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Short Interest May Signal Rally in Hong Kong: Strategist

Hong Kong stocks have seen a steep slide in the last month, shedding nearly 6 percent, with a record amount of shorts in the market. But if history is any guide, this could be a positive sign, according to one strategist.

"Over the past 2, 3 years when we've seen shorting at these levels, it has tended to prefigure a rally in the Hong Kong market on average of around 20 percent and lasting up to 10 weeks," Michael Kurtz, Head of Regional Strategy at Macquarie Securities told CNBC.

Kurtz pointed out the amount of shorts outstanding as a percentage of daily volumes in the Hong Kong equity markets stood at a year-to-date high of 10.2 percent on Wednesday. That's the highest since June 2010, when it stood at 10.4 percent.

"The tactical outlook may actually be very good for share prices as we look out at the rest of the summer," he added.

Paul Heffner, CEO of investment management firm Gen2 Partners attributes this to weak "hands" being shaken out of the market. And, he added, the recent low volumes have exacerbated the declines.

Hong Kong's market turnover on Wednesday stood at $3.79 billion (HK$29.49 billion). That is less than half the average daily turnover of $9.76 billion (HK$75.9 billion) in the first quarter.

Another reason behind the low volumes, according to Heffner, is investors staying on the sidelines as they reposition their portfolios, switching money out of bonds slowly back into equities.

Like Kurtz, Heffner thinks this is likely to be positive for stock markets such as Hong Kong.

"I think equities may surprise in the second half of the year, and that's where we have to position ourselves," Heffner said.