The Adjustment Will Bring Another Opportunity For Investors Who Miss The Market.

The announcement of the China Securities Regulatory Commission on the two financial industry has caught the market unprepared, and the market will be adjusted in the short term. However, such a large-scale adjustment will bring another opportunity for investors who have missed the market. If bond yields continue to fall and interest spreads between stocks and bonds extend to extremes, the Shanghai Composite Index will rise to 4200 points in the event of a bubble in the market. Shanghai Stock Index bubble point: 4200 Shanghai Stock Index bubble point: 4200

The CSRC's announcement on the two financial business has caught the market by surprise. The market will be adjusted in a short period of time, with the increase in the amount of capital coming down and the feeling that the market is going to be hurt. The adjustment will be simple and crude. Taking the 1999 "519" market as a reference, if this is not handled properly, this adjustment will last several months. However, such a large-scale adjustment will bring another opportunity for investors who miss the market.

If bond yields continue to fall and interest spreads between stocks and bonds extend to extremes, the Shanghai composite index can rise to 4200 at a bubble in the market, rather than more than 10000 points the experts expect. Although this has not yet become our benchmark scenario, we will discuss its possibility in this report. As we discussed in the December 24, 2014 report "five accidents in China in 2015 years," the market has faced significant resistance at 3400.

The "519" market in 1999: in May 19, 1999, China's stock market suddenly recovered after more than two years of silence, and the Shanghai Composite Index rose 5% on that day. By June 30, 1999, the Shanghai Composite Index rose 66% in just a month and a half. In July 1, 1999, China promulgated the new securities law, and the Shanghai stock market plunged 7.6% in a day.

We find that both the trend of the market and the role of the regulatory authorities are quite similar to the recent stock market gains in 1999. In 1999, regulators also investigated illegal market activities, cleaned up the trust fund industry, and opened up bond market financing transactions. After a sharp fall in July 1, 1999, the market was consolidated, and then continued to decline in the remaining six months until the early 2000. Chart 1:1999 comparison of the "519" market with the present. Chart 1:1999 comparison of the "519" market with the present.

Regulation of the two illegal businesses will strike the market in the short term: the CSRC announced the findings of the two transaction activities after the market closed last Friday. The two businesses of the three big brokerages were suspended for three months, and some major dealers were warned and punished. The announcement of the securities and Futures Commission worried the market. After all, in the second week of January, the balance of financing has exceeded 1 trillion and 100 billion yuan. In the recent rush hour, the amount of financing buying accounts for more than 30% of Shanghai stock market volume.

Before the announcement of the SFC, the Shanghai Composite Index tried twice to break through 3400 points, but it would not be able to resume at 3410, and the reversal of the last half hour of trading hours in January 9th was indeed surprising. We raised the Shanghai Composite Index's target level to 3400 points in the "price and value of the Chinese market: Shanghai equivalent to 3400" (20141205), and discussed the importance of this resistance position in "five accidents" in China in 2015 years.

We believe that one of the accidents in 2015 is that the market initially failed to break through 3400 points, which delayed the arrival of many bull markets that many people looked forward to. From the recent trading activities and the negative factors mentioned above, the accident seems to be gradually gaining momentum in the sound market. Chart 2: in the past, China's stock market surged with financing buying, but the margin trading fell sharply in the near future. Chart 2: in the past, China's stock market surged with financing buying, but the margin trading fell sharply in the near future.

The market can drop to below 3000 levels, but bring better market timing: we note that the Shanghai Composite Index's rise is mainly supported by large cap stocks. These stocks are popular collateral for financing transactions. For example, financing transactions account for 30% of non bank finance (mainly brokerage firms) and engineering decoration materials trading u.

Banks account for about 16%. If the incremental capital investment is reduced and the index weight is high, the decline of these sectors will hurt the whole market. If the market is down, we can not exclude the possibility of forcing the broker to liquidate the stock as a result of the margin payment. The balance of financing transactions has dropped from RMB 1 trillion and 100 billion yuan to RMB 760 billion yuan this week. Meanwhile, the trend of index rise and the simultaneous decline of trading volume have deviated.

Overbought stocks are very serious. All of the above facts show that the market is facing deep adjustment. If that happens, the callback will be a simple and brutal adjustment, similar to the rapid rise of the market in the past two months.

In a low yield environment, the logic of pursuing stable returns is the reason for the previous index rise: in our 2014 investment outlook report, we discussed the global capital expenditure return peaked, suggesting the overcapacity of the world and the end of the commodity super cycle. In 2014, the main commodity prices, especially the price of oil and iron ore, fell. Commodity prices plummeted all the way, and the pressure to pass accounts fell sharply.

In the world, the yield on bond yields is falling, and the interest rate of German and Japanese two-year bonds is falling all the way. Investors are forced to invest in products with a certain rate of return and certain certainty as the global central bank is trying to suppress interest rates. Many large blue chips in China, especially those listed in Hongkong, are better able to cater to the needs of investors pursuing interest rate returns. If this logic is correct, h-valuations with low valuations and many A share listed large blue chip undervalued stocks are still the buying options for dips.

After the recent surge in big cities, experts tried to explain the rise of big cities for various reasons. The most frequently cited reasons are the reform dividend, the risk-free interest rate fall and the tail risk of the real economy. But frankly, the market surged more than 60% in less than four months, which is not related to reform or any fundamental change.

Risk-free interest rates are largely difficult to observe and should have risen. The reason is that no matter how risky they are, the illusion of "rigid payment" is about to be broken. In both domestic and overseas markets, we found that bond yields declined and stock markets continued to rise. The logic of pursuing returns seems to explain the developments in domestic and international markets.

If this logic is established, margin trading is not the main driving force of the bull market, but just an accelerator. In other words, margin trading has changed the trajectory of the market, but has not changed the direction of the market. Therefore, the upward trend of the adjusted market will slow down, but it will not stop. In fact, we find that deposits are growing at the slowest pace in nearly 20 years. This is an important evidence that Chinese investors are moving deposits to stocks, which is actually one of the important drivers behind the recent market trend.

The 4200 point is possible. If the yield of long debt continues to fall, the market will once again move towards the extreme level of bubbles: Based on the sharp rise in the market, market participants are looking forward to it. A shares It will develop into a bubble and eventually reach a level of more than 10000. We considered the situation very carefully. We hope to predict where the ultimate level of the market will be if the market is really going to the extreme bubble.

We estimate the extreme extent of the market trend by using the gap between the profitability yield and the bond yield. We find that the change in the yield gap is negatively related to the performance of stocks. The most profound changes coincide with the peak period of the stock market at the end of 2007 and the end of 2009. if bond The yield will continue to fall to 3% within the range of loose monetary policy, and if the gap between stock and bond yields is changing to the extreme level at the peak of 2007 and 2009, then Profit earning rate It will rise from a slightly higher level of 6% to 5% at present, pushing the Shanghai Composite Index to 4200 level.

Furthermore, we note that market turnover ratio (formerly used to forecast market peak) has also bottomed out. That is to say, the market seems to be going to the extreme, and this trend is being interpreted. This trend is not a myth, for the Swiss franc and bond yields are also making historic changes. Nevertheless, we must emphasize that this scenario is still not our basic scenario until the market can withstand the test of adjustment after a short period of bad experience. Chart 5: if the gap between China's stock and bond yields reaches the extreme level of bubbles, Shanghai stock market is expected to rise to 4200. Chart 5: if the gap between China's stock and bond yields reaches the extreme level of bubbles, Shanghai stock market is expected to rise to 4200. Chart 6: in the past few months, the ratio of market capitalization has reached the extreme; this is the leading indicator for the market to reach its peak gradually.