Core Viewpoints

We have attempted to measure market sentiment from three perspectives: A-share volume and price data, capital flow and structure, and comparison with other asset prices. Over more than a year of tracking, the A-share market sentiment index we constructed has played a role in quickly signaling changes in market sentiment. Now we attempt to analyze the characteristics of this round of rising market trends from these three angles and to what extent this round of rising market has evolved.

Core Viewpoints:

Recently, after the market sentiment index broke below the 10% level and entered an extremely cold state, it rebounded from the bottom, and market sentiment rapidly warmed up, with volume and price indicators rising to bull market levels. However, on October 9th, there was a widespread correction in stock prices, and market expectations became somewhat divergent. Is this a normal correction in the rising market trend, or has this round of rising market come to an end?

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Overall, the characteristics of the bull market to date are manifested in the rapid rise of volume and price, driven more by relatively flexible funds due to market expectations that A-shares will rise after policy introductions. There is still room for incremental funds to enter, and stock valuations and cost-effectiveness are still at historical normal levels. In the absence of policy details and the rise in logic being disproven, it is difficult to say that this round of market trends has peaked. During the policy and data vacuum period, price fluctuations are more about trading behavior. The correction on October 9th was partly due to the rapid rise in the previous period, and it may also be that some investors chose to take profits after continuous losses turned into profits. It is expected that the downside space for the A-share market is limited.

Looking forward, this round of rising market was ignited by policy. Judging from the intensity of policies that have been introduced and related statements, there is still room for imagination for subsequent policies. After the market is ignited by policy, the subsequent market performance will mainly depend on the entry of incremental funds, including incremental funds entering from other markets and incremental funds transferred from other types of assets, which requires continuous observation. In the end, it still depends on the fundamental data after the policy effects are manifested. Before the fundamental data is released, the logic of the rise cannot be disproven. If the fundamental situation really improves, especially if the issue of weak domestic demand improves, it is expected that the market's upward space will exceed expectations.

Volume and Price Perspective: Relevant indicators have risen to the level of historical bull market stages, but have not yet indicated a reversal.

From the perspective of turnover rate, the speed of this round of turnover rate increase is historically rare, and the absolute value of the turnover rate has risen to a historical high. On the one hand, this reflects the high market sentiment of this round, and on the other hand, it also indicates that the speed of market trading information is accelerating. From the perspective of price characteristics, the proportion of individual stocks exceeding the average price of the past year is a very effective reversal indicator, which has now risen to a historical high, but has not yet reached the level of indicating a reversal.

Capital Perspective: Relevant indicators have risen but are still far from historical highs, and there is still room for capital to enter.

From the perspective of leveraged funds, the balance of financing and the amount of financing purchases have risen rapidly, but the balance of financing is still a certain distance from historical highs, and the proportion of financing purchases has risen to a historical high. From the perspective of public funds, the estimated stock investment ratio of open-end funds by Wind has risen sharply, but it has not reached the previous high. From the perspective of incremental funds, the fermentation time of this round of rising market is relatively short, and the share of newly established equity-type funds has not changed significantly.Perspective from Price Comparison: Relative Cost Performance Declines, but Remains at a Historical Mid-Level

From the perspective of equity premium rate, as the stock market surges, the equity premium rate has dropped from a historical high to a normal level. From the difference in returns between stocks and bonds, in recent trading days, the equity market has shown strength while the bond market has been relatively weak, leading to a rapid increase in the stock-bond return difference. Regarding the futures basis of stock index futures, the recent Shanghai-Shenzhen 300 futures have shifted from a discount to a premium.

Risk Warning: Historical experience and indicators may be at risk of becoming invalid, statistical conclusions may vary across different intervals, there is a risk of unexpected fluctuations in the macroeconomy, and geopolitical situations may evolve beyond expectations.

Introduction

We measure market sentiment from three angles: A-share volume and price data, capital flow and structure, and comparison with other asset prices. In the process of tracking for over a year, we have found that the A-share market sentiment index we have constructed has a high degree of fit with the actual market trend, and its upper and lower limits are relatively stable, which can serve as a quick indicator when market sentiment shifts. Now we attempt to analyze the characteristics of this round of the upward trend and the stage it has reached from these three perspectives.

I. What stage has this round of the upward trend reached?

Recently, after the market sentiment index broke through the 10% level and entered an extremely cold state, it rebounded from the bottom, and market sentiment rapidly warmed up, with volume and price indicators rising to bull market levels. However, on October 9th, there was a widespread stock price correction, and market expectations became somewhat divergent. Is this a normal correction within the upward trend, or has this round of the upward trend come to an end?

From the volume and price indicators, this round of the trend has unfolded quickly, with related indicators already reaching the levels of historical bull markets, but there has been no indication of a reversal. From the turnover rate perspective, the speed of this round's turnover rate increase is historically rare, and the absolute value of the turnover rate has risen to a historical high. This reflects the high market sentiment of this round on one hand, and on the other hand, it also indicates that the speed of market transaction information is increasing. From the price characteristics, the proportion of individual stocks exceeding the average price of the past year is a very effective indicator of reversal, which has now risen to a historical high but has not yet reached the level indicating a reversal.

From the capital indicators, related indicators have risen but are still some distance from historical highs, and there is still room for capital to enter. From leveraged capital, the balance of margin financing and the amount of margin purchases have risen rapidly, but the balance of margin financing is still some distance from historical highs, and the proportion of margin purchases has risen to a historical high. From public funds, the estimated proportion of stock investment in open-end funds by Wind has risen sharply, but has not yet reached the previous high. From incremental capital, the fermentation time of this round of the upward trend is relatively short, and the share of newly established equity-oriented funds has not yet changed significantly.

From the price comparison indicators, after the sharp rise in stock prices, the relative cost performance has declined, but it is still at a historical mid-level. From the equity premium rate perspective, as the stock market surges, the equity premium rate has dropped from a historical high to a normal level. From the difference in returns between stocks and bonds, in recent trading days, the equity market has shown strength while the bond market has been relatively weak, leading to a rapid increase in the stock-bond return difference. Regarding the futures basis of stock index futures, the recent Shanghai-Shenzhen 300 futures have shifted from a discount to a premium.In a comprehensive analysis, the characteristics of the bull market thus far have been characterized by rapid increases in both volume and price, largely driven by relatively flexible capital flows following policy announcements as market expectations for an upward trend in A-shares have been fueled. There is still room for additional capital to enter the market, and stock valuations and cost-effectiveness remain at historically normal levels. In the absence of policy details and with the upward logic unrefuted, it is difficult to claim that this market trend has reached its peak.

During the policy and data lull, price fluctuations are more a result of trading behaviors. The correction on October 9th was partly due to the rapid increase in the market earlier and partly due to some investors choosing to take profits after turning losses into gains. It is expected that the downside risk for the A-share market is limited.

Looking ahead, this round of increase was ignited by policy. Judging from the intensity of policies already introduced and related statements, there is still room for imagination regarding future policies. After the market is ignited by policy, the subsequent market performance will mainly depend on the entry of additional funds, including funds entering from other markets and funds transferred from other types of assets, which requires continuous observation. Ultimately, it will depend on the fundamental data after policy effects become apparent. Before the fundamental data is released, the upward logic cannot be refuted. If the fundamental situation improves, especially if the issue of weak domestic demand improves, it is expected that the market's upward space will exceed expectations.

From a volume and price perspective, trading sentiment is high.

In the volume and price perspective, we have selected four sub-indicators to observe market sentiment, which are the turnover rate that measures trading enthusiasm, the proportion of strong stocks that reflects the price structure, the proportion of leading stock turnover that reflects the trading structure, and the proportion of stocks hitting new highs that reflects the strength of market momentum.

The turnover rate has increased rapidly and its absolute value is high. Starting from September 24, 2024, the A-share turnover rate increased rapidly. The turnover rate of Wind's total A-share floating market value increased by 3.41 percentage points in 6 trading days, breaking through 3% starting from September 30. On the first trading day after the holiday, the turnover rate reached 4.3%. Such a rapid increase in turnover rate is rare in history. Looking at the absolute level of the turnover rate, since 2006, only during the bull markets of 2006, 2008, and 2015, has the single-day turnover rate exceeded 3%.

On one hand, this reflects the high market sentiment in this round. On the other hand, it also indicates that with the development of technology, the number of information dissemination channels has increased, the speed of information dissemination has become faster, the time for sentiment to ferment has been shortened, and the speed of market trading information has also increased.

From the perspective of price structure, the proportion of stocks with prices above the average price of the past year has risen to a historical high. We use the proportion of stocks in the entire market that exceed the 250-day moving average to reflect the degree of consistency in market stock price trends. The proportion of stocks that have broken through the average price of the past year in the current market continues to rise, indicating that the market is becoming more optimistic and momentum is upward.

Since 2007, this indicator has mostly operated within the range of [10%, 90%], and its trend is relatively synchronized with market prices. It has broken through 90% upwards three times and broken through 10% downwards seven times. These 10 times corresponded to significant price reversals. Since our market sentiment tracking report was released on September 4, 2023, this pattern has been verified twice, including in February of this year and this September.

As of October 8, 2024, 78.6% of the stock prices in the market are higher than the average value of the past year. This proportion is close to the level at the high points in 2019 and 2020, but has not reached the level at the high points in 2007, 2009, and 2014, and has not yet formed a reversal signal.

From the perspective of trading structure, the concentration of leading stock turnover is still at a relatively low level, and the structural characteristics of the market are relatively weak. We calculate the proportion of the transaction amount of the top 20% of stocks in the market's daily transaction amount to the total transaction amount of the market to reflect the strength of trading enthusiasm between leading stocks and non-leading stocks in market transactions. Recently, the proportion of leading stock transaction amounts remains at a relatively low level. This round of market trend started with a general increase, and the structural characteristics are relatively weak.From the perspective of market momentum, the proportion of individual stocks hitting new highs has risen to a high level. We measure market momentum by the proportion of individual stocks that break through their 250-day new highs daily. This indicator is sensitive to bull markets and typically fluctuates below 20%. Only when a large amount of capital flows in and market sentiment is excited can it drive a large number of stock prices to break through their one-year highs. As of October 8, 2024, 28.6% of individual stock prices have reached the highest level in the past year.

III. From the perspective of capital, there is still room for capital to enter

In addition to volume and price indicators that can directly reflect market sentiment, capital flow and structure can also reflect the market sentiment of different entities from different dimensions. From the perspective of capital, we have selected four indicators to observe changes in market sentiment, including the margin balance representing leveraged funds, the open-end fund stock position representing public funds, and the proportion of margin purchase amount reflecting the capital structure, and the share of newly established equity-oriented funds reflecting market demand.

From the perspective of leveraged funds, the margin balance and margin purchase amount have risen rapidly, and the proportion of margin purchases has risen to a historical high. The marginal change of margin funds can observe the trend of leveraged funds, and the proportion of margin purchase amount to market turnover can reflect the consistency level between leveraged funds and the overall market funds. When the proportion of margin purchase amount is high, it reflects that leveraged funds have a stronger trading tendency, which may appear in two situations. The first is that market prices continue to be low, but professional investors "know in advance" and increase the margin purchase amount before the market transaction is active; the second is that market prices continue to strengthen, investors are full of confidence in the future, and want to obtain higher returns with higher leverage, which often reflects an overheated trading sentiment.

As of October 8, 2024, the margin balance of Shanghai and Shenzhen stock markets was 1,538.1 billion yuan. Looking at the difference between the 20-day moving average and the 100-day moving average, it is at the 30% quantile of the past year. The margin balance has risen rapidly, but it is still a certain distance from the historical high; the proportion of margin purchase amount to market turnover has risen to 11.9%, which has approached the historical high.

From the perspective of public funds, the open-end fund stock investment ratio estimated by Wind has risen sharply, but it has not reached the previous high. This indicator not only reflects the changes in market funds but also reflects the timing results of fund managers. The consistency between this indicator and market trends is not high. As of October 8, 2024, the open-end fund stock position estimated by Wind was 72.82%, and it still has a distance from the annual high.

From the perspective of incremental funds, the fermentation time of this round of rising market is relatively short, and the share of newly established equity-oriented funds has not changed significantly. This indicator can measure the strength of market demand for equity-oriented funds. When investors' expectations for the stock market turn to positive optimism, the demand for equity-oriented funds increases. Moreover, considering factors such as fund performance, fund companies are also inclined to issue new funds when they expect future market trends to rise. Therefore, this indicator can indirectly reflect the market's optimism about the stock market. Although the share of newly established funds is a lagging indicator of the market, it is also an important source of incremental funds to maintain the bull market trend.

IV. From the perspective of price ratio, stock valuation has risen to a relatively high levelThe relative prices between different assets can also, to some extent, reflect the market's preference levels for these assets. Here, we have selected three sub-indicators, including the equity premium rate that measures the cost-effectiveness of stocks versus bonds, the stock-bond return difference that reflects the rotation between stocks and bonds, and the futures basis that reflects investors' future expectations.

Looking at the equity premium rate, the current cost-effectiveness of the stock market has somewhat declined. The equity risk premium reflects the market's preference between stocks and bonds. When the equity risk premium rises, it indicates more funds flowing into bonds, a decrease in stock market valuation levels, and a reduced preference for stocks. We calculate the equity premium rate as \( \frac{1}{\text{Wind All A rolling P/E}} - \text{China 10-year government bond yield} \), and calculate the two-year percentile on a rolling basis. Overall, the equity premium rate is inversely related to market prices. Therefore, we calculate "1 - Equity Premium Rate" and include it in the comprehensive sentiment index.

This indicator is also a relatively effective contrarian indicator. When the equity premium rate approaches or exceeds 0.045, as it did in January 2019, February 2024, and September 2024, it corresponds to a significant rebound in the stock market. On September 14, 2024, the equity premium rate rose to a historical high of 0.0473. As the stock market surged, the equity premium rate quickly declined, and as of October 8, 2024, it dropped to 0.0296.

Regarding the stock-bond return difference, in the recent trading sessions, the equity market has shown strength, while the bond market has been relatively weak, causing the stock-bond return difference to rise rapidly. We use the difference in the 20-day returns between the Wind All A and the China Bond Composite Index to measure the difference in return on investment between stock and bond assets over a period, and calculate the 60-day average to smooth the indicator. In the recent trading sessions, the equity market has shown strength, while the bond market has been relatively weak, leading to a rapid increase in the stock-bond return difference. As of October 8, 2024, the return difference for the 20 trading days between stocks and bonds was 33.2 percentage points.

Looking at the futures basis, the CSI 300 futures have recently shifted from a discount to a premium. We use the percentage increase/decrease of the closing price of the active CSI 300 futures contract relative to the closing price of the CSI 300 to measure the market's optimism about the future of the index. An expansion of the premium or a reduction of the discount reflects a marginal warming of the market's expectations for the future trend of the index. As of October 8, 2024, the basis was at 0.12%, shifting from a continuous discount to a premium.

V. Risk Warnings

Historical experience and indicators may be subject to the risk of becoming ineffective. There may be risks of differing conclusions in different statistical intervals. There are risks of unexpected fluctuations in the macroeconomy and the unexpected evolution of geopolitical situations.