Index "breaks below" the annual moving average—what does this mean for A-shares? The key factors are duration and the extent of the pullback.

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Last week, the Shanghai Composite Index once again "fell below" the annual line, raising concerns about the market turning bearish—but history tells us that this event itself is not rare; the real question is how deep and how long the decline will be.

Last week, the Shanghai Composite Index fell below the annual line (250-day moving average), triggering worries about a bull-to-bear switch. Guosheng Securities Strategic Team (Analysts Wang Chengjin and Yang Liu) released a research report on July 19, reviewing historical experience since 2000 and providing a framework for judgment.

“Falling below” the annual line is not uncommon in bull markets

First, it’s necessary to clear up a misconception: Falling below the annual line ≠ Bear market signal.

According to Guosheng Securities, since 2000, the probability that major broad-based indexes in A-shares outperform or underperform the annual line is roughly half each. Specifically, the CSI 500 and CSI 1000 have a slightly higher chance of outperforming, while STAR 50 is slightly lower, but the overall distribution is fairly symmetric.

Even if the scope is narrowed to bull market periods, the situation is similar. Using the annual line to determine bull or bear markets, the chances of the index underperforming the annual line during a bull market are around 10%-15%. Among them, ChiNext Index is lowest at about 9%, CSI 300 highest at about 15%.

Guosheng Securities points out that this kind of "falling below" often corresponds to a volatile phase in an upward trend, rather than a trend reversal.

The key isn’t “did it fall,” but “how long and how deep”

Guosheng Securities divides the "falling below annual line → rising above annual line" in the Shanghai Composite since 2000 into more than 160 phases, and separately counts them in bull market, bear market, bull-to-bear, and bear-to-bull categories.

The data differences are very significant:

• Brief falls in bull markets: Average duration about 5.5 trading days, average maximum drawdown about 1%, average maximum increase about 2.9%—opportunity outweighs risk.
• True bull-to-bear switches: Average duration about 191.3 trading days, average maximum drawdown about 28%, average maximum increase about 24.4%—risk outweighs opportunity.

Thus, Guosheng Securities provides a rule of thumb: If, after falling below the annual line, it returns above within 10 trading days and the maximum drawdown is not more than 5%, the probability of triggering a bull-to-bear switch is low.

The report notes that only a few historical exceptions exist—for example, in 2020 (55 trading days, drawdown 8%-10%) and 2015 (47 trading days, drawdown 8%-10%), these thresholds were exceeded, but the bull market ultimately continued.

True bull-to-bear switches share two common features

Since 2000, A-shares have had six typical bull-to-bear "falls below" the annual line: July 2001, February 2008, April 2010, August 2015, March 2018, January 2022.

Guosheng Securities summarizes two common points:

First, a narrative “turning point”. Every bull-to-bear switch is accompanied by a reversal in the core narrative of the period—such as the ebb of the internet wave, peak of real estate subprime expansion, end of the large-scale infrastructure wave, bursting of the internet+ bubble, contraction of China’s global trade dividend, and the fading of China’s misaligned export advantage.

Second, valuation “polarization”. During each bull-to-bear switch, the P/E ratio of the Shanghai Composite often exceeds twice the three-year average standard deviation—that is, valuations are at historically extreme highs.

How does the current situation compare?

Guosheng Securities believes it is still hard to directly apply historical bull-to-bear switch experience to now, for two reasons:

First, the AI narrative is indeed undergoing amplified disagreements, but the report notes that for now, the disagreement "mostly stays in expectations and rumors, lacking solid fundamental clues." In the coming month, earning reports and business guidance from tech companies at home and abroad will be key watch points.

Second, in terms of valuation, the Shanghai Composite's current P/E remains near one standard deviation above the three-year average, far from the "polarized" levels seen in previous bull-to-bear switches.

If the bull market hasn't ended: The faster the stabilization, the greater the opportunity

Guosheng Securities further analyzed the relationship between the stabilization pace and subsequent performance after "falling below" the annual line during bull markets.

Statistics show that about 28% of cases stabilized the next day, and about 21% stabilized on the 2nd to 5th trading days, totaling almost half. Moreover, the speed of stabilization is positively correlated with the upward space in the following month—the faster the stabilization, the greater the subsequent recovery potential.

The report concludes: If the bull market hasn't ended, "a short-term 'fall below' the annual line should offer more opportunity than risk. In the next one to two weeks, focus should be on potential stabilization signals."

Risk warnings and disclaimersThe market involves risks; investments require caution. This article does not constitute personal investment advice and does not take into account individual users’ unique investment goals, financial situation or needs. Users should consider whether any opinions, views or conclusions herein fit their particular circumstances. If you invest accordingly, you bear responsibility for the results. ```