Trading trends with the upcoming Chinese New Year

Overview

The Chinese New Year (CNY) period may create seasonal market trends, driven by factors like consumer spending, holiday-related consumption and tourism. Market participants often look to take advantage of the pre-CNY rally, capitalising on the increased demand for consumer goods, travel and luxury items.

Here are how you can capitalize on trading opportunities during the Chinese New Year season:

Does seasonality point to a pre-Chinese New Year (CNY) rally?

A look at average performance pre and post-Chinese New Year over the years seems to suggest a more supportive risk environment in the lead-up to the festive season. Since 2005, where data for the CSI 300 index is available, the index has averaged around 2.6% one week before the CNY, while only saw an average of 0.3% one week after the festival. The percent positive is higher as well, with 85% of the years seeing gains a week before the CNY versus the 40% post-CNY.

Some of the possible reasons may be a general optimism in the market during the lead-up to the festive season, as traders anticipate increased consumption, travel, and industrial activities, particularly in sectors like retail, e-commerce, and transportation. Any form of economic measures or stimulus announced by the Chinese government before CNY to uplift consumer spending may also offer an added boost to sentiments.

Immediately post-CNY, trading volumes may generally drop, with lower liquidity and less trading activity potentially resulting in a slower performance. Supply chains may take time to recover, as factories and businesses gradually resume operations, which could lead to more cautious trading behaviour.

Historical performance for the Hang Seng Index (HSI) seems to show a similar trend as well. Over the past 60 years, where data for the HSI is available, the index tends to see stronger gains (average 2.0%) in the one week leading up to CNY, while performance slows to 0.7% after the festive season. The percent positive is higher as well, with 75% of the years seeing gains a week before the CNY versus the 55% post-CNY.

Other stock-specific trends?

The holiday season tends to be marked by increased consumer spending on travel, gifts, food and entertainment and hence, stocks ranging from retail, consumer goods, e-commerce and travel companies may be on watch. Some examples are listed below, with Alibaba, JD.com and Tencent generally seeing some strength heading into CNY. However, not all stocks have a clear trend of exhibiting strength in the lead-up to the festive season, hence traders should still exercise discretion when trading these stocks.

Overall, while market participants may generally have a positive outlook going into CNY, it is important to note that the ‘festive premium’ may fade as the holiday passes, with overall market direction likely to revolve around broader catalysts such as economic conditions, corporate profits and geopolitical trade ties.