Looking back on history, A-Shares have experienced six rounds of continuous decline since 2005. After a period of in-depth research, we have summarized the following ten laws and Enlightenment for investors’ reference from the formation of sharp decline, bad feedback, stability maintenance policy, “policy bottom” and “market bottom”, rebound, bottom and reversal signals in sharp decline:
\u3000\u30001. From the perspective of DDM model, the factors affecting stock price are divided into fundamentals, liquidity and risk preference. Looking back on the past six rounds of market switching in history, any one of the three factors can not independently dominate the market trend. At least two of the three factors will deteriorate significantly before the market turns in an all-round way. Of course, fundamentals are the primary factor, such as 20112012.
\u3000\u30002. Generally speaking, the A-share market fluctuates violently in the continuous sharp decline or causes large-scale subscription and redemption of the fund. The net value of the fund falls by 10% and redemption occurs. The period of greatest redemption pressure is often one month after the stabilization and recovery of the fund income. The sequence of negative feedback in the process of sharp market decline: first, from fund redemption (down to 10% in total), to private equity fund liquidation, risk control closing line (down 15-20% in total), then to two financial and equity derivatives (down more than 20% in total), and then equity pledge risk (down more than 30% in total).
\u3000\u30003. A sharp fall makes no bottom. Falling by half is the bottom line thinking. If it falls by less than half, it will be measured by 60% of falling by half. At the same time, the important support level and important integer gateway in the previous period are observation indicators. According to historical statistics, in the previous round of sharp decline, the average decline of the A-share core index compared with the previous high is more than – 25%.
\u3000\u30004. Historically, after the introduction of the stability maintenance policy, A-Shares are expected to rebound in the short term. Central media propaganda and monetary policy adjustment have a weak and short-term impact on the market, and the rebound lasts about 5-10 days. The high-level / regulatory authorities made a statement and encouraged funds to enter the market, which had a stronger impact on the market. The rebound lasted about 15 days and the rebound range was greater. On the whole, the support of encouraging funds to enter the market for the stock market statements of senior management / regulators monetary policy adjustment propaganda of the central media.
\u3000\u30005. According to our observation and statistics, there are often 3-4 rebounds during each round of continuous market decline, with an average rebound range of about 10%. Generally speaking, since the rebound is generally driven by short-term events, it is difficult to form a main line and may not be sustainable.
\u3000\u30006. The historical law shows that the bottom of the market needs to be accompanied by the contraction of trading volume or the verification of turnover rate, which will be more stable. Shrinkage is not a necessary and sufficient condition, but active bull bias is a sufficient condition.
\u3000\u30007. According to our observation and statistics, the market has fallen continuously or sharply, which means that during the continuous sharp decline, the market often has some deep-seated medium-term contradictions that have not been resolved for a long time. Only when these core contradictions show obvious improvement signals can the pattern of continuous decline be fundamentally reversed. From our observation, the confidence from fundamentals is the most important for the reversal after the sharp decline of the stock market. This confidence can come from the profit growth trend of listed companies, or from the changes of important policies, economic data and peripheral relations.
\u3000\u30008. We summarize the three core characteristics of the bottom position: the turnover rate of all a is about 1%, the valuation quantile of the core index is less than 20%, and the profit performance price ratio of stocks and bonds is at least 90% in history. Other reference indicators: Net breaking stocks account for more than 10%, low-cost stocks below 15 yuan account for more than 25%, and stocks below the 60 week moving average account for more than 80%.
\u3000\u30009. During the sharp decline, there is often no difference in the decline of various industries. Generally speaking, the industries with relative benefits are defensive industries. Of course, if there is a continuous positive (expected) industry, it will also perform relatively well. For example, the construction industry in 2012 and the agriculture, forestry, animal husbandry and fishery industry in 2018. In the bottom grinding stage from “policy bottom to market bottom”, the market is facing the suppression of economic downturn and policy uncertainty. Value based and counter cyclical industries (such as infrastructure, finance and real estate) and weak cyclical industries (such as public power, military industry and pharmaceutical consumption) perform better than growth industries. However, after the bottom grinding stage, the risk appetite will pick up, and the market will return to the growth style. TMT, nonferrous metals, military industry and other high-risk preference sectors perform better. Entering the reversal stage, the industry that fell the most during the continuous decline of the market does not necessarily get the most increase after the market bottoms out. According to our statistics, the industry with the highest growth rate after the reversal of the crash has a high probability of rebounding in the process of the previous crash.
\u3000\u Doushen(Beijing) Education&Technology Inc(300010) . At the end of each round of A-share crash, there is an evolution process of “policy bottom → market bottom → economic bottom → profit bottom”. The “market bottom” is mostly located between “policy bottom / credit bottom (social finance data inflection point)” and “economic bottom” (except for 15 years of “leverage bull”), forming a positive relationship between social finance data and A-share valuation. Generally speaking, the evolution law from “policy bottom” to “market bottom”: policy bottom / credit bottom → market bottom (2.5 months away from the former) → economic bottom (4 months away from the former) → profit bottom (basically synchronized with the former or lagging behind for 3 months).
Risk tip: the epidemic spread exceeded expectations, the policy was less than expected, the Sino US relations deteriorated again, the overseas monetary policy changed, and the risk of statistical error
