This marks the final weekly report before the Year of the Horse. We extend our best wishes for success and smooth sailing in the new year. While recent market corrections have caused some investor concern, we advise regaining confidence and preparing for the first upward cycle of the Year of the Horse at the current level around 4000 points.

In our post-New Year report, we previously noted that during year-end roadshows, we observed significant demand for equity asset allocation among absolute return funds for the new year, primarily a matter of timing selection. Market consensus suggested that while January's market performance was divisive, the Shanghai Composite Index's level around 4000 points at the beginning of the year was unlikely to represent the peak for 2026. Consequently, many funds adopted an "earlier is better than later" approach, increasing their A-share positions immediately after the New Year, which subsequently triggered a rapid market rise.

Now, after January's fluctuations, the Shanghai Composite Index has returned to the vicinity of 4000 points. Will the same logic replay?

First, a key market variable over the past month—substantial continuous outflows from various broad-based ETFs—has largely concluded. As shown in the chart, between January 15 and January 29, broad-based ETFs experienced two consecutive weeks of significant outflows. Since January 30, these outflows have essentially ceased, with some trading days even recording net inflows.

Against this backdrop of significant change in a major market influence, looking ahead 1-2 months, A-shares are likely to enter a period of favorable conditions for a rise.

(1) Timing Advantage: Starting in February, the Spring Rally enters its phase of highest historical success probability. Historically, February and the period around the Spring Festival exhibit the strongest calendar effects for the Spring Rally, characterized by high market success rates and outperformance of small-cap styles. Taking a small-cap index as an example, the probability of increase between the Spring Festival and the Two Sessions is 100%, and the probability of increase in February is 87.5%.

Given that indices like the 500, 1000, and 2000 began advancing earlier from late December, there is some concern about whether the Spring Rally has already been front-run. Historically, when the "Spring Rally" occurred early in December or January of the previous year, it was mostly within the context of an industrial or economic fundamental upturn cycle (or policy shift) combined with a bullish global recovery atmosphere. Looking at the CSI 1000 Index, years with notably early "Spring Rally" activity include 2013, 2014, 2015, and 2020.

Reasons for pre-Spring Festival rises: - 2013: December Politburo meeting emphasized stability and growth, strengthened expectations of fundamental reversal, and year-end data improvement. - 2014: Economic transformation expectations, the mobile internet wave, and global semiconductor recovery. - 2015: Concerns about a hard landing, establishment of shantytown renovation targets, and further boost to risk appetite from financial market reforms. - 2020: Early signs of a short-cycle bottom, warming China-US relations, and overseas monetary easing with economic recovery.

Similar to previous instances, this early start is accompanied by a bullish atmosphere around industrial trends. Based on past experiences, an early start in December-January does not preclude the continuation of the Spring Rally into February-March.

(2) Fundamental Advantage: After the release of annual report forecasts, negative fundamental disturbances have subsided. From a top-down perspective, the preliminary 2025 annual report forecasts disclosed by the end of January show that the proportion of companies with low expectations, losses, or negative growth has reached new highs compared to 2024.

Perspective 1: The proportion of companies with low expectations is 67.3%, higher than during the three-year profit decline cycle from 2022-2024. Perspective 2: The proportion of companies reporting losses or negative growth in Q4 single-quarter profits is 70%, also a recent high.

In fact, since 2018, listed companies often conduct phased financial adjustments in Q4. As the chart shows, post-2018, influenced by factors like impairments, tax payments, and bonuses, Q4 profits for listed companies have shown significant sequential negative growth. With these negative financial disclosures now public and being digested, the market can start February with a lighter load, as negative fundamental shocks have concluded.

(3) Market Sentiment Advantage: Within a bull market trend, periods shortly after the Wind All-A Index falls below its 20-day moving average often present good buying opportunities. In our previous report analyzing 99 instances of the index breaching the 20-day MA across six major bull cycles, we summarized key patterns:

1. Temporary breaches below the 20-day MA were not uncommon, occurring 99 times in total across the six bull markets. 2. After breaching the 20-day MA, market success rates at T+5, T+20, T+60, and T+180 were 60%, 67%, 79%, and 92% respectively. This indicates that after short-term digestion, the market mostly resumes its upward trend. 3. After breaching the 20-day MA, the average correction duration was 6.4 days with an average adjustment magnitude of 2.9%. The median correction duration was 3 days with a median adjustment of 1.2%. 4. In extreme scenarios where further short-term adjustment pressure exists, historical reviews of larger declines post-breach identified four primary causes: policy tightening expectations; liquidity shock concerns; external shocks; and economic/earnings pressures.

Currently, one week ago on February 2, the Wind All-A Index fell 2.7% below its 20-day MA in a single day. If we maintain the view that the bull trend persists (refer to our earlier report discussing the breaking of expectations that 'A-shares cannot sustain valuation expansion for three consecutive years'), then based on the historical review of 99 cases, the recent week should represent a favorable window for adding positions.

Therefore, against this backdrop of favorable conditions, despite recent corrections causing investor concern, we recommend rebuilding confidence and preparing for the first upward cycle of the Year of the Horse at the current level around 4000 points.

(4) Configuration Direction: How to approach it? Is earnings growth unimportant during the "Spring Rally"? In fact, our review shows a strong correlation between the "Spring Rally" and earnings; it is not detached from fundamentals nor merely speculative trading in small or poor-quality stocks. Particularly since 2019, the correlation between "Spring Rally" gains and the year's Q1 report performance, as well as the sequential change in Q1 growth rates, has strengthened.

As seen in the charts, the performance of stocks without Q1 earnings reports (last three rows of each table) is mixed. However, those linked to industrial trend themes or turnaround expectations can perform well even without Q1 reports, similar to last year's robotics theme. Potential analogous directions this year include the ByteDance产业链 (related to AI applications and domestic computing power via Spring Festival Gala advertising) and space photovoltaics.

Conversely, stocks with the best Q1 earnings (top three rows of each table) generally show positive performance, mostly ranking in the upper-middle range. Looking ahead to Q1 earnings and considering recent annual report forecasts, we have preliminarily screened some directions. Detailed content can be found in the report "Sector Allocation Clues from the Latest China-US Financial Reports." Furthermore, if the market initiates a new upward cycle as anticipated, the Q1 reports for the non-bank financial sector should also be quite strong.

(5) Trading Perspective: How to view recent hot sectors? In a previous report, we introduced the Moving Average Deviation indicator to gauge the strength of primary trend momentum. The formula is: Moving Average Deviation = ln(Close) - ln(EMA20), approximately representing the percentage deviation.

Reference thresholds for entry and exit are: - Entry: Avoid entering when deviation is excessively high (>15%); consider entry when deviation is moderate (5%-15%). - Stop-loss: No need for concern above the MA; hold firm just after breaching the MA (deviation between -5% and 0%); consider the trend consolidating if significantly below the MA (deviation < -5%). (These are empirical parameters; finer threshold adjustments based on sector volatility are recommended.)

1. When the trend remains intact, the Moving Average Deviation acts more as a risk-reward indicator: Lower deviation (closer to the MA) offers higher potential reward upon entry; higher deviation (further from the MA) offers lower potential reward. For example, sectors like satellite communications and non-ferrous metals showed signs of overheating recently with high deviations. Currently, typical leading sectors have deviations mostly between -4% and 2%. If the underlying industrial trends hold, the risk-reward profile at current levels appears attractive.

2. During trend progression, volatility serves more as a probability-of-success indicator: Higher 20-day historical volatility indicates greater recent divergence in the trend, while lower volatility suggests less divergence and often occurs early in a trend after consensus is reached. Participating during low volatility typically means lower divergence and higher success probability; participating during high volatility often means greater divergence and lower success probability.

Combining volatility analysis: - Sectors like non-ferrous metals, satellites, memory, chemicals, and power grids have recently experienced increased volatility. While their Moving Average Deviations suggest reasonable risk-reward, entering now involves higher divergence; waiting for volatility to subside is advisable for those seeking higher success probability. - Sectors like optical modules, semiconductor equipment, humanoid robots, and STAR Market chips have recently shown strong trends, suitable risk-reward, and moderate volatility. - Sectors like innovative drugs and PCBs currently exhibit low volatility but have shown weak trends over the past month, resembling sideways consolidation.

This Week's Key Changes (Data source: Wind unless otherwise specified)

(I) Midstream Industries 1. Downstream Demand - Real Estate: As of Feb 7, transaction area in 30 major cities fell 7.15% YoY cumulatively; MoM up 63.27%, YoY up 382.07%, WoW down 2.94%. Jan-Dec new construction starts down 20.40% YoY; Dec single-month starts down 19.31%. Jan-Dec real estate development investment down 17.20% YoY; Dec single-month investment down 36.85%. Jan-Dec commercial housing sales area down 8.70% YoY; Dec single-month sales down 16.57%. - Automobiles: - Passenger Vehicles: Jan 1-18 retail sales 679k units, down 28% YoY, down 37% MoM; YTD down 28%. Wholesale 740k units, down 35% YoY, down 30% MoM; YTD down 35%. - New Energy Vehicles: Jan 1-18 retail sales 312k units, down 16% YoY, down 52% MoM; YTD down 16%. Wholesale 348k units, down 23% YoY, down 46% MoM; YTD down 23%.

2. Midstream Manufacturing - Steel: Rebar spot price down 2.14% WoW to 3,208.00 yuan/ton; stainless steel spot down 2.03% to 13,476.00 yuan/ton. Rebar futures closed at 3,077 yuan/ton on Feb 6, down 1.63% WoW. Key steel enterprises' average daily output in late Jan up 3.14% from mid-Jan. Dec crude steel cumulative output down 4.40% YoY. - Chemicals: As of Jan 31, methanol price down 1.05% from Jan 20; polybutadiene rubber price up 13.21%.

3. Upstream Resources - International Commodities: WTI down 2.55% WoW; Brent down 2.48%; LME metals index up 1.00%; CRB index down 3.31%; BDI down 10.47%. - Coal & Iron Ore: Iron ore inventory up WoW; coal prices rose. Qinhuangdao coal price up 0.17%; port iron ore inventory up 0.69%; Dec raw coal output up 2.40%.

(II) Stock Market Characteristics - Index Performance: Shanghai Composite down 1.27% WoW. Top gainers: Food & Beverage, Beauty & Personal Care, Power Equipment. Top decliners: Non-ferrous Metals, Communications, Electronics. - Dynamic Valuations: Overall A-share P/E (TTM) increased slightly; P/B (LF) increased slightly. Similar slight increases seen for A-shares ex-financials, ChiNext, STAR Market.沪深300 P/E decreased slightly. Sector P/E percentile expansions largest in Basic Chemicals, Utilities, Steel. Largest contractions in Banks, Transportation, Food & Beverage. Several sectors trade below historical median P/E and P/B. Equity risk premium decreased slightly. - Margin Trading Balance: As of Feb 5, balance down 1.27% WoW. - A/H Premium Index: Decreased to 119.44.

(III) Liquidity - During Feb 1-7, PBOC reverse repo operations resulted in a net withdrawal. - As of Feb 6, R007 decreased; SHIBOR overnight rate decreased slightly; term spread decreased; credit spread increased.

(IV) Overseas - US: January ISM Manufacturing PMI improved; Services PMI slightly lower. - Eurozone: January core CPI slightly lower; benchmark rate unchanged. - UK/Japan: No major data. - Global Markets: S&P 500 slightly down; FTSE 100, DAX, Nikkei 225 up; Hang Seng down.

Next Week's Key Data Releases - Key points: China's January money supply, CPI, PPI; December export value index; January foreign exchange reserves. US December retail sales; January CPI. Eurozone December goods trade data. Japan December current account balance. - Specific dates provided for each release.

Risk Warnings - Geopolitical conflicts exceeding expectations, leading to surges in oil and other commodity prices, reigniting global inflation pressures. - Resurgent overseas inflation and US economic resilience resulting in global liquidity easing falling short of expectations, particularly regarding Fed rate cut pace and US Treasury yield declines. - Domestic stabilization policies falling short, leading to prolonged economic weakness, depressed corporate profits, and reduced market risk appetite.