The tide of foreign funds propping up the October China stocks rally ebbed Friday, but it probably will come roaring back shortly.

Finally on Friday after 10-straight trading days of gains, blue chips in the China stocks gateway of Hong Kong retreated. The Hang Seng Index slumped 1.2% to 21,546 in reduced volume while the index of Chinese companies sank 1.6% to 10,450. For the week the Hang Seng barely moved, slipping six points. The index of Chinese companies, H-shares, had begun their correction a week earlier and finished down 2.2%.

The October rally reached its height of 4.6% on Thursday for the Hang Seng and of 9.3% for H-shares on October 22.

But never fear, underlying market sentiment and the flow of foreign cash are still buoyed by expectations China’s struggling economy will start to rebound in this quarter.

“In the short term, traders will lock in profits and wait for the next wave of hot money,” said Francis Lun, managing director at Lyncean Securities.

He told Equities the Hang Seng would likely lose about 500 points, half its October gains, before rebounding to 22,000. Lun expects the index to climb to 23,000 by the end of the year.

Big blue chips like China Mobile (CHL) will lead the way, according to Lun. End

DAILY FIX

Hong Kong Blue Chips: -265, -1.2, to 21,546, 10-26-12, Hang Seng Index

Chinese Stocks in Hong Kong: -177, -1.6%, to 10,450, 10-26-12, HSCE Index

Shanghai Stocks: -35, -1.7% to 2,066, 10-26-12, Shanghai Composite Index.

Chinese Stocks in the U.S.: -0.02, 391.2, 10-25-12, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong blue chips retreated after 10-consecutive days of gains. However, Macau gambling stocks continued to rise. KGI Research

Quotable: “Intraday volatility of HK market reduced to 129 points reflecting a slowdown in market momentum. However, it did not mean that the sentiment had turned weak especially when market turnover was relatively high at HK$61.24bn.” Core Pacific Yamaichi. 10-26-12

Chinese Company to Watch: “NewOcean Energy (342, HK) is the largest LPG operator in South China…. In general, the Company is in a rapid development period and successive operation of several under-construction projects will bring a considerable growth for future performance based on rapid growth of performance.” Phillip Securities. 10-26-12

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN