Core Conclusion: The degree of divergence within the spring rally itself can, to some extent, be viewed as a marker for cyclical bear-to-bull transitions. This is not limited to long-term shifts in the broader market trend; the timing of increased divergence also heralds the beginning of style rotation. The new main themes that emerge during the spring rally window of style rotation are expected to maintain their outperformance for 1-2 years after the style is established. From a rearview mirror perspective, the spring rally often trades on reversal expectations from the previous year's annual reports and the certainty expectations for the following year's reports. Given the relatively short trading time span of the spring rally, we consider the impact of PPI turning positive expectations on trading continued prosperity and distressed reversals over a longer reporting period. Historically, the transition from trading prosperity recovery to trading prosperity stabilization is completed in the two quarters surrounding the shift from the previous low in PPI to zero and then to PPI turning positive.
From a rearview mirror perspective, the spring rally often trades more on reversal expectations from the previous year's annual reports and the certainty expectations for the following year's reports. Based on back-testing data from 2010 to 2024, industries in the stabilization precursor group from the previous year's annual reports showed a higher win rate during the spring rally period; similarly, industries in the prosperous and stabilized groups from the current year's annual reports also exhibited a higher win rate. We believe that during the spring rally period, it may be appropriate to allocate to industries in the stabilization precursor category that are likely to reverse based on the previous year's annual report.
The trading time span of the spring rally is relatively short. Therefore, we examine the impact of PPI turning positive expectations on trading continued prosperity and distressed reversals over a longer reporting period interval.
From a rearview mirror perspective, the transition from trading prosperity recovery to trading prosperity stabilization is completed in the two quarters surrounding the shift from the previous low in PPI to zero and then to PPI turning positive. When PPI is still some distance from turning positive, the more prosperous groups tend to have relatively higher certainty of returns. Conversely, when PPI is near zero, groups on the edge of prosperity stabilization offer relatively higher return certainty.
From an endgame perspective, we find that when PPI turns positive, the market often "coincidentally" selects the industries that are most prosperous at the end of the period. In other words, the industries with the most recent prosperity in their financial reports at the end of various intervals performed the best during those intervals.
The divergence inherent in the spring rally itself can, to some extent, serve as a signal for cyclical bear-to-bull transitions. Using the variance in price changes of primary and secondary industries during the spring rally period as a measure of its internal divergence, it is evident that years with high divergence often mark long-term bear-to-bull transitions (e.g., 2013, 2015, 2019, 2021, 2024).
This implication is not confined to long-term shifts in the broader market trend; the timing of increased divergence also initiates the prologue to style rotation. 1) During the 2019 spring rally, growth stocks quickly outperformed value stocks, marking the beginning of a three-year major outperformance cycle for growth. 2) The 2021 spring rally arrived early, characterized by large-cap blue-chips, represented by the Mao Index, accelerating towards a market top. During this topping process, internal weaknesses appeared within the dominant style, leading to a subsequent weakening trend after the peak.
The new main themes that play out during the style rotation window of the spring rally have the potential to maintain outperformance for 1 to 2 years after the style is established. Taking the 2019-2020 tech innovation and new energy bull markets as examples, during the 2019 spring rally, semiconductors and consumer electronics initiated the first leg of a major uptrend, continuing their strong performance throughout the year. During the 2020 spring rally, these same sectors led gains again, but the structural focus within growth shifted from consumer electronics to sectors like solar, wind, and lithium. Industries such as lithium batteries, photovoltaic processing equipment, and photovoltaic auxiliary materials surged over 100% from the end of the spring rally to the end of 2020.
From a rearview mirror perspective, the spring rally often trades more on reversal expectations from the previous year's annual reports and the certainty expectations for the following year's reports. January is typically when listed companies issue earnings previews, often overlapping with the spring rally. We use the year-on-year growth of contract liabilities and advance receipts to represent demand and TTM ROE to represent profitability, thereby positioning industry cycles.
The trading time span of the spring rally is relatively short. Therefore, we consider the impact of PPI turning positive on trading continued prosperity and distressed reversals from a longer reporting period perspective. A previous report utilized a "future function" for analysis, acknowledging the lag in financial report releases by aligning future report data with current stock performance retrospectively.
From a rearview mirror perspective, the transition from trading prosperity recovery to trading prosperity stabilization is completed in the two quarters surrounding the shift from the previous low in PPI to zero and then to PPI turning positive. When PPI is still some distance from turning positive, the more prosperous groups tend to have relatively higher certainty of returns. Conversely, when PPI is near zero, groups on the edge of prosperity stabilization offer relatively higher return certainty. This aligns with the earlier point that as ROE confirms an upward trend after bottoming, the market increasingly bets on distressed reversals.
From an endgame perspective, we find that when PPI turns positive, the market often "coincidentally" selects the industries that are most prosperous at the end of the period. That is, the industries with the most recent prosperity in their financial reports at the end of various intervals performed the best during those intervals.
Risk Disclosures: 1) Past historical experience is for reference only; 2) Policy introduction and implementation are uncertain; 3) Overseas liquidity may tighten beyond expectations.
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