The Shanghai Composite Index has broken below its annual moving average twice in July, entering a critical validation window. The current fundamental and liquidity characteristics are more indicative of a mid-bull market pause rather than a bull-to-bear transition. However, the establishment of a stage bottom still depends on the trajectory of several key indicators over the next two weeks.
A strategy team, after reviewing 17 instances of breaking below the annual moving average since 1995, noted that recovery in a mid-bull market typically occurs within 20 trading days. This suggests the current period is crucial for determining the market's direction. Concurrently, a quantitative team's three-dimensional timing framework (liquidity, divergence, and prosperity) currently maintains a "volatile decline" assessment. It warns that if the CSI 300, having already broken below its previous trend line on high volume, fails to hold the current final support level, it could signal a deeper trend reversal.
Both analytical frameworks point to the same conclusion: the present moment requires close monitoring for confirmation signals rather than hasty positioning. Below are the key focal points for the market outlook.
Has Selling Pressure Been Fully Released?
The intensity of net outflows from leveraged funds is a core indicator for assessing the extent of short-term profit-taking. According to statistics, as of July 16, the net outflow from margin financing over the past week accounted for 0.16% of the free-float market capitalization of all A-shares. This exceeds the 0.14% seen in mid-February this year and is second only to the 0.25% during the "reciprocal tariffs" period in April 2025. Margin trading volume as a percentage of total A-share turnover has dropped to 8.7%, the lowest since June 2025 and close to the 8.3% seen during the "reciprocal tariffs" impact in April last year.
Important signals are also emerging from the perspective of share distribution. As of the close on July 17, the Shanghai Composite Index had retreated to levels seen in mid-August 2025. Calculating the equilibrium point for buying and selling in this market cycle using daily volume and closing price weighting, the ChiNext Index's equilibrium point is 3384 points; it closed at 3429 points on July 17, indicating it is very close. The STAR 50 Index's equilibrium point is 1543 points, while its current close is 1715 points, suggesting some distance remains. If these indices further converge towards their equilibrium points, it would signal that selling pressure has largely been exhausted and short-term profit-taking is nearing completion.
The quantitative team's perspective is more cautious. Their three-dimensional timing framework shows current liquidity continues to decline, divergence is rising, and prosperity remains in a downtrend, leading to a maintained "volatile decline" judgment. From a technical pattern perspective, the CSI 300 failed to stabilize above its previous horizontal support level and fell again, showing characteristics of a "distribution completion" pattern. The index is now near its final support line; if it fails to hold, it could indicate a more significant trend reversal.
Key indicators to watch: whether the ratio of net margin financing outflows to free-float market capitalization peaks and then declines, whether margin trading volume as a percentage of total turnover stabilizes, and whether the STAR 50 and ChiNext indices reach their buying/selling equilibrium points.
Inflow Momentum from Medium- to Long-Term Funds
The trend of increasing holdings in broad-based ETFs is currently the clearest positive signal in the market. According to statistics, broad-based ETFs have seen a noticeable acceleration in net inflows since July 6. As of July 17, net inflows over the past week reached approximately 156.1 billion yuan. In terms of product structure, the leaders in net inflows included the CSI 300 ETF (about 40 billion yuan), CSI 1000 ETF (about 25.6 billion yuan), STAR 50 ETF (about 19.6 billion yuan), CSI 500 ETF (about 16.4 billion yuan), and CSI A500 ETF (about 16.2 billion yuan). Compared to the rolling five-day peaks of previous rounds of broad-based ETF inflows (ranging from 170 to 240 billion yuan), the current inflow speed is already considerable. On July 19, two major state-owned investment platforms announced plans to increase holdings of Chinese stock assets.
It is worth noting that the sector structure of current broad-based indices differs significantly from the past. Comparing data from early April 2025 and mid-July 2026, the weight of electronics in the CSI 300 rose from 10.2% to 23.7%, and communications from 3.2% to 10.5%. In the CSI 500, the electronics weight increased from 12.5% to 28.7%. In the Shanghai Composite Index, the electronics weight rose from 8.7% to 20.6%. Overall, AI-related components now account for 30% to 40% of major broad-based indices, meaning that medium- to long-term fund inflows will provide relatively direct support for the technology and AI sectors.
Historical experience suggests that if medium- to long-term fund increases are coupled with policy measures like monetary easing, index stabilization and rebounds tend to occur more quickly. If reliance is solely on sustained fund inflows, stabilization typically requires 15 to 20 trading days.
Overseas Liquidity: Fed Meeting and Cloud Provider Capex Guidance
Two major overseas catalysts warrant close attention from July 27 to 31. The first is the Federal Reserve's policy meeting on July 28. As of July 18, the market expects two more rate hikes within the next year. If the meeting signals a delay in the next hike or a reduction in the number of hikes, it would provide effective support for global U.S. dollar liquidity and capital markets over the next six months, potentially serving as a key catalyst for global equity valuation recovery.
The second catalyst is earnings reports from North American cloud providers. At the end of July, companies including Amazon.com, Microsoft, Alphabet, and Meta Platforms, Inc. will release quarterly reports, with their forward-looking guidance on AI capital expenditures being highly anticipated. According to statistics, the compound annual growth rates of capital expenditure for these four cloud providers from 2023 to 2025 were approximately 63%, 52%, 68%, and 60%, respectively. If capital expenditure guidance meets or exceeds expectations, it will strongly support the continuation of the AI industry chain rally in the second half of the year. If individual companies report lower-than-expected capital expenditure, it would validate the recent fundamental logic behind the AI sector's adjustment.
The quantitative team also pointed out that with current liquidity indicators continuing to decline, marginal changes in external disturbances will significantly impact market sentiment.
The approaching interim reporting season may also provide earnings support. According to statistics, corporate earnings are still in an upward revision channel. The consensus forecast for 2026 net profit growth for all A-shares excluding financials is 47%, having been revised up by about 19 percentage points over the past six months. By sector, building materials, non-ferrous metals, chemicals, and new energy have seen the largest improvements in their 2026 net profit growth consensus expectations. The Q1 2026 year-on-year net profit growth for all A-shares excluding financials reached 11%, with a neutral full-year growth expectation of about 10% and an optimistic scenario of up to 19%.
Potential Rebound Sectors: AI Mainstay and Liquidity Spillover Directions
While awaiting market stabilization signals, potential investment directions can be identified in advance. The view is that AI will remain the core theme of any rebound, but the trading logic is shifting from "AI inflation" to "technology roadmap differentiation," similar to the shift in the solar sector in 2021 from a broad rally to divergence among different technology paths like TOPCon. Within the AI industry chain, the valuation logic for PCBs and copper-clad laminates is shifting towards order verification, the "transition solution" attribute of connectors and copper cables is being re-evaluated as a "longer-cycle practical solution," while optical modules continue to differentiate based on the certainty of 800G and the ramp-up pace of 1.6T/CPO.
Regarding liquidity spillover directions, potential beneficiaries are screened based on three dimensions: earnings revisions, institutional pricing power, and low valuation. These include innovative pharmaceuticals, basic chemicals (chemical products/agrochemicals), non-ferrous metals (industrial metals/minor metals), power grid equipment, and securities firms. Among these, innovative pharmaceuticals benefit from the ongoing realization of overseas expansion logic, with out-licensing deal values nearing $100 billion in the first half of 2026. Power grid equipment benefits from global grid system upgrades and AI data center connection demand. Securities firms benefit from the performance elasticity brought by increased IPO volume and trading volume expansion.
From the perspective of fund flow resonance, sectors to watch this week include commercial retail, pharmaceuticals, construction, and food & beverage, as their fund flow factors show that both large order net inflow and margin financing net inflow percentiles are at relatively high levels.
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