Hong Kong stocks may rebound after short-selling climbed on Tuesday to the highest level since February amid protests in the city and a global equities selloff, according to Tanrich Securities Co.

The ratio of total short-selling by value on Hong Kong's mainboard versus the shares traded reached almost 1-to-8 on Tuesday, the highest since Feb 24, according to data compiled by Bloomberg. The ratio surged by 58 percent since Sept 25, the last day of trading before the police's use of tear gas and pepper spray to quell demonstrations galvanized protesters demanding electoral reforms.

"When short-selling reaches a peak, the market tends to rebound as people will have to cover their positions," said Tanrich investment manager William Fung. "Shorts remained high after protests started. Investors may also be selling short as overseas volatility" impacts the Hong Kong market, he said.

The Hang Seng Index slid 0.4 percent on Tuesday. Hong Kong police cleared barricades erected by demonstrators in the city's business district. The benchmark gauge has fallen by 3 percent since Sept 25 as retail outlets and banks closed their doors after protesters blocked some main roads.

A rout in global equities wiped $1.54 trillion from shares last week, with the Standard & Poor's (S&P) 500 Index tumbling 3.1 percent in its worst such drop in two years, amid growing concern of an international economic slowdown. US Federal Reserve officials said over the weekend that the threat from overseas may lead to rate increases being delayed. The International Monetary Fund cut its forecast for global growth last week and said the euro area faces the risk of a recession. The slump sent a key measure of US volatility to a two-year high.

Cement makers and power producers were among companies with the most bearish bets in Hong Kong. Short interest in Anhui Conch Cement Co was 23 percent of its outstanding shares, according to Markit data. China Coal Energy was at 15 percent, up 31 percent from June, while Weichai Power Co stood at 14 percent.

Futures on the S&P 500 gained 0.5 percent on Tuesday, while contracts on the Hang Seng Index slipped 0.6 percent. The gauge's volatility index jumped 5.7 percent to an eight-month high of 21.58, indicating traders expect a 6.2 percent swing for the shares in the next 30 days.

Although some traders would take the spike in short-selling as a sign to buy, it's no sure bet. After the ratio surged in February to a six-month high, the Hang Seng Index fell 5.4 percent to the year's low on March 20.

"Hong Kong has never experienced something like this, and no one knows what will happen so some took short positions to hedge," said Steven Leung, director of institutional sales at UOB-Kay Hian Holdings Ltd in Hong Kong, referring to the unrest.

"Investors are still watching how the protests develop along with the US interest-rate outlook, so I don't think they will come back to cover positions so quickly," Leung said.

(HK Edition 10/15/2014 page9)