Analysis | What goes up must come down: Shanghai stock index poised for decline as daily turnover touches historical turning point
Last three declines in the benchmark – when trading values were above 300 billion yuan – were in August and November last year, and this April, with each lasting a month
Chinese shareholders should probably brace themselves for a decline, if recent trading value history is any guide.
Daily turnover on the Shanghai Composite Index (SCI) overtook 300 billion yuan (US$46 billion) this week, suggesting the benchmark could be set to decline, judging by previous form.
Trading values have risen above that threshold three times over the past year, and in each case the index fell into a month-long decline of more than 4 per cent, according to data compiled by the South China Morning Post.
Should that pattern be repeated this time round, it would mean the SCI’s 11 per cent rally since May could now be set for a pause.
Wei Wei, a trader at Huaxi Securities in Shanghai, reckons rising stock turnovers point to increasingly split views among investors, as more shares change hands.
“The market is becoming divided after a decent run of rises, with some still bullish but others now starting to profit take,” she said.
The market is becoming divided after a decent run of rises, with some still bullish but others now starting to profit take
“There has been a limited amount of new funds moving into the market to push stocks up further. So the market could now be set for a moderate correction.”
Wei predicts the SCI could fall by as much as 100 points, or 3 per cent from its 21-month high, set last week.
The Shanghai benchmark closed 0.1 per cent higher at 3,384.15 on Wednesday. Turnover on the gauge of all 1,376 stocks on the Shanghai exchange increased to 324.4 billion yuan on Tuesday, its highest level since November, according to data compiled by Bloomberg.
Those last three declines in the index – when trading values were above 300 billion yuan – took place in August and November last year, and this April, with each lasting a month.
The biggest shake-up happened in April, when the Shanghai Composite sank 7.2 per cent. The other two drops were 4.6 per cent in August 2016, and 5.7 per cent the following November.
So the declines seem to be increasing, as big-cap shares – which led the benchmark’s gainers this year – started being sold.
Gree Electric Appliances, which has soared 52 per cent this year, is now down 10 per cent since July, while China Life Insurance has lost 7.4 per cent from its August high, trimming its annual gain so far to 15 per cent.
But analysts still maintain the declines will remain limited and temporary, with the market again likely to resume its upward trajectory afterwards.
Orient Securities expects the Shanghai Composite to rise as high as 3,500 this year, which would represent a 3.4 per cent rise from Wednesday’s close.
“The market will stage a mild correction,” said the Shanghai brokerage’s analysts Xue Jun and Sun Jinxia.
“But that will not alter the medium-term upward trend.”
