Will HSI's 7th year cycle play out?

WHILE scanning through the long-term chart of the Hang Seng Index (HSI), we noticed an intriguing cycle playing out in the seventh year of each decade, going back to 1980s. Some market crisis event tends to happen in the seventh year, resulting in a dramatic correction in the HSI.

The first of the examples occurred in October 1987 where the infamous Black Monday wiped out 52 per cent of the HSI within nine weeks due to the erroneous program trading and illiquidity.

The second correction triggered by the seventh year cycle happened in August 1997 where the market experienced the Asian Financial Crisis (AFC). During that period, the HSI crashed 61 per cent before finding a bottom 14 months later. The main trigger of panic during the AFC stemmed from the fixed exchange rate system that Thailand and Hong Kong adopted where their currencies were pegged to the US dollar. The excessive current account deficits and the shortage of foreign reserves led to the break of the fixed exchange rate mechanism as massive speculative attacks took place in the FX marke…