The most challenging phase for institutional investors is about to pass. Historically, November shows the weakest correlation between market movements and fundamentals. However, starting in December, the effectiveness of fundamental pricing gradually strengthens.
The optimal window for "profitability" is approaching. Each spring, two key events—the Lunar New Year and the National People's Congress (NPC)—typically drive a favorable "Spring Rally," lasting an average of 20 trading days. During this period, market dynamics shift from (1) low to high win rates and (2) large-cap to small-cap dominance.
**What Determines the Strength of the Spring Rally?** Three scenarios often lead to a strong rally: 1. Better-than-expected short-term macroeconomic data (e.g., 2011). 2. Improving corporate earnings without external shocks (e.g., 2019). 3. Significant liquidity easing (e.g., 2012’s global QE).
Conversely, three factors may suppress the rally: 1. Major policy or external disruptions (e.g., 2014’s U.S. QE exit). 2. Liquidity shocks (e.g., 2021’s bond yield surge). 3. Earnings downturns (e.g., 2022).
For 2026, the combination of marginal earnings recovery, supportive domestic policies/liquidity, and neutral-to-positive external factors suggests a promising Spring Rally.
**Can the Rally Start Early?** On average, the rally begins two trading days before the Lunar New Year, rarely in December. Notably, strong December performance often precedes weaker spring rallies. With the 2026 Lunar New Year falling late, historical precedents (2010, 2015, 2018, 2021, 2024) show no early starts but maintain average gains (~6.3% for CSI 1000 vs. the long-term 6.7%).
**Does the Rally Predict Annual Performance?** Spring Rally performance strongly correlates with full-year returns, except during macro reversals (e.g., 2015, 2024), indicating its role in annual positioning.
**Is Earnings Growth Irrelevant During the Rally?** No. Post-2019, the rally’s strength has increasingly tied to quarterly earnings growth, debunking the myth of "speculative small-caps."
**Do Earnings Warnings Trigger Reversals?** Post-2021, stocks with poor annual reports often rebound in spring, but only if Q1 earnings reverse declines. Otherwise, the rally falters. Markets focus on current-quarter growth, not prior-year weaknesses.
**Timing and Sector Picks** December-January offers prime entry points, especially for sectors with stable annual forecasts and improving 2026 outlooks. Many sectors have already corrected ~20%, aligning with historical norms.
**Risks**: Geopolitical tensions, overseas inflation, and weaker-than-expected domestic stimulus.
**Market Snapshot (Week of Nov 29)** - **Equities**: Shanghai Composite rose 1.4%, led by Communications (+8.7%), Electronics (+6.1%). - **Valuations**: A-share PE (TTM) edged up to 19.05x; CSI 1000’s rally potential remains intact. - **Liquidity**: PBOC net drained CNY164.2B via open market operations.
**Upcoming Data**: China’s October retail sales, U.S. PCE inflation, and Eurozone Q3 GDP will guide near-term sentiment.
**Key Watch**: Earnings trajectory, policy clarity post-December meetings, and global liquidity trends.
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