HSBC rally may have been overdone

The recent 20% rally in HSBC shares from the March low was extremely strong and one based on some fundamentals but otherwise optimistic and relief style issues.

Much has been made in the press of HSBC’s AGM announcement that it would re-consider its HQ location in London following aggressive corporate taxation and regulatory oversight. This to many saw it open up the door to a move of its headquarters to Hong Kong and received a positive reaction from investors who bet that a move to the financial capital of Asia would see tax savings that could be returned to investors in the forms of greater dividends. It is speculated that moving HQ to Hong Kong could save the banking giant as much as £3bn.

The stock also reacted to press speculation that HSBC could be looking to sell its retail arm, which could be part of a £20bn deal. The firm has to separate its domestic retail banking division by 2019 thanks to a new law and this loss of control is making the HSBC executive board uneasy.

It is also worth mentioning that having rallied strongly on these two factors, the base level from which the 20% rally emanated from was a two and a half year low at 550p.

I think the upward move is overdone, and given the fact that we are now entering the month of May, which can be typically be the start of a short term bearish move in UK stocks as investors minimise portfolios for the summer lull, HSBC shares could now be due a correction. Normally, I would wait until the month of June, which has seen HSBC shares finish the month lower on 8 of the last 9 years for the month. However, the recent bull move higher in the firms shares, I feel there is the potential to make the most of any downward move over the coming two months, and not purely just May.

Key findings:

• HSBC shares rose 11.6% in April following 5-monthly declines
• Share prices hit resistance levels of 660p
• Consolidation channel trend remains of 540p – 660p
• Shares have finished lower in June 8 of last 9 years