CITIC Securities: After the "5-day miracle" in A-shares, the oversold rebound has ended, ushering in a new round of upward trend

With the combination of financial policies being introduced, the A-share market staged a "5-day miracle", and market sentiment quickly moved out of the panic zone, entering the excitement zone in just 5 trading days. Currently, market sentiment has returned to a high level after 3 years and to an excited level after 4 years. The heightened investor sentiment indicates that the A-share market has entered a new stage, and we should make investment decisions with a bullish market mindset. Does the hot investment enthusiasm mean that the market is overheated and at risk of correction? Based on the experiences of 2015, 2019, and 2020, after sentiment enters the excitement zone, the market often continues to rise in the short term. Subsequently, as sentiment cools down, there may be a certain degree of adjustment in the market, but this adjustment does not necessarily mean the end of the bull market. Looking at the current position of the sentiment index, the market sentiment at the end of September is equivalent to March 5, 2019, or July 7, 2020, in history.

At the end of September, investor sentiment rose significantly, showing a simultaneous increase in volume and price, specifically:

Turnover Rate: The turnover rate of A-shares soared to above 2% at the end of September, indicating that the market has entered a short-term overheated state. Subsequently, there may be further volume expansion, with the turnover rate leading the stock index to decline.

Equity Fund New Issuance: The issuance of A500ETF promoted the rebound of fund issuance at the end of September. Recently, new fund issuance has returned to the high point of May this year. With the market further warming up, this indicator is expected to continue to rise, becoming a key indicator to track bullish market sentiment.

Margin Buying Ratio: The margin buying ratio surged significantly at the end of September, approaching 10%, the highest since March 2021. This reflects a significant improvement in the expectations of leveraged funds for the future market, and the market is expected to remain strong in the next 3 months.

Implied Risk Premium: Rapidly declined from historical highs at the end of September, but still at a relatively high level, indicating that the current allocation cost-effectiveness of equity assets is still good.

Stock-Bond Yield Spread: Returned to above the zero axis after 4 months, showing a significant improvement in the money-making effect. With the warming up of the stock market and the adjustment of the bond market, the stock-bond yield spread indicator reflecting the short-term money-making effect of investors has recently seen a significant increase, approaching 10% at the end of the month. However, there is still a considerable distance compared to the highs of March 2019 and July 2020.

Above 60MA: Soared from a very low position to the median level. This indicator dropped to a low point of 8% on September 18th, then soared significantly by the end of the month, now approaching 50%. It rose to the median level at a very fast pace, but there is still a certain gap compared to the highs of nearly 80% in April 2019 and August 2020.

Overbought/Oversold: The indicator turned from negative to positive, indicating that the oversold rebound has ended, and the market has started a new uptrend. It is also noted that there is still some distance from the highs of April 2019 and July 2020, indicating limited pressure for the current overbought decline.

At the end of March 2022, we launched the CITIC Securities Strategy - Investor Sentiment Index, which is synthesized from multiple publicly traded market indicators. This index has effectively reflected the market sentiment levels at important historical intervals in the A-share market, and the extreme highs and lows have been able to lead the market reversal, showing a certain predictive abilityIt should be pointed out that this index is used to depict the market's investor sentiment, it is a synchronous indicator, and its predictability is mainly reflected by the predictability of investor sentiment on the market. After the launch of the Investor Sentiment Index, it has attracted a lot of attention from investors. Therefore, starting from the end of April 2022, we have been tracking and displaying the current market sentiment in the form of a monthly report, and providing historical trends and the latest developments of core sentiment indicators. In August 2024, we once again released a special report, reviewing the market timing effectiveness of the sentiment index over the past two and a half years, and summarizing the performance of different market styles under different sentiment states.

Investor sentiment surged at the end of September, leaving the panic zone and entering the euphoria zone in just 5 days

In the previous issues of the Market Sentiment Tracking Monthly Report, we pointed out that from the perspective of market sentiment, the current market has many similarities with the end of the bear market in 2018. It needs to confirm repeatedly at the bottom and after bottoming, starting with technical rebound and thematic market as the starting point, gradually evolving into a structural market, and finally appearing in a general uptrend. However, the arrival of the market came more rapidly and fiercely than we expected. With the financial policy combination on September 24th, A-shares staged a "miracle in 5 days", the market sentiment quickly left the panic zone, entering the euphoria zone in just 5 trading days, and the entire A-share index also rose by more than 26% in these 5 trading days.

On September 24th, the sentiment index surged significantly and left the panic zone, issuing a buy signal on the right side. By September 30th, we estimated that the sentiment index data had reached 95 (due to incomplete margin trading data, there may be some errors), the market sentiment returned to a high level after 3 years, and to the euphoria zone after 4 years. Historically, it is difficult for investor sentiment in a bear market environment to reach a high level, let alone enter the euphoria zone. In fact, the long-term market weakness and stock game since 2022 have prevented the sentiment index from breaking through 75 and entering the high level zone for 3 years. The current high investor sentiment indicates that the A-share market has entered a new stage, and we should make investment decisions with a bullish mindset. One issue of current market concern is whether the hot investment enthusiasm implies market overheating. Is the market facing the risk of adjustment? Based on the experiences of 2015, 2019, and 2020, after the sentiment enters the euphoria zone, the market often continues to rise in the short term. Subsequently, with the decline in sentiment, the market may experience some adjustments, but this adjustment does not mean the end of the bull market. Based on the current position of the sentiment index, the market sentiment at the end of September is equivalent to March 5, 2019, or July 7, 2020, in history.

We analyze various indicators. Among the seven major indicators, the turnover rate, equity fund issuance volume, margin buying ratio, implied risk premium, and stock-bond yield spread data have been smoothed over a 5-day average; the two indicators of exceeding 60MA and overbought and oversold were originally weekly data, but now they are unified into daily data for greater sensitivity, with the 60-week moving average essentially becoming a 300-day moving average. The following text will default to using this approach.

Turnover rate: By the end of September, the turnover rate of A-shares soared above 2%, indicating that the market has entered a short-term overheated state. Historically, after the turnover rate breaks through 2%, there is often a further increase in trading volume, and the stock index's upward trend has not yet ended, with turnover rate leading the stock index to fall back later.

Equity fund issuance volume: The issuance of A500ETF has driven the rebound in fund issuance by the end of September. Recently, new fund issuance has returned to the high point in May of this year. With the market further warming up, this indicator is expected to continue to rise, becoming a key indicator to track bullish market sentiment.

Margin buying ratio: The margin buying ratio surged significantly at the end of September, approaching 10%, the highest since March 2021. This reflects a significant improvement in leveraged funds' expectations for the future market. Historically, looking at the forward-looking significance of this indicator, the market is expected to remain strong in the next 3 months.

Implied risk premium: Rapidly declining from historical highs but still at a relatively high level. From June to September, this indicator rose sharply to its highest level in history. However, with the A-share market warming up, the indicator rapidly declined at the end of the month, but overall it remains at a relatively high level, indicating that the current allocation cost-effectiveness of equity assets is still good.

Stock-bond yield spread: After 4 months, it returned above the zero axis, showing a significant improvement in the money-making effect. With the stock market warming up and the bond market adjusting, the stock-bond yield spread indicator reflecting investors' short-term money-making effect has recently seen a sharp rise, approaching 10% by the end of the month. However, compared to the high points in March 2019 and July 2020, there is still a considerable distance.

Exceeding 60MA: Soaring from a very low level to the median level. This indicator portrays the market's strength and weakness from a medium to long-term perspective, reflecting the proportion of stocks closing above the 60-week moving average (300-day moving average). Historically, when this indicator exceeds 80% or falls below 20%, it often indicates market sentiment being overheated or oversold, with the possibility of a market reversal. This indicator hit a low point of 8% on September 18th, then soared significantly by the end of the month, now approaching 50%. It has risen to the median level at a very fast pace, but compared to the high point of nearly 80% in April 2019 and August 2020,There is still a certain gap.

Overbought and Oversold: The indicator has turned from negative to positive, indicating that the oversold rebound has ended, and the market has started a new round of upward trend. This indicator portrays the market strength and weakness from a short-term perspective. By the end of September, the indicator had risen above the zero axis, indicating that the market has entered a strong period. It is also noted that the indicator is still some distance away from the highs of April 2019 and July 2020, so the pressure for a sharp decline from the current overbought levels is limited.

Authors of this article: Chen Guo, Xia Fanjie; Source: CITIC Securities Research (ID: gh_79ce9c666738); Original title: "CITIC Securities: A-shares staged a 'miracle in 5 days', emotions went from panic to excitement"