The Shanghai Composite Index once again "fell below" its annual moving average last week, sparking concerns about a shift to a bear market. However, historical data suggests this event is not uncommon in itself; the real questions are how deep and for how long the decline might persist.
Last week's drop below the 250-day moving average by the Shanghai Composite has raised fears of a bull-to-bear transition. A strategy research report from Guosheng Securities, published on July 19th, analyzes historical patterns since 2000 to provide a framework for assessment.
Falling Below the Annual Line is Not Uncommon in Bull Markets
First, it's crucial to correct a common misconception: a break below the annual moving average does not automatically signal a bear market.
Guosheng Securities' analysis shows that since 2000, the probability of major A-share broad market indices outperforming or underperforming their annual moving averages is roughly balanced. Specifically, indices like the CSI 500 and CSI 1000 have a slightly higher chance of staying above it, while the STAR 50 Index has a slightly lower probability, but overall the distribution is fairly symmetrical.
Even narrowing the focus to bull market periods reveals a similar pattern. Using the annual line as a bull/bear gauge, the probability of an index falling below it during a bull market is around 10% to 15%. The ChiNext Index shows the lowest probability at about 9%, while the CSI 300 has the highest at approximately 15%.
The report notes that such "breaks" often correspond to "consolidation phases during an ongoing uptrend" rather than a decisive trend reversal.
The Crux is Not 'If' But 'How Long and How Deep'
Guosheng Securities segmented the Shanghai Composite's movements since 2000 into over 160 phases defined by "crossing below the annual line to crossing back above it," categorizing them into four types: bull market, bear market, bull-to-bear transition, and bear-to-bull transition.
The differences in the data are stark:
Brief breaches during bull markets: These last an average of about 5.5 trading days, with an average maximum retracement of roughly 1% and an average maximum gain of about 2.9%—suggesting opportunity outweighs risk.
Genuine bull-to-bear transitions: These persist for an average of about 191.3 trading days, featuring an average maximum retracement of approximately 28% and an average maximum gain of around 24.4%—indicating risk significantly exceeds opportunity.
Based on this, the report offers a practical guideline: if the index reclaims its position above the annual line within 10 trading days of falling below it, and the maximum retracement during that period does not exceed 5%, the likelihood of a full-blown bull-to-bear switch is relatively low.
The report notes that historical exceptions are rare—instances like 2020 (55 trading days, 8%-10% retracement) and 2015 (47 trading days, 8%-10% retracement) did exceed these thresholds but ultimately did not end the broader bull market.
Two Common Traits of Genuine Bull-to-Bear Transitions
Since 2000, the A-share market has experienced six typical instances of a "break" below the annual line that signaled a bull-to-bear shift: July 2001, February 2008, April 2010, August 2015, March 2018, and January 2022.
Guosheng Securities identifies two common characteristics:
First, a narrative "inflection point." Each transition was accompanied by a reversal of the preceding dominant market narrative—the receding tide of the internet boom, the peak of real estate and subprime credit expansion, the end of massive infrastructure investment waves, the bursting of the 'Internet+' bubble, the contraction of China's global trade红利 (dividends), and the fading of China's export advantages during the global economic misalignment.
Second, valuation "polarization." At the onset of each historical bull-to-bear transition, the Shanghai Composite's price-to-earnings (PE) ratio often exceeded its three-year average by more than two standard deviations—indicating valuations at historically extreme highs.
Assessing the Current Situation
Guosheng Securities suggests that directly applying historical bull-to-bear transition templates to the current market is challenging for two main reasons.
First, while the AI narrative is indeed facing widening divergences, the report points out that current disagreements "remain largely confined to expectations and rumors, still lacking solid fundamental evidence." The upcoming earnings reports and business guidance from global technology companies over the next month will be a critical observation window.
Second, regarding valuations, the current PE ratio of the Shanghai Composite remains around one standard deviation above its three-year average, far from the "polarized" levels seen at the start of past bull-to-bear shifts.
If the Bull Market Persists: Faster Stabilization Means Greater Opportunity
The report further analyzes the relationship between the speed of stabilization after a bull market "break" below the annual line and subsequent performance.
Historical statistics show that in about 28% of cases, the market stabilized the very next trading day, and in roughly 21% of cases, stabilization occurred within 2 to 5 trading days. Combined, these account for about half of all instances. Furthermore, a positive correlation exists between the speed of stabilization and the upside potential over the following month—the faster the stabilization, the greater the potential for subsequent recovery.
The report concludes that if the bull market has not yet ended, "a short-term 'break' below the annual line should represent an opportunity outweighing risk, and the next one to two weeks should focus on identifying potential stabilization signals."
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