Rebirth of the Capital Legend

"A double bottom is inevitable," Lao Qian said in the group. "With the current liquidity in the market, how can this complete collapse in sentiment possibly hold up? The 'emerging industrial chain' sector clearly looks like it's already in a state of liquidity depletion. There's practically no buying power to take over, while selling pressure is endless. Not only are those who have made profits selling, but those who have cut their losses are also selling. Those who were trapped at the top in the past are also frantically dumping their shares. Under these circumstances... without a double bottom to further clear the market's shareholding structure, how can there be a reversal? How can a concentrated buying force be gathered?"

“Indeed, the main problem is the poor market liquidity,” Zhang Xinlei said. “I originally thought that as market sentiment improved and the core theme of ‘major infrastructure’ was supported, some off-market funds would enter the market to support the gains, and the trading volume and turnover would gradually increase. But now it seems that there is no off-market capital involved at all. Liquidity has not improved, so naturally, the market trend cannot be significantly improved.”

"The key issue is the overall poor macro liquidity," Zheng Jinming said. "With the Federal Reserve about to enter a rate hike cycle, the central bank is hesitant to play all its cards at the moment."

“Macro liquidity is not bad at all,” Lao Qian said. “Look at the current domestic real estate market. How much hot money is being poured into it? In recent months, the news about the real estate market has been full of record-breaking land prices. Each real estate company has basically poured tens of billions or hundreds of billions into it. Is this a sign of a lack of money on a macro level? Not at all. The main problem is that the hot money simply cannot flow into the stock market. It has all been sucked dry by the off-market real estate market.”

"With the property market so hot, it's hard not to be siphoning off macro liquidity," Zheng Jinming said. "However, I feel that's not the root cause. If we're talking about a lack of money, the Hong Kong stock market is also short of funds. But look at the recent performance of the Hong Kong stock market; it's clearly outperforming the A-share market by a significant margin. What's the reason for that?"

Zhang Xinlei said, "The ecosystem of the Hong Kong stock market is obviously different from that of the A-share market, right? In the Hong Kong stock market, most of the participants in market transactions are overseas capital. Domestic capital has no pricing power at all in the Hong Kong stock market and cannot dominate the trend of the main market."

"Isn't it because these major domestic institutions that can dominate the market trend lack vision and composure?" He Zhong said. "These institutions only stick together when it comes to certainty, they really have no guts, and they run away faster than anyone else at the slightest sign of trouble."

“There’s nothing we can do!” Zheng Jinming said. “It’s determined by the market’s ecosystem structure, and there’s no way to change it. All we can do is follow this ecosystem and adjust our trading strategies accordingly based on the movements of these major institutions.”

“Actually, these domestic institutions have done quite well in this wave of the ‘major infrastructure’ theme, right?” Zhang Xinlei said. “I feel that if it weren’t for the sustained momentum of this wave of the ‘major infrastructure’ theme, the Shanghai Composite Index would still be below 2800 points, and the ChiNext Index would most likely still be below 1500 points.”

"This wave of the 'major infrastructure' theme wasn't actually discovered by domestic institutions," Lao Qian said. "I remember it was the 'mainland property stocks' in the Hong Kong stock market that started to move, right? Then, with the continuous surge in domestic housing prices, domestic institutions gradually began to adjust their portfolios and follow the 'major infrastructure' theme. In fact, before the 'major infrastructure' theme started to move, housing prices in major cities in China had already been rising for quite some time."

"Isn't the market trend mainly driven by the institution 'Huayi Capital'?" Zhang Xinlei said. "I remember that the initial continuous fluctuations in the 'major infrastructure' theme started with Huayi Capital continuously increasing its holdings on a large scale and appearing on the buy-side of the stock exchange's daily trading data."

“That’s true.” Old Qian nodded and said, “Right now, the institution ‘Huayi Capital’ rarely appears and rarely guides the macro trend of the market.”

“Huayi Capital’s current holdings are already too large, and the ‘major infrastructure’ theme has already largely realized its expectations and is at a relatively high point, making it difficult to guide the market,” Zhang Xinlei said. “Under these circumstances, if the market is not guided properly, it will severely damage the institution’s reputation and market influence.”

"Actually, I think the 'major infrastructure' theme is no longer the core focus of market sentiment," He Zhong said. "Instead, the ChiNext Index, Huazheng 500 Index, and CSI 1000 Index, which are dominated by small and mid-cap stocks, are the focus of market sentiment. I feel that only by fully activating the sentiment surrounding small and mid-cap stocks and completely restoring the investment confidence of retail investors can the market have a future, and only then can the Shanghai Composite Index break free from the situation of continuously fluctuating around the 3000-point level and failing to break through."

"Everyone knows that the vast majority of retail investors in the market hold the most concentrated positions in small and mid-cap stocks. However, the historical trapped positions in these stocks are too heavy," Zheng Jinming said. "Let's not even talk about these industry sectors and concept sectors, which currently lack strong fundamental expectations or strong policy support. Just look at this position, facing hundreds of billions or even trillions of yuan in historical trapped positions. Who can really shake this situation? And how much new capital would be needed to fill this gap? The most unlikely trading strategy for the major institutional investors in the industry is to prop up the stock for retail investors."

I estimate that these major institutions will hold onto core sectors such as liquor, white goods, pharmaceuticals, consumer goods, power, and finance until the very end.

The concentration of investors in leading stocks across these key sectors has led to a concentrated bubble in valuations.

They probably won't adjust their strategy to focus on small-cap and micro-cap stocks, which are popular among retail investors.

“Old Zheng makes a good point,” Old Qian replied. “These domestic institutions always prioritize the survival of their own people over their own. As long as there is some liquidity in the market, as long as the main board’s heavyweight sectors such as liquor, white goods, pharmaceuticals, power, and finance, as well as the core leading stocks in the current ‘major infrastructure’ industry, still have expectations and their fundamentals are still in a boom cycle, without a sustained sharp decline in performance or a continuous deterioration in fundamentals, these major institutional groups will not be able to massively shift their positions to other main sectors.”

These major funds continue to cluster around these key sectors.

This means that market liquidity will continue to be sluggish.

Without the participation of these financial groups, the market will gradually become stagnant.

At that time, the market will most likely return to the previous pattern of low-volume, gradual decline.

Anyway, I understand now...

Before the Shanghai Composite Index fully breaks through 3300 points, and before the overall macroeconomic environment of the market is completely reversed, it is not advisable to make large-scale, heavy investments, nor to be overly optimistic or gamble heavily on any single core theme. Instead, it is best to buy low and sell high, and take profits when appropriate.

"Yes, that's right," Zheng Jinming said. "It's estimated that the market will remain in this continuous oscillation for a long time. Moreover, for a long time, the Shanghai Composite Index, Shenzhen Component Index, and A50 Index will likely maintain a trend where they are significantly stronger than other core market indices. The small and micro-cap stocks in the ChiNext Index, Huazheng 500 Index, and CSI 1000 Index are likely to find it difficult to develop a truly sustainable market trend due to the large amount of historical trapped capital and the lack of concentrated intervention from core institutional funds."

In short, no matter how the market fluctuates, we should not be overly optimistic.

Of course, despite the current poor market performance, with over 50 stocks hitting their daily limit down, I don't think we need to be overly pessimistic.

At most, after today's sharp drop, there will be another low point tomorrow before a rebound.

After all, overall...

The trend in external markets is still very good, and the global economy is gradually getting out of the quagmire of economic stagnation and is gradually recovering.

As long as US stocks continue to reach new highs, the overall external environment will remain favorable.

So, driven by the performance of US and Hong Kong stocks, the domestic A-share market, while unlikely to rise much, is also unlikely to fall much.

Moreover, whether it's the Shanghai Composite Index at 3000 points or the ChiNext Index at 1500 points.

The support is still very strong.

The key is that we must have a correct understanding of the market. When we are gripped by extreme panic, we must not panic or lose our composure. Conversely, when we are stimulated by extreme optimism in the market, we must not be led by our emotions and follow the optimistic view of the market.

Instead, in a situation of extreme panic, one should free up positions to pick up shares sold during panic selling.

In moments of extreme optimism, sell off holdings to profit from the temporary emotional premium.

Instead, one should not do the opposite, following the market's extreme panic and selling off, or excessively increasing positions and chasing the rally when sentiment is overly optimistic.

"Will it rebound if it opens lower tomorrow?" Old Qian said. "Old Zheng, aren't you being a bit too optimistic?"

Zheng Jinming smiled and said, "Today, the entire 'emerging industrial chain' theme is in a state of extreme panic. Most of the funds that entered earlier have not only failed to make a profit, but have also fallen into a state of slight loss. Under such circumstances, when this batch of panic-driven stop-loss selling is completed, the downward momentum will naturally weaken. And when the downward momentum weakens, the risk of a continued sharp drop will naturally be not great."

“There’s certainly enough panic in the ‘emerging industrial chain’ sector,” Zhang Xinlei said. “But as for clearing out stop-loss orders and profit-taking, I think it won’t be that easy.”

"Anyway, I've already placed a stop-loss order at the daily limit down, so whatever happens, happens," He Zhong said. "I tried to steal a chicken but lost the rice instead. No matter how the market moves afterward, I need to rest for a while after stopping the loss and get my feel for the game back."

"When you're suffering heavy losses and your mindset is bad, it's the right thing to stop and rest," Lao Qian said. "I'm also planning to take a break for a while. It looks like the ChiNext index won't be able to bottom out again so soon. With today's terrible sentiment, even if the market drops sharply tomorrow and clears out the stop-loss and profit-taking positions briefly, there will be a rebound. But I don't think that rebound will change the trend of continuing to bottom out."

“I think so too.” Zhang Xinlei nodded and said, “This kind of extreme panic cannot be reversed in a day or two. It takes a long time to build up market confidence, but it can be destroyed in an instant. Look at the voices of countless retail investors on major stock investment exchange platforms across the internet right now. It is undeniable that the market’s bullish sentiment has indeed completely collapsed, and looking at the current downward trend of the market… I estimate that we will see another scene of hundreds of stocks hitting the daily limit down today.”

"How long has it been since there were 100 stocks hitting their daily limit down?" Old Qian asked.

Zhang Xinlei thought for a moment and said, "Not many. About half a month ago, before the second wave of sustained gains started in the 'major infrastructure' theme, the market saw a hundred stocks hit their daily limit down. In fact, now the market is almost seeing a hundred stocks hit their daily limit down."

"As long as there aren't thousands of stocks hitting their daily limit down, that's fine," Zheng Jinming said. "The current market trend of hundreds of stocks hitting their daily limit down no longer poses the same huge destructive force as the stock market crash of the past, nor will it cause the market to truly lose liquidity and create a systemic risk macroeconomic situation of liquidity depletion."

“It’s highly unlikely that we’ll see another day with thousands of stocks hitting their daily limit down,” Zhang Xinlei said. “After all, the national team currently holds over 1.5 trillion yuan worth of shares, with most of them concentrated in the main sectors of the main board, such as liquor, white goods, pharmaceuticals, consumer goods, power, and finance. At the very least, if the market collapses across the board, the national team’s funds can stabilize these main sectors.”

"Isn't that what's happening now?" Old Qian said. "The ChiNext index has fallen by almost 3%, but look at the Shanghai Composite Index, it's basically still hovering around 0.9% to 1%, it just can't fall any further. In fact, the main sectors like liquor, white goods, and big financials are still seeing continuous buying. If it weren't for the intervention of the 'national team,' I wouldn't believe it at all. However, in reality... this trend of the main market remaining stable while small and medium-sized stocks collapse across the board is actually the most damaging to the overall market sentiment, and it's the situation that retail investors complain about the most."

“There’s no other way,” Zheng Jinming said. “In order to prevent the overall market performance from looking too bad, the national team can only operate in this way. And first, they need to stabilize the Shanghai Composite Index and keep it fluctuating above 3000 points. Overall, this is beneficial to the market, right? If, for example, the Shanghai Composite Index were to experience a sharp drop of 3%, breaking through 3000 points, I don’t think the market sentiment would be any better than it is now. At that point… I’m afraid it won’t be enough to stop it with hundreds of stocks hitting their daily limit down. The market will inevitably move towards a situation of ‘thousands of stocks hitting their daily limit down’.”

“No matter what happens…” He Zhong said, “It’s always right to clear out your positions first and preserve your principal. As long as the market doesn’t close, there will always be opportunities in the future. If you continue to gamble on risk and profit and lose your principal, it will be very difficult to earn it back in the future.” (End of Chapter)