Dongwu Strategy: Hold Coins for the Holiday or Hold Stocks for the Holiday?

Historical “Spring Festival Effect” Patterns

Historically, the A-share market exhibits prominent “Spring Festival Effect” characteristics. We reviewed the market performance around the Spring Festival over the past 20 years and summarized four patterns:

First, in terms of trading volume, there is a “decrease before the festival and rebound after” pattern. Historical data shows that trading volume typically begins to decline around T-8 days (T being the Spring Festival, same below), and this cycle aligns with current market behavior—this Wednesday became a volume watershed, with total A-share trading amounts on Thursday and Friday dropping below 2.5 trillion yuan, approaching the 2 trillion level. Based on past experience, this shrinking volume trend usually continues until the first trading day after the festival, after which the volume center significantly rises from T+2, market enthusiasm recovers, and liquidity gradually restores.

Second, in terms of overall trend, the week before the festival is the best window for index positioning, with around five days before the festival often marking a turning point for rebounds. Since 2006, analysis of Spring Festival market trends shows that after a period of fluctuation and consolidation, indices typically begin a trend-based rebound about five trading days before the festival; in terms of rebound continuity, the trend generally lasts until around T+6 after the festival, with indices showing a clear upward trend during this period, though the slope of the rise gradually slows down.

Third, in style dimensions, there is a prominent reversal between large-cap and small-cap stocks around the Spring Festival. Before the festival, large-cap stocks outperform small caps, and growth stocks outperform value stocks; after the festival, small and micro caps tend to outperform large caps again. From the perspective of win rates and average interval returns, the style reversal effect is particularly significant. During the 5/10 trading days after the festival, the average excess returns of the China Securities Index 1000 relative to the SSE 50 are 4.1%/6.0%, and the Wind Micro Cap Index outperforms the SSE 50 by 4.7%/7.1%; meanwhile, the return differential between growth and value styles is relatively moderate. Further dissection of specific styles shows that before the festival, financials, consumer sectors, and growth styles have higher win rates and odds; after the festival, the market style shifts toward cyclical and growth sectors.

Fourth, in industry dimensions, industries that historically perform well before the festival include non-ferrous metals, automobiles, chemicals, pharmaceuticals, and power equipment; while industries that perform relatively better after the festival include environmental protection, electronics, media, and agriculture, forestry, animal husbandry, and fishery.

How to Understand the “Spring Festival Effect”?

On one hand, overall trading psychology tends to be subdued before the festival, but after resuming work, confidence is “reinvigorated.” From the perspective of capital attributes, the “Spring Festival Effect” is also closely related to the participation level of active funds. Funds tend to retreat before the festival and heat up afterward. This characteristic is mainly reflected in three aspects: first, the changes in volume and turnover center around the festival; second, in terms of market style, small and micro caps are under pressure before the festival due to lack of active capital support, but rebound after the festival as active funds flow back, favoring small and micro sectors; third, the market sentiment index, which is compiled based on stocks hitting daily limit-ups or limit-downs in the past five trading days, shows that over the past 12 years, the win rate in the five days before the festival is only 33%, and over ten days is 25%, while after the festival, the win rate reaches 100%, directly reflecting low active fund bullishness before the festival and a significant warming afterward.

On the other hand, the pattern of the index declining first and then rising before the festival can also be understood from a capital behavior perspective: during the long holiday, macro events overseas are uncertain, and some funds choose to exit before the festival to avoid potential risks, which can cause a temporary weakness in the market; as participants deepen their understanding of the “Spring Festival Effect” pattern, some funds prefer to position early and gamble on a rebound after the festival to seize opportunities, which often results in market rebounds occurring in the last few trading days before the festival.

Market Outlook: The Main Index Is Expected to Continue Setting New Yearly Highs

Recently, the market has been oscillating weaker under the influence of overseas liquidity shocks and collective adjustments in U.S. tech stocks. Regarding overseas liquidity, the “Wells Fargo Trade” has impacted the market. On January 30, the most crowded commodities, especially non-ferrous metals, experienced sharp corrections, with deleveraging in futures tightening liquidity and further transmitting to the equity market. The trigger for this round of overseas liquidity shock is the “Wells Fargo Trade.” On January 30, Trump nominated Waller as the next Fed Chair. Waller is known for hawkish views, emphasizing Fed independence and opposing long-term quantitative easing and fiscal monetization, which loosened the previously supporting long-term structural logic of a weak dollar. Coupled with U.S. inflation data exceeding expectations, market expectations for rate cuts were further weakened, leading to a rebound in the dollar and marginal tightening of global liquidity. In terms of U.S. stocks, the AI narrative faces renewed challenges. First, after Anthropic launched new tools, related AI application companies like Thomson Reuters weakened significantly, highlighting the impact of “technological progress swallowing old applications.” Second, the latest earnings guidance from North American tech giants like Google and Amazon exceeded expectations, raising concerns about the sustainability of AI investment returns. Third, technical disputes re-emerged in the computing power and communication sectors, with market interpretations leaning bearish, impacting the chain and suppressing risk appetite. Under these influences, the A-share market experienced volume contraction and general pressure on tech stocks, with disorderly rotation.

Looking ahead, we believe the two major factors suppressing the market may reverse. Regarding overseas liquidity, the “Wells Fargo Trade” is expected to see a reversal. Currently, the market may have overinterpreted Waller’s hawkish stance; in fact, Waller is not simply “hawk or dove.” His call for balance sheet reduction mainly opposes the Fed’s previous unlimited balance sheet expansion, and he believes inflation is caused by government policies, so shrinking the balance sheet can indirectly pave the way for rate cuts. Moreover, from the nomination background, Trump’s core reason for nominating Waller is to push for rapid rate cuts, and Waller is likely to cooperate with Trump’s policies. Therefore, the current market pricing of dollar liquidity tightening may be overly aggressive and could reverse. Additionally, the volatility of futures like silver and gold, which have experienced large fluctuations recently, has begun to decline, and the impact of futures deleveraging on liquidity has weakened. Regarding AI narratives, the market’s risk appetite has been suppressed, and investors tend to interpret new information negatively, amplifying narrative flaws or divergences as reasons for realization. Currently, the AI industry is still rapidly developing and iterating; without disproof of industry trends, pessimism-driven irrational pricing often creates “golden pits.”

Overall, we believe that the factors currently suppressing the market will gradually weaken. Combining with the spring effect pattern, the main index is expected to rebound starting next week, with the rally likely to continue for several trading days after the festival. Therefore, holding stocks over the holiday is recommended. In terms of allocation, first, focus on technology sectors that are overly priced in this correction, including domestic chips, semiconductor equipment, storage chips, computing power communication, and cloud computing; second, focus on cyclical sectors such as energy storage/lithium battery industry chain, wind power, and other cyclical price-increasing segments; third, pay attention to themes related to the 14th Five-Year Plan, including commercial aerospace, 6G, nuclear power, hydrogen energy, quantum communication, and brain-computer interfaces, among emerging and future industries.

Risk tips: domestic economic recovery slower than expected; Fed rate cuts below expectations; macro policy intensity weaker than expected; technological innovation slower than expected; geopolitical risks.

(Source: Dongwu Securities)