Rebirth of the Capital Legend

"The profit-making effect determines the sustainability of the market trend, that's for sure," Li Jinshi continued. "But the key is to keep various funds flowing in, which still requires the support of underlying logic, valuation systems, industry fundamentals, and future expectations, right?"

Liao Guoxiang chuckled and said, "These factors are necessary, but even with them, stock prices may not necessarily rise. The most important factor is the market's own style bias, that is, the macro trend. For example, back at this time last year, and even during the last bull market, weren't the heavyweight stocks in sectors like liquor, white goods, and power value highly valued? Didn't they have investment value? I remember that the valuations of these heavyweight stocks in the market were much lower than they are now, right? At that time, there were quite a few heavyweight stocks trading below book value in the entire heavyweight sector. But have the prices of these stocks risen now? Not only have they not risen, but they have also fallen considerably during that period."

Moreover, this was in the overall market environment at the time.

Both the overall bullish sentiment among investors and the overall liquidity in the market are stronger than they are now.

Why did the stock price not only fail to rise but also fall significantly, given that liquidity was more abundant, valuations were lower, and the industry fundamentals were also good?

At that time, stocks in sectors that favored the technology theme, such as film and television media, internet software, internet applications, electronic information, and semiconductors, had valuations many times higher than these heavyweight stocks, with many stocks generally having a PE ratio of over 100.

However, even when valuations are severely overvalued and the industry's fundamentals aren't much better, the situation remains complex.

These stocks, however, continued to reach new highs under the circumstances at the time, continuously siphoning liquidity from a host of heavyweight stocks in the market.

You say...

Can this situation be determined simply by so-called positive factors, expected logic, fundamentals, and valuation levels?

In my view, the reason this situation can occur is because the core group of major funds in the market, those who control the market pricing power, continuously guide the market and create a sustained profit-making effect. It has little to do with valuation, expectations, or fundamentals.

In my view, this is the real trend force in the market.

Regardless of the time, whether it's an upward or downward trend, once all market participants have reached a consensus and the trend is clear, it will be effective.

Do not go against the trend.

Don't try to guess the top or bottom; just follow the trend and set stop-loss orders.

It is obvious that, in the current market trend, the main focus of the major funds in the market is on the heavyweight sectors of consumption, infrastructure, power, and finance. As for the technology-oriented sectors such as film and television media, internet software, and internet applications, they are in a downward trend with continuous capital outflow and capital flight.

Furthermore, this is in contrast to the previous market conditions.

In today's market, overall liquidity has also decreased significantly.

Given the continued decline in liquidity and the expectation of further contraction in trading volume, the leading sectors that are experiencing severe losses are unlikely to attract significant buying interest in the short to medium term, even if their valuations fall to a level where they are already quite low. It is even more difficult for them to form a bottoming-out and reversal pattern in the short to medium term.

So, in the final analysis...

In market trading, the primary focus should be on capital flow, following the main trend where capital flow is most concentrated.

"Old Liao is right." Chen Guiyun nodded and continued, "Our A-share market is dominated by retail investors and is not a fully mature market. In such a market, the emotional concentration effect formed by capital preferences will cause the market trend to rush in one direction until subsequent buying is insufficient and no one is willing to take over, at which point the trend will turn around and change."

This is a typical market pendulum effect.

Previously, the market had a strong preference for speculating on small- and mid-cap stocks.

However, the multiple stock market crashes following the end of last year's bull market resulted in heavy losses for the funds involved in speculating on these small and medium-sized stocks, creating a massive amount of trapped capital.

Meanwhile, due to the involvement of the 'national team'.

This has provided a sufficient safety margin and attracted proactive buying for a number of market-weighted stocks that did not experience significant gains or obvious valuation bubbles during the previous bull market.

Afterwards, under the deliberate guidance of the 'national team'.

As the balance between the continuous profit-making and loss-making effects shifted, people began to continuously transfer their positions to the main weighted themes of the market, until the current polarization trend emerged.

This trend did not form overnight.

I think this trend will not easily reverse or end before its valuation level reaches the bubble stage.

Therefore, given that the current main funds still favor a number of heavyweight themes and heavyweight stocks.

Continuing to focus on the main themes of liquor, white goods, power, major infrastructure, and finance, and concentrating on these key sectors, with proactive buying concentrated on the most popular leading stocks for positioning and market manipulation, I think there's absolutely no problem with that. As for when the trend will end...

When will the pendulum of this market swing back to the small and mid-cap and micro-cap sectors?

That's something no one can predict.

But I think that no matter when, this style shift should be clearly indicated. When we follow the trend, we just need to observe and continuously track the changes in market trends.

As for trying to buy at the bottom or guess the top, that's the behavior of retail investors.

Our primary focus should be on sustained profit-making potential.

Only when a particular leading sector, or several related leading sectors, exhibits a sustained profit-making effect, and both the technical and fundamental aspects show significant improvement, is it worthwhile to invest heavily. Otherwise... I think it's better to participate with a small position and patiently monitor and wait.

“I agree that positions should not be too heavy,” Li Jinshi said. “As for the major funds in the market at the current level, I still have reservations about whether they will further increase their positions in the main weighted sectors and further push up the valuations and prices of these stocks. Of course… stocks in the film and television media, internet software, and internet applications sectors, which are more technology-oriented, have not yet reached the investment zone worth investing in for medium- to long-term funds, and there are no clear signals of a bottoming out.”

The three continued their discussion about the market.

At this moment, on major online stock investment platforms, countless retail investors, seeing the final closing results of the two stock exchanges, especially the Shanghai Composite Index closing in the green while 1900 stocks in both exchanges were still declining, felt somewhat indignant and even dissatisfied, with many complaining. "Damn, this is really speechless, the Shanghai Composite Index actually closed in the green."

"This trend is simply disgusting. My account almost lost more than 5% today, but I didn't expect the Shanghai Composite Index to still be in the green."

"Today I made money on the index but lost money on my personal finances."

"It's not just a loss, it's a huge loss. It's toxic. You can only say that the 'national team' is really powerful and can really control the market."

"If it weren't for the 'national team' propping up the market, today's market would have been a completely one-sided sharp decline, right?"

"Yes, it looks like the overall market decline isn't that big, but the average decline for individual stocks across the market is generally around 2%."

"Yes, the general decline is around 2%, and the Shanghai Composite Index now feels completely distorted."

"Ever since the 'national team' completely took control of the financial, power, and petrochemical sectors, and controlled the four major banks, two oil giants, and several power stocks, the Shanghai Composite Index has become completely distorted. The real index performance now is actually reflected in the Shenzhen Component Index and the ChiNext Index, which are more accurate indicators of market trends."

"It feels like the Shanghai Composite Index's performance has become largely irrelevant to us retail investors."

"It wasn't really a big deal to begin with."

"Is this forcing everyone to buy blue-chip stocks?"

"It's obvious. They're forcing everyone to buy stocks in banks, insurance, real estate, liquor, and white goods. But these stocks are already at pretty high prices, and some have even risen above what they were when the Shanghai Composite Index was at 5000 points last year. It's really hard to bring yourself to buy them now."

"I just can't bring myself to buy it... Buying now would be obviously chasing the high."

"You might buy these heavyweight stocks now, only to see the market style change again later."

"That's right, I'm afraid of being proven wrong again and again."

"I hope I won't be proven wrong again? I was actually worried about being proven wrong before, and that the main infrastructure sector was currently at too high a level and would have a lot of downward pressure. But in the end... I still blindly bought at the high price, hehe... Now it seems that I made the right decision. Although my cost basis is relatively high, even higher than most people, I have already made more than 15% as the stock price continues to reach new highs."

"Those who dare to continue chasing high prices and buying into core infrastructure stocks at this time are truly exceptional individuals."

"Actually, overall, the major infrastructure sector hasn't risen much since it bottomed out and reversed its trend, has it?"

"They've generally doubled, and that's not even a huge increase? What do you mean by 'huge increase'? How much would it have to rise to be considered a huge increase? Two times? Three times?"

"I think the level of stock price has nothing to do with how many times it has increased. It depends on whether the industry is currently in an upward cycle or a downward cycle. If it is in an upward cycle, then it is okay for the valuation to be slightly higher during the period of explosive performance. Once the performance continues to grow, the valuation will come down."

"I don't understand fundamental analysis. Anyway, I'm just comparing the Hong Kong-listed mainland property stocks. As long as the Hong Kong-listed mainland property stocks are still rising and continuing to expand their upward space, then... in our A-share market, the real estate sector and the main theme of large-scale infrastructure are unlikely to have peaked at the moment, and there is still room for further growth."

“Looking at the trend of mainland property stocks in the Hong Kong stock market is indeed a good reference point.”

"Sigh, why are the Shenzhen Component Index and the ChiNext Index so weak? It feels like there's no negative news in the market. When the Shanghai Composite Index rises, these two indices can't keep up, and when the Shanghai Composite Index falls, these two indices fall faster than anyone else. As a result, lately, I've only been making money on the index but not on my own money. Not only am I not making money, but I'm also continuously losing money. It's really frustrating."

"The reason why the Shenzhen Composite Index and the ChiNext Index are so weak is mainly due to the drag from technology-oriented sectors such as film and television media, internet software, internet applications, and electronic information. If it weren't for the drag from individual stocks in these sectors, these two major indices wouldn't have fallen so much."

"I feel that the weighted stocks in the ChiNext index are too heavily weighted towards the film and television media, internet software, and internet application sectors. Moreover, some of these weighted stocks have been declining due to extremely poor performance and excessive speculation during the last bull market, which has also dragged down the index performance."

"You mean LeTV, Netspeed Technology, Baofeng Technology... these stocks, right? Sigh, I have to say, the performance of these stocks is truly speechless. In the past two or three months, even though the index has been steadily recovering, the stock prices of these stocks have continued to hit new lows. Baofeng Technology, in particular, has seen its value halved in just two or three months."

"The way these stocks are behaving is not surprising to me at all. In today's market, simply speculating on concepts is no longer effective."

"I also feel that the market is no longer buying into mere concept hype."

"Isn't this a good thing? The previous atmosphere of focusing on speculating on small and poor-performing stocks was not a normal investment environment to begin with."

"Do we really have to continue focusing on large-scale infrastructure and consumption?"

"There's nothing wrong with that, is there?"

"It's not that there's anything wrong with it, it's just hard to get started. Without a base position, it's really frustrating."

"Then just buy little by little, gradually increase your position. Isn't there a trading method called grid trading, right? You buy in a grid pattern and keep lowering your cost basis."

"I've realized that continuous short-term trading doesn't make money; you have to settle down and do long-term trading."

"But with a small initial investment, there's no point in investing for the long term."

"It's better than continuously losing money. When you can't make money with small amounts of capital, it's better to do long-term investing. Although you may not make much money that way, you lose money more slowly."

"In short, I think it's more important to preserve the principal first."

In the discussions following the market close, as well as the discussions about individual stocks.

In the current group chat of the "Shanghai Short-Term Trading Gang," Xu Qiao stared at the now-frozen trading screens of the two stock exchanges, pondering for a while before saying, "This trend indicates that market funds are increasingly clustering together. The film and television media, internet software, and internet applications sectors are truly in a state of collapse. Regardless of market sentiment, funds in these sectors are frantically fleeing. If this continues… I really don't know if this polarization in the market, and the localized profit-making effect, can be sustained." (End of Chapter)