Key Takeaways: The market continued to fluctuate this week with shrinking trading volume. Overseas liquidity disturbances persistently impacted risk appetite, as the Bank of Japan signaled potential further rate hikes, raising concerns about a reversal in carry trades. Since November, the U.S. dollar index has oscillated around 100, while market expectations for a Fed rate cut in December remain contested. The prolonged consolidation phase is attributed to stable buying power primarily from long-term and industrial capital, making it difficult for rapid sector rotations to attract significant retail inflows. Additionally, year-end institutional caution and profit-taking amid uncertainty have extended the sideways movement. However, we maintain optimism at this juncture. Historically, low trading volumes in bull markets are not bearish signals; rather, volume troughs often mark favorable entry points. Moreover, pre-year-end rallies are typically preceded by market adjustments, as tactical funds create safety margins for positioning. December 2025 may present a strategic window for year-end opportunities.
(1) Low trading volumes in bull markets are not negative indicators. Post-facto analysis shows that volume bottoms often coincide with attractive buying opportunities. The current extended consolidation reflects the dominance of long-term and industrial capital, limiting retail participation despite sector rotations. Year-end institutional conservatism and profit-taking have further prolonged the phase. During the 2005–2007 and 2019–2021 bull markets, corrections or consolidations saw rapid volume contractions, with troughs aligning with interim market lows.
(2) The year-end calendar effect warrants attention, though the timing of the rally remains uncertain. Historically, if indices are at low levels, year-end rallies start earlier, with higher magnitude and positive returns. Conversely, elevated index levels delay the rally, amplifying uncertainty in scale and gains. These rallies hinge on tactical bets around economic and policy expectations, often preceded by market adjustments. Pre-2015, corrections before year-end rallies averaged over 10%, while post-2015, they narrowed to 5%–10%.
(3) A year-end rally is likely in 2026, with December 2025 emerging as a potential entry window. Weak macro expectations leave room for speculation on stronger pro-growth policies. However, given current elevated A-share valuations, the rally may not commence early. While low rates continue to support household allocations to equities, short-term inflows are constrained by muted "wealth effects" and year-end risk aversion. A turnaround hinges on stabilizing economic data (earnings) and looser liquidity conditions domestically and abroad, likely materializing in early 2026.
Risk Factors: Unexpected downturns in real estate, sharp U.S. stock volatility, and potential deviations from historical patterns.
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