Historical Review of Market Reversals

1. Historical Experience of Market Reversals

1.1 This market rebound may be a reversal after a long bear market.

Historically, market bottoms often have two main reasons: (1) stabilization of the economic bottom; (2) rapid expansion of liquidity. This market rebound may be a combination of these two states, with rapid expansion of liquidity in the short term, but at the same time, the current situation may be at a turning point in the long-term fundamentals. Once the fundamentals start to stabilize and rise, the sustainability of the subsequent market trends may be longer.

Based on historical experience, the stabilization of the market bottom often first sees a turning point in monetary growth, then a turning point in credit growth, and finally a turning point in profit growth, which occurs around the same time as the market bottom.

Currently, the economic situation is still unclear, with monetary growth rebounding but credit still declining. Therefore, the sustainability of the subsequent market trends still requires validation of the fundamentals. While monetary growth has begun to stabilize and rise, credit growth has not yet shown an upward trend. If credit can stabilize and rise subsequently, the sustainability of this round of market trends may be strong. Otherwise, the market may rebound rapidly with the support of liquidity, but the possibility of returning to volatility afterwards is higher

On the other hand, under the catalysis of policies, the rapid replenishment of market liquidity and the quick restoration of risk appetite are the direct reasons for this round of rebound. From the perspective of futures premium, the upward trend in this round is strong and fast, resulting in a strong futures premium. Referring to historical experience, such strong premium usually occurs in October 2010 and 2015, both times driven by liquidity catalysis pushing the market continuously upward.

Furthermore, the current turnover rate has reached the highest level since 2010, only comparable to the intensity of turnover rates in October 2010, 2015, March 2019, and July 2020.

1.2 How sustainable is this round of market trends?

Regardless of futures premium or turnover rate, around 2 weeks after the market sentiment falls from its peak, the market may often reach its peak. From the perspective of futures premium, after the peak and fall of futures premium in 2010 and 2015, the market often reaches a cyclical high within 1-2 weeks; from the turnover rate perspective, after reaching a peak and starting to fall since 2010, the market similarly reaches a high point within 1 month.

1.3 Structural differentiation in the subsequent market

Historical experience shows that in the short term, the market often focuses on oversold rebounds, lasting for about 1 month; if the market trend continues, the core reason may be the thorough stabilization and rebound of the fundamentals, leading to differentiation in the market as different industries prosper. From historical experience, each first wave of market trends often comes from oversold rebounds, and this time is no exception. The decline in various industries from May to the market bottom and the subsequent rise in various industries since the bottom are basically negatively correlated

Looking ahead, if this trend continues, the core reason is the stabilization of the economic fundamentals and the gradual recovery of market profits; under this circumstance, the effectiveness of investment in prosperity often rises, and the market will differentiate according to the prosperity of various industries.

In the short term, during the process of market highs and fluctuations, we have observed two main characteristics of past trends:

1. On the style level, during the market highs, there is often a switch between large and small caps: in the first half of the uptrend, large-cap styles often take the lead, but later there is a transition to small-cap styles.

2. On the industry level, during the peak process: on one hand, the market often rises during the accelerated industry rotation and peaks after the rotation slows down; on the other hand, cyclical industries often start to rise at the end of the trend.

2. Market: Gradual stabilization with a growth-oriented style

As of September 30th, the Sci-Tech Innovation 50 and CSI 2000 led the gains, while the Dividend Index and SSE 50 lagged behind, with an overall market style leaning towards small caps and growth. In terms of industries, last week, beauty care and computers led the gains, while banks and coal lagged behind. Year-to-date, banks and non-banking financials led the gains, with light manufacturing and textile apparel lagging behind. Year-to-date, in terms of market value, SSE 50 and CSI 100 led the gains, while CSI 2000 and CSI 1000 lagged behind. In terms of style, large-cap value and ChiNext 50 led the gains, while WIND Double Innovation and small-cap growth lagged behind.

2.1 Broad-based and Industry Performance

Last week, there were significant adjustments in profit expectations across various industries. Profit expectations for the non-banking financial industry were raised, while profit expectations for the real estate and steel industries saw significant downward adjustments.

2.2 Style Performance

Our understanding of style: In the medium to long term, style is determined by relative prosperity and reflected in relative valuation. In the short term, style is influenced by relative sentiment and reflected in relative heat. We have made horizontal and vertical comparisons of the current market style from the dimensions of valuation and sentiment:

1. Valuation perspective, there were no industries with an average relative valuation premium increase last week.

2. Trading perspective, there were no industries with a significant increase in average relative heat last week.

3. Major style categories, the short-term heat balance between essential consumption and technology was maintained.

3. Sentiment: Broad-based sentiment heat, cyclical, manufacturing, essential consumption, optional consumption, TMT, financial real estate on the rise

Market observation: Last week, the GLDI sentiment heat, manufacturing, cyclical, essential consumption, optional consumption, TMT, and financial real estate industries were on the rise. As of last Friday, our constructed sentiment index GLDI (Diffusion Index) reading reached 100% for the entire A-share market. In terms of funds, there was an improvement in micro liquidity in September, with leveraged funds flowing in 3.1 GLDI Sentiment Index

3.2 Liquidity Observation

In terms of stock funds, industries with the highest holdings by northbound funds include electrical equipment, food and beverage, and banking, with holdings of 220.7 billion, 213.6 billion, and 198.1 billion yuan respectively.