(Bloomberg) — The drag in Iran war has put Chinese stocks’ resilience to the test, but investors anticipate a rebound as key market indicators signal conditions often associated with turning points.
The benchmark CSI 300 Index tumbled 3.3% on Monday, its worst since the global tariff shock about a year ago, while another onshore benchmark slid deeper below the psychologically important 4,000 level. The setback has dragged a number of indicators — including momentum gauges and breadth — to levels last seen in previous routs that ultimately preceded market turnarounds.
China stands to gain from the conflict thanks to lower energy dependence and its edge in renewables, said You Lanqiang, a fund manager at Pingtan Strategic Asset Management Co. “In the short term, losses are driven by momentum traders, who hold a huge sway,” he said, adding that the pullback could offer an attractive entry point after the “irrational selloff.”
Below are charts showing how stocks are nearing extreme levels that have previously triggered rebounds.
Market breadth has deteriorated sharply this month, and is on track for its weakest reading since January 2024 — a period remembered for a derivatives‑driven meltdown that began in small‑cap names.
In Shanghai and Shenzhen, more than 1,100 stocks on average are declining versus rising, out of nearly 6,000 names. That’s less severe than the 1,400 gap seen in early 2024, a level that marked capitulation as volatility eased with state-backed funds stepping in.
Breadth has weakened despite only modest changes in earnings expectations, suggesting that sentiment rather than fundamentals is driving flows. A further decline would mean there’s limited room for things to worsen from here.
The Shanghai Composite’s 14-day relative strength index has slipped to 23, entering oversold territory. Similar lows were seen in April after President Donald Trump’s sweeping tariffs announcement, and again in the third quarter of 2024, shortly before Beijing’s policy pivot triggered a re‑rating.
Historically, such extremes have often coincided with near exhaustion in selling pressure. While oversold readings aren’t always a buy signal by themselves, they have typically been followed by rebounds rather than further declines.
Fundamentals have remained firm. Over the past quarter, earnings revisions for the CSI 300 have trended higher, with analysts steadily lifting forward profit expectations even as the index has retreated.
The declines have pushed the Bloomberg‑estimated dividend yield on the index back to 2.7%, the highest since November, when an AI‑driven selloff curbed valuation. Improving earnings momentum and better payouts suggest the de-risking may prove fleeting and reverse quickly.
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