Hong Kong’s stock market is only pausing for breath after logging a hefty 50 per cent rally from late October. Investors should look forward to more upside after the current hiccup caused by conflicting fund-flow signals, a top China market strategist said. The Hang Seng Index retreated 4.5 per cent last week, the most in three months. Funds from mainland China took their money off the table, while investors also withdrew from the Tracker Fund, the biggest fund tracking the benchmark index. The market struggled even as fresh data showed Chinese manufacturing expanded for the first time in four months. “A call here will have to determine whether the rally is just another dead-cat bear market rebound, or a genuine trend reversal heralding an eventual economic recovery,” said Hong Hao, a partner and chief strategist at Chinese hedge fund Grow Investment. “We are in the recovery camp, but believe that the journey will be tortuous.” Hong correctly forecast that the Hang Seng would rally to about 23,000 from just above 14,000 levels during the market slump in October. The rebound, which added US$1.5 billion of capitalisation, peaked at around 22,700 after the Lunar New Year holiday, or 1 per cent short of his prediction. Rabbit fortune-reading: Hang Seng’s 30,000 struggle and Taiwan black swan alert Hong based his optimism on the 850-cycle line, a technical indicator that has accurately predicted global boom-bust cycles in the past 60 years, except during the 1970s stagflation, the 2008 global financial crisis and during the coronavirus pandemic in 2022. The Hang Seng Index surged more than 10 per cent in January, its best start to a year since 2012, before its setback last week. That ranked as the best performance among major global stock indices, according to Bloomberg data. Still, the market is facing a critical juncture at this point. Despite a recovery in sentiment, mainland funds have turned net sellers of Hong Kong stocks. Investors also withdrew their money from the Tracker Fund, the city’s largest investment vehicle tracking the Hang Seng Index. Also, the commodity index has been largely flat in the past three months when equities rallied, with energy perplexingly underperforming metals despite forecasts of greater demand for oil as China’ economic recovery gains momentum. That suggests traders are hesitant to participate and are instead opting to wait for further evidence. China fund sees 18 per cent drop in Hong Kong stocks as fatigue sets in Wang Qi, CEO of MegaTrust Investment, a boutique Chinese investment firm, last week said the three-month rally in Hong Kong stocks was overstretched. The Hang Seng Index could lose as much as 18 per cent from its post-Lunar New Year peak, he added. Still, the trough witnessed in late October is significant, with both the valuation of the Hang Seng Index and China’s total market capitalisation bottoming around then. These two indicators have pinpointed previous market lows in November 2008, June 2016, March 2020. “Both valuation and China’s market capitalisation suggest that the bottom in October is indeed a secular turning point,” Hong said. “While the Chinese markets have run into near-term resistance at the important technical hurdle, the recovery should resume after correction.”