Broad strategy: A-shares may usher in a new round of upward cycle in the future.

GF SEC released a research report stating that although the recent market correction has caused some investors to begin worrying about the market situation, it is recommended that everyone regain confidence and gear up for the first wave of the bull market in the Year of the Horse, at the current level of around 4000 points. Looking ahead to the next 1-2 months, A shares are likely to see an opportunity for a rise due to favorable timing, conditions, and people. In terms of allocation direction, GF SEC believes that similar to last year's Siasun Robot & Automation, possible directions this year may include the byte industry chain (Spring Festival investment flow, corresponding to AI applications and domestic computing power), and space photovoltaics. In a report after the New Year's Day this year, GF SEC mentioned: "During the end-of-year roadshows, we observed that many funds with absolute returns had demands for equity asset allocations in the new year, it mainly comes down to timing. Through discussions, it was generally believed that although there were some differences in the market in January, with the Shanghai Composite Index around 4000 points at the start of the year, it is probably not the peak of the index for 2026. Therefore, many funds adopted a mentality of 'buy early rather than late,' and immediately increased their holdings in A shares after New Year's Day." The index then started a rapid uptrend. Now, after the ups and downs of January, the Shanghai Composite Index has once again returned to a level near 4000 points. Will the logic mentioned above be repeated? Firstly, an important variable that has affected the market in the past month - various broad-based ETFs have experienced significant outflows that have now come to an end. The report gives the view that in the next 1-2 months, A shares are likely to see an opportunity for a rise due to favorable timing, conditions, and people. (1) Timing: In February, the spring season is the stage with the highest win rate for excitement. Historically, February and the period around the Spring Festival are the strongest stages for spring season excitement. The market has a high win rate, and small-cap styles are favored. For example, in the period between the Spring Festival and the two sessions, the probability of a rise in small-cap indices is 100%, and the probability of a rise in February is 87.5%. Due to the fact that indices like the 500, 1000, and 2000 have been leading since late December, there are concerns that the spring excitement may have started prematurely. In the history of the "spring excitement" market, if it starts early in December or January of the previous year, it often occurs in a bull market atmosphere combined with industrial or economic fundamentals on the rise (or policy shifts) and a global recovery. Looking at the CSI 1000 Index, the years when the "spring excitement" market started significantly early were: 2013, 2014, 2015, 2020. The reasons for the market rise before the 2013 Spring Festival: the December political bureau meeting set the tone for stable growth, with expectations of a fundamental turnaround strengthening, and year-end data warming up; the reasons for the market rise before the 2014 Spring Festival: expectations of economic transformation, the mobile Internet wave, and global semiconductor recovery; the reasons for the market rise before the 2015 Spring Festival: concerns about a hard landing, the establishment of shantytown renovation goals, and further policy reforms in the financial markets boosting risk appetite; the reasons for the market rise before the 2020 Spring Festival: early signs of bottoming out in the short cycle, improvement in US-China relations, loose overseas currency and economic recovery. This time's early start, similar to previous occasions, is accompanied by a bull market sentiment in industrial trends. Based on past experiences, the early start of the market in December-January does not affect the continuity of the spring excitement in February-March. (2) Conditions: After the release of annual report forecasts, negative fundamental disruptions are coming to an end. From a top-down perspective, in the annual report forecasts completed at the end of January, the percentage of companies with low expectations, losses, or negative growth has reached a new high compared to the past three years. Perspective 1: The percentage of companies with low expectations is 67.3%, higher than the three years of declining profits from 22 to 24. Perspective 2: The percentage of companies with losses or negative growth in Q4 single quarter profits is 70%, also a new high in recent years. In fact, starting from 2018, listed companies have often carried out phased financial adjustments in Q4. As shown in the figure below, after 2018, due to various factors such as impairment, tax payments, and bonuses, Q4 profits of listed companies have generally seen a significant decline. With the landing and gradual digestion of these negative financial information, starting from February, the market will "go lightly" and the negative fundamental shocks will come to an end. (3) People: In a bullish trend, every time the Wind Full A Index falls below the 20-day moving average for about a week, it is often a good time to increase positions. In a report last year, we reviewed the scenarios where the Wind Full A Index fell below the 20-day moving average in the 6 previous major bull market cycles, summarizing some empirical regularities: (1) Out of the past 6 bull markets, the temporary falls below the 20-day moving average were not uncommon, totaling 99 times. (2) After falling below the 20-day moving average, the market had win rates of 60%, 67%, 79%, and 92% in T+5, T+20, T+60, and T+180, respectively. This means that after a short-term adjustment, the market mostly resumes its uptrend. (3) After falling below the 20-day moving average, the average duration of the pullback was 6.4 days, with an average adjustment magnitude of 2.9%. The median duration of the pullback was 3 days, with a median adjustment magnitude of 1.2%. (4) In extreme cases, if there is still pressure for a short-term adjustment in the market, what factors could lead to this? We further reviewed several instances in history of significant market falls after falling below the 20-day moving average. Historically, the probability of significant pullbacks (over 8%) after falling below the 20-day moving average was not very high, occurring only 11 times, with an average pullback of 11 trading days and an average decline of 10%. In summary, the reasons in history for a significant pullback after falling below the 20-day moving average were: 1. Expectations of policy tightening (market regulation/monetary/real estate, etc.); 2. Concerns about liquidity shocks (such as IPOs); 3. External shocks (such as trade frictions or significant fluctuations in external markets); 4. Economic and performance pressures (these cases generally involve longer adjustment periods). Back to the current situation, on February 2, the Wind Full A Index fell below the 20-day moving average by 2.7% in a single day. If we believe that the bullish trend has not ended (for an argument on this, refer to GF SEC's previous report "Expectations of 'A shares struggling to break valuation for three consecutive years' gradually being shattered"), then based on the 99 cases analyzed in the past, the recent week should be a good opportunity to increase positions. Therefore, against the background of favorable timing, conditions, and people, although the recent market correction has caused some investors to begin worrying about the market situation, it is recommended for everyone to regain confidence, regroup, and prepare for the first wave of the bull market in the Year of the Horse. (4) So, in terms of allocation direction, how should we consider it? During the "spring excitement" period, is earnings growth no longer important? In fact, upon reviewing, the correlation between "spring excitement" and earnings has been strong. It is not about ignoring earnings, nor is it just about speculating on poor-performing stocks. Especially since 2019, the correlation between the "spring excitement" rally and the quarter-on-quarter change in growth rates of first-quarter reports has been strengthening. As seen in the table, the last three rows (companies without first quarter reports) show a mix of red and green performances, some good and some bad. If a company can link to some industrial trend themes or expectations of a turnaround in difficulties, even though it doesn't have a first-quarter report, it could still perform well, similar to last year's spring excitement with Siasun Robot & Automation. Similar to Siasun Robot & Automation last year, possible directions this year may include the byte industry chain (Spring Festival investment flow, corresponding to AI applications and domestic computing power), and space photovoltaics. On the other hand, the first three rows of every table (companies with the best first quarter performance) all show pink, indicating that although some are not the strongest performers, most rank above average. Looking ahead to first quarter earnings this year, combined with recent annual report forecasts, we have preliminarily selected some directions. Of course, if the market unfolds as expected, the non-bank sector (securities firms, insurance) should also have very good first-quarter results. (5) Finally, from a trading perspective, how should we view the situation of these hot sectors recently? Previously, in our report "How to distinguish whether the mainline is adjusting or ending? 20250914," we proposed the moving average deviation indicator to measure the strength of the mainline trend. The moving average deviation = ln (Close) - ln (ema20), with values approximate to a percentage deviation. Where the entry or exit thresholds correspond to: not chasing when the deviation is too high (>15%), chasing when the deviation is moderate (5%-15%), no need to worry when above the moving average, and suggest holding when just below the moving average (-5% to 0%), indicating a consolidation phase, which starts when the deviation is below -5%. (These parameters are based on empirical data, and due to the different volatility levels of individual sectors, more refined thresholds need to be set based on the sector's own volatility.) (1) When the trend has not been broken, the moving average deviation is more like an odds indicator: the lower the moving average deviation, the closer it is to the trend line, the higher the odds at the start of the trend, while the higher the moving average deviation, the further it is from the trend line, the lower the odds at the start of the trend. Typical examples from the past month include satellite communications (01/12 moving average deviation of 30.2%) and non-ferrous metals (01/28 moving average deviation of 15.0%), signaling signs of overheating. Currently, the moving average deviations of typical mainline sectors range between -4% and 2%. If the industrial trend is not invalidated, the current position's odds are cost-effective. (2) During the trend, volatility acts more like a probability indicator: Taking the 20-day historical volatility as an example, the higher the volatility, the greater the divergence in the trend over the last 20 days, whereas lower volatility indicates less divergence over the same period. In the early stages of a trend, low volatility suggests less divergence and high win rates, as both bulls and bears have already been through a process of consensus formation in chip exchanges. By the middle to later stages of the trend, profit-taking pressure from funds intensifies, leading to greater divergence in the market, which is reflected in increased volatility. Participating in a trend with lower volatility typically results in less divergence and higher win rates, while participating in a trend with higher volatility leads to more divergence and lower win rates. Looking at it based on volatility, of the typical mainline sectors currently: (1) sectors like non-ferrous metals, satellites, storage, chemicals, and power grids have seen increased volatility recently. Although from the perspective of moving average deviation (odds), they are suitable for entry, there is currently greater divergence in entering these positions, which means waiting for reduced volatility if pursuing higher win rates; (2) sectors like photovoltaic modules, semiconductor equipment, human-like Siasun Robot & Automation, and science and technology chips have shown a strong trend lately, with suitable odds and moderate volatility; (3) sectors like innovative pharmaceuticals and PCBs have had minimal volatility recently, but their trend strength in the last month has not been strong, indicating a more oscillatory movement.