Key Observations After Breaking the Annual Moving Average

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The Shanghai Composite Index broke below its yearly moving average twice in July, placing the market in a critical validation window. The current fundamentals and liquidity characteristics are closer to a bull market continuation than a bull-bear transition, but whether a phase bottom has been confirmed still depends on the direction of several key indicators over the next two weeks.

The Huachuang Securities strategy team, after reviewing 17 instances of breaking below the yearly moving average since 1995, pointed out that recovery time in a bull market continuation typically does not exceed 20 trading days. This means that the current period is crucial for judging market trends. Meanwhile, Guolian Minsheng Securities quantitative team’s three-dimensional timing framework (liquidity, divergence, prosperity) currently maintains a “volatile downtrend” judgment, and warns that if the current last support line is also breached after the CSI 300 previously broke its trend line with expanded volume, it would signal a deeper trend reversal.

Both research frameworks point to the same conclusion: this is a stage where signals should be closely tracked and validated, not a time for rash bets. The following are the core observation points most worth monitoring going forward.

Have stop-loss orders sufficiently exited?

The net outflow of leveraged funds is one of the core indicators to judge the short-term realization of chips.

According to Huachuang Securities statistics, as of July 16, the net outflow of margin financing in the past week accounted for 0.16% of the free float market value of all A-shares, exceeding the 0.14% seen in mid-February this year, second only to the 0.25% during the "reciprocal tariffs" launched by Trump in April 2025. The margin financing transaction amount as a percentage of A-share turnover has fallen to 8.7%, the lowest level since June 2025 and close to the 8.3% during the “reciprocal tariffs” shock in April last year.

Important signals have also emerged from the chip distribution perspective. As of the close on July 17, the Shanghai Composite Index had fallen to the same price level as August 19, 2025. By calculating the buying-selling equilibrium point using daily trading volume and closing points, the ChiNext Index equilibrium point is 3,384 points, and as of July 17, it closed at 3,429 points, which is very close. The SSE Science and Technology Innovation 50 equilibrium point is 1,543, and the current closing is 1,715, which still has some distance. If these indexes converge further to their equilibrium points, it indicates that the selling pressure has basically been released, and the short-term chip realization is nearly complete.

Guolian Minsheng Securities quantitative team takes a more cautious view. Its three-dimensional timing framework shows liquidity continues to decline, divergence continues to rise, and prosperity remains on a downward trend, with an overall judgment of a volatile downtrend. From a technical perspective, the CSI 300 has failed to stay above the previous support line and has fallen again, exhibiting a "distribution completed" pattern; the index is now near the last support line, and failure to hold may indicate a larger trend reversal.

Key observation indicators: whether the ratio of margin financing net outflow to total A-share free float market value falls after peaking, whether margin financing transaction amount as a percentage of turnover stabilizes, and whether the SSE Tech 50 and ChiNext Index reach their equilibrium points.

Strength of medium- to long-term funds entering the market

The buying trend of broad-based ETFs is the clearest positive signal in the current market.

According to Huachuang Securities statistics, broad-based ETFs have seen a significantly accelerated net inflow since July 6, with a net inflow of 156.1 billion yuan in the past week as of July 17. In terms of fund composition, the largest net inflows include CSI 300 (about 40 billion yuan), CSI 1000 (about 25.6 billion yuan), SSE Tech 50 (about 19.6 billion yuan), CSI 500 (about 16.4 billion yuan), and CSI A500 (about 16.2 billion yuan). Compared with previous rounds of broad-based ETF net inflow 5-day peaks (170–240 billion yuan range), the current pace is already considerable. On July 19, China Chengtong and China Guoxin both announced increased holdings of Chinese stock assets.

Worth noting is that the industry structure of broad-based indexes has changed significantly from the past. Compared to April 7, 2025 and July 17, 2026, the weight of electronics in the CSI 300 increased from 10.2% to 23.7%, and communications from 3.2% to 10.5%; in the CSI 500, electronics weight rose from 12.5% to 28.7%; in the Shanghai Composite Index, electronics weight went from 8.7% to 20.6%. Overall, AI-related components make up 30–40% of major broad-based indexes, which means medium- to long-term funds entering the market provide direct support to the tech and AI sectors.

Historically, if increased holdings by medium- to long-term funds are combined with monetary easing and other policies, index stabilization and rebounds tend to emerge more rapidly; relying solely on sustained capital inflows usually requires 15–20 trading days for gradual stabilization.

Overseas liquidity: Fed meeting and cloud provider capex guidance

From July 27–31, two major overseas catalysts will be in focus.

The first is the Fed’s July 28 meeting. As of July 18, the market expects the Fed to raise rates twice in the coming year. If this meeting signals a delay in the next hike or fewer hikes, it will provide solid support for dollar liquidity and global capital markets over the next half year, potentially catalyzing global stock market valuation recovery.

The second is North American cloud providers’ earnings reports. Amazon, Microsoft, Google, Meta, etc. will release quarterly reports at the end of July, with forward guidance for AI capital expenditures drawing particular attention. According to Huachuang Securities, the compound annual growth rates for cloud provider capex from 2023 to 2025 are 63%, 52%, 68%, and 60%, respectively. If capex guidance meets or exceeds expectations, it will strongly support a continuation of AI industry chain momentum in the second half; if certain companies’ capex falls short, it will confirm the fundamental logic behind the recent adjustment in the AI sector.

Guolian Minsheng Securities quantitative team also notes that the liquidity indicator continues to decline, and marginal changes in external disturbances will have a significant impact on market sentiment.

The approaching mid-year reporting season may also provide earnings support. According to Huachuang Securities, listed company earnings are still in an upward revision channel, with Wind consensus forecasting A-share non-financial parent net profit growth of 47% in 2026, an upward revision of about 19 percentage points in the past half year. By sector, building materials, nonferrous metals, chemicals, and electric equipment saw the greatest improvement in expected profit growth for 2026. For Q1 2026, A-share non-financial parent net profit year-on-year growth reached 11%; Huachuang’s neutral forecast for the full year is about 10% YoY growth, and in an optimistic scenario could hit 19%.

Rebound stock ideas: AI main line and liquidity spillover direction

While waiting for the market stabilization signal, it is possible to start sorting out potential investment directions.

Huachuang Securities believes that AI will remain the main rebound driver, but the trading logic is shifting from “AI inflation” to “technology route differentiation,” similar to the 2021 shift in photovoltaic sector from broad rally to differentiation along TOPCon and other N-type technologies. Within the AI industry chain, the PCB and copper clad laminate valuation logic has shifted to order verification, connectors and copper cable “transitional solutions” have been reevaluated as “longer-term practical solutions,” and optical modules are showing ongoing divergence around 800G certainty and the ramp-up of 1.6T/CPO.

For liquidity spillover direction, Huachuang Securities selects innovative drugs, basic chemicals (chemical/fertilizer products), nonferrous metals (industrial/small metals), power grid equipment, and brokers from the dimensions of earnings revision, institutional pricing power, and low valuation as potential beneficiaries. Innovative drugs benefit from continued overseas licensing deals, with China’s innovative drugs transactions nearly $100 billion in H1 2026; power grid equipment benefits from global grid upgrades and AI data center connectivity demand; brokers benefit from IPO increases and rising trading volumes, driving performance elasticity.

Guolian Minsheng Securities quantitative team, from the perspective of capital flow resonance, suggests focus this week on commerce and retail, pharmaceuticals, construction, and food & beverage, where large order net inflow and margin financing net inflow factors are at relatively high levels.

Risk disclosures and disclaimersThe market entails risks, and investment needs caution. This article does not constitute personal investment advice, nor does it take into account the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their specific circumstances. If you invest based on this article, you are responsible for the outcome. ```