It was the first year-on-year rise in inflation since November 1998 and added to expectations of a strong economic recovery.

'In a nutshell, the return of inflation should prove supportive of domestic consumption, investment and domestic asset prices,' Merrill Lynch economist Marvin Wong said in a report.

He noted that the prolonged period of deflation had encouraged consumers to defer spending in anticipation of even lower prices.

This had resulted in consumption as a share of gross domestic product falling to a 13-year low last year.

Macquarie Bank head of Hong Kong and China research Kingston Lee said the firm expected the consumer price index to rise to 2 per cent next year, but bank savings would continue to pay interest rates of below 1 per cent, leaving Hong Kong with negative interest rates.

'This will prompt investors to shift their money out of the banking system and chase after equities,' Mr Lee said.