Rebirth of the Capital Legend

“That’s normal.” Chen Ge nodded slightly after hearing Xu Qiao’s words and replied, “The difference between market sentiment and actual market trends is what creates profit margins for short-term speculation. In our A-share market, the vast majority of investors earn profits from the price difference between stock prices. Very few investors would make long-term investments with the attitude that ‘buying stocks is buying equity in a company.’”

Because the vast majority of investors in the A-share market are retail investors, they are easily influenced by emotions and have a strong tendency to chase highs and sell lows. This leads to a market trend that is characterized by short bull markets and long bear markets, resulting in poor long-term investment returns.

Since most investors profit from stock price fluctuations and price differences.

That means the A-share market is essentially a zero-sum game.

Since it is a zero-sum game market, the difference between expectations caused by emotions and actual market trends is quite important for the choice of trading strategies.

Looking at the current overall market trend and changes in trends.

Given that market liquidity cannot be significantly improved in the short term, the market will remain trapped in a zero-sum game, with the main themes rotating in and out of favor.

Since it is a zero-sum game, the main trend will rotate.

Therefore, by selling high when sentiment is overly optimistic and buying low when sentiment is overly pessimistic, the success rate of trading will be greatly improved.

"According to what Brother Chen said..." Old Zhang pondered for a moment and said, "Tomorrow, the 'emerging industrial chain' sector might be suitable for bottom-fishing and making a rebound? As for the 'major infrastructure' sector, we can take advantage of the high point in sentiment to take profits and then wait for the pullback to buy back the positions we sold at a high price?"

Chen paused for a moment, then continued, "Based on market sentiment, that's probably the case. In fact, whether it's the main board's heavyweight theme, the 'major infrastructure' theme, or the 'emerging industrial chain' theme, none of them have escaped the situation of rotation and fluctuation. At this point, especially given the lack of significant improvement in trading volume in both markets, I think it's unlikely that the 'major infrastructure' theme will continue to show a continuous breakout trend, because from an expectation perspective, the timing is not yet ripe."

Moreover, in the "major infrastructure" sector, the internal shareholding structure of many core stocks is not well-established.

Many of the major funds that intervened earlier did not take profits in large quantities.

This has led to significant selling pressure on the 'major infrastructure' sector as it continues to rise from its current level.

Meanwhile, the third-quarter earnings reports of many core leading stocks and industry heavyweight stocks in the "major infrastructure" sector have not yet been released. Whether previous expectations can be met or exceeded remains an uncertain unknown.

And in the face of this uncertainty...

Funds that enter at this level, without any cost advantage, will find the profit-loss ratio of continuing to push the price up insufficient, and will certainly lack motivation.

Let's look at the main market theme of 'emerging industrial chains'.

Despite the fact that the core sectors of 'film and television media', 'internet software', and 'internet applications' lack any underlying logic and have indeed risen significantly in recent days.

However, after a long period of continuous decline, its absolute position is still very low.

As far as the main board index is at its current position, the stock prices of related concept stocks and industry leaders in these core sectors are still far behind the average gains of related stocks in other main sectors of the market. In other words, apart from the speculative funds that have recently entered the market, there are not many profitable shares in this sector. The main selling pressure is still from the historical trapped shares from the previous period.

However, due to the historical losses incurred, the cost basis for most investors is still relatively high.

Looking at these sectors, the average holding cost of historically trapped investors should be around 2500 points on the ChiNext index. However, the ChiNext index is still quite far from 2500 points.

In other words, its trend has not yet reached the areas where these historically trapped positions are concentrated.

The potential selling pressure on these concept stocks and industry heavyweight stocks in these sectors is relatively limited. Once the speculative funds that have entered in recent days have sold off most of their holdings, the related stocks are unlikely to continue to fall. In other words, the actual downward momentum in these sectors is still significantly insufficient.

Moreover, the entire 'emerging industrial chain' main theme...

Apart from the sectors of 'Film and Television Media', 'Internet Software', and 'Internet Applications', other main and sub-sectors such as 'New Energy Industry Chain', 'Smartphone Industry Chain', 'Consumer Electronics', 'Security Lens', 'Semiconductor Concept', and 'Information Electronics' have not seen much growth in this wave.

Its overall increase generally lagged behind the increase in the market index.

Meanwhile, after speculative funds took profits and fled, the market closed sharply lower today, giving back the profits from the past few days' speculation. Even if there are still some profitable funds in the market, their willingness to continue selling at a lower price is not very high. After all, if they continue to sell, the stock price will fall back to the position where it started.

Next, let's look at the candlestick chart patterns of the ChiNext Index, the Huazheng 500 Index, and the CSI 1000 Index.

The core market indices of small-cap and micro-cap stocks in these major related markets do not show unfavorable candlestick patterns and are still hovering at the bottom. Overall, they show a clear bullish trend with gradually increasing trading volume.

My thought is...

We still can't let market sentiment lead us by the nose.

You can't be overly bullish when prices rise and overly bearish when prices fall.

This is the behavior of retail investors in the market, and it reflects an immature investment environment.

“Yes, Brother Chen is right.” After listening to Brother Chen’s analysis, Xu Qiao thought about it carefully and replied, “Overall, as long as there is no major breakthrough in market volume, it will be difficult for the market to break through the current range in a substantial and effective way and form another major upward trend.”

As long as the index continues to fluctuate between 3000 and 3100 points.

The major themes in the market, whether they are the main heavyweight themes of the main board such as liquor, white goods, pharmaceuticals, power, and finance, the "major infrastructure" theme where major funds are currently clustering, or the "emerging industrial chain" theme that suffered a severe correction and significant losses today, are all still struggling to break free from the influence of the market index and independently break out of the upward trend.

When judging the main market trend or the trend of individual stocks, the primary condition is to understand where the core market index is currently positioned and what trend it is in.

Since the market index has been determined, it is limited by trading volume and the expected situation of major core themes.

Under the current conditions, it is unlikely that the market will continue its previous one-sided breakout trend. It is more probable that it will maintain a low-volume, oscillating pattern.

Therefore, choosing a trading strategy becomes relatively easy.

Just like what Brother Chen just said...

If market sentiment is overly optimistic, then it's time to take profits and reduce holdings. Wait until sentiment subsides and becomes excessively pessimistic, then buy back the shares at a lower price.

“What Brother Chen said does make some sense,” Old Wu replied after thinking for a while. “However, it seems that while most people are indeed focusing on the ‘major infrastructure’ sector, there are quite a few investors thinking of buying the dip in ‘Huawen Online’ stock. After all, more and more people are now understanding the ‘leading stock’s first pullback’ strategy.”

And I worry that as such expectations increase...

Tomorrow, the stock 'Huawen Online' will likely see too much buying pressure at the bottom. The opening gap down in the pre-market auction won't be large enough to absorb the large number of stop-loss orders placed today through extreme sentiment. It's unlikely to see a rebound, especially compared to 'Huaxin Cement', where the certainty of the trade is far inferior.

"I don't think so," Old Zhang chimed in. "Judging from the current market sentiment, the vast majority of investors are still quite aggressive in their view of tomorrow's 'major infrastructure' sector. Moreover, after the leading stocks in the 'emerging industrial chain' sector have already experienced extreme losses today, more and more negative news is being unearthed tonight."

It feels like this panic about cutting losses will spread further as time goes on.

Meanwhile, the "major infrastructure" theme will benefit from positive news, and the bullish sentiment is likely to increase further.

Amidst these fluctuating emotions.

Tomorrow's opening auction trend is expected to lean more towards the 'major infrastructure' theme.

Moreover, market liquidity is already limited, and the concentrated feedback of emotions will naturally lead to a concentrated convergence of funds.

As Chen Ge just mentioned, the current market is a zero-sum game. As a large number of active speculative funds continue to concentrate on the "major infrastructure" sector, the "emerging industrial chain" sector will naturally receive less attention from speculative funds and speculative buying.

In other words, under the expected feedback.

The trend during tomorrow's opening auction is unlikely to be positive for the 'emerging industrial chain' sector.

Of course, the worse the opening auction trend is than expected, the more severe the sell-off at the open, the faster the early profit-taking in the 'emerging industrial chain' sector can be cleared out, and the more thoroughly the stock price can fall. As long as the early profit-taking is cleared out quickly, the stock price will fall rapidly.

Faced with a host of small-cap growth stocks that are still at historically low levels and far behind the market average gains, as well as numerous low-priced concept stocks.

At the same time, a large amount of speculative funds are also gathering in the 'major infrastructure' sector.

After the market started to rally, I realized that the potential selling pressure on the 'major infrastructure' sector was greater than I had anticipated.

Naturally, a lot of short-term speculative funds will flow back to the low-priced sectors and converge on the oversold 'emerging industry chain' sectors.

"According to what you're saying, Lao Wu..." Lao Zhang said, "the best scenario would be for 'Huawen Online' to open at its daily limit down tomorrow, right?"

Old Wu nodded and continued, "It's not that opening at the limit down is the best. The best is opening at the limit down with appropriate volume. If it's a limit down with low volume, it will probably further damage the sentiment of the 'emerging industrial chain' theme, causing investors who originally wanted to buy the dip and make the 'first negative day of the leading stock' to hesitate and not dare to buy the dip and lift the price."

If tomorrow's 'Chinese Online' stock opens with a low-volume, limit-up move...

It's highly likely that the 'emerging industrial chain' sector will experience another sharp drop tomorrow, reaching an extreme low in market sentiment.

And if that's the actual feedback...

The rebound in the 'emerging industrial chain' sector will come a little later.

The most likely entry point for this speculative trading will be next Monday.

“I feel that the probability of ‘Huawen Online’ opening at the daily limit down with low volume tomorrow is very small,” Xu Qiao said after thinking for a moment. “On the other hand, ‘Huawen Media’ will most likely open at the daily limit down with low volume tomorrow. Compared with the trend of ‘Huawen Online’ and the market enthusiasm, ‘Huawen Media’ seems to have been completely abandoned by speculative funds. However, if ‘Huawen Media’ opens at the daily limit down with low volume tomorrow, it will have retraced more than 30% in two days, which can be considered as hitting the bottom in one step and returning to the starting point, thus achieving the goal of thoroughly underperforming the stock price ahead of schedule.”

"If 'Huawen Online' doesn't open at the daily limit down tomorrow with low volume, and if it can be pulled up by bargain hunters during the day..." Old Zhang said, "then even if 'Huawen Media' opens at the daily limit down with low volume, it will probably be difficult for it to stay there during the day. Of course, in terms of the cost-effectiveness of bargain hunting, 'Huawen Online' definitely has a higher probability of success."

"This ideal trend probably depends on the performance of overseas markets tonight," Xu Qiao said. "It all depends on how the US stock market performs tonight. If bullish sentiment shifts back to tech stocks tonight, then we can have a corresponding expectation for tomorrow's trend."

"I don't think we need to worry too much about the performance of the US stock market, right?" Old Wu said.

Brother Chen nodded and replied, "But from a technical perspective, the US stock market is likely to continue its upward trend. Moreover, the major US tech giants are currently in an upward trend in terms of their business scope, operations, and fundamentals. It feels like as long as the performance of these tech giants doesn't collapse, the overall US stock index will be hard to crash."

“That’s right,” Old Wu said. “Looking at the candlestick patterns of the US stock indexes, especially the monthly charts, they are simply beautiful. I wonder when our major A-share indices will be able to produce such beautiful monthly candlestick patterns.”

"As long as the market's investor structure doesn't change, I feel there's basically no hope," Xu Qiao said. "Let's talk about that possibility again when retail investors gradually decrease and institutional investors gradually increase, and the entire market becomes completely dominated by institutions. Otherwise, the market pattern of short bull markets and long bear markets, given that many retail investors naturally like to chase highs and sell lows and are too easily influenced by emotions, will probably be difficult to improve." (End of Chapter)