Rebirth of the Capital Legend

"You think that the Shanghai Composite Index has failed to break through 3100 points effectively, while market volume continues to decline, and the divergence between large and small caps is becoming increasingly severe, which has lowered the market's bullish sentiment and reduced the profit-making effect in certain parts of the market... " After hearing Yu Xiaolu's words, Lu Xiangxiang smiled and said, "So you're starting to worry that the market will likely adjust downwards and retrace to the 3000-point level, and you believe that the major infrastructure sector, which is currently heavily favored by various funds, will also experience a significant and sharp correction?"

Yu Xiaolu nodded and said, "That's right. I think that with the vast majority of stocks in the market falling indiscriminately, even though the expectation for the infrastructure sector is still there, and there is also the linkage with the Hong Kong stock market, in the short term, funds have already clustered together like this. Without further improvement in sentiment, it is difficult to continue to push the market up. And as the so-called upward momentum in the short term continues to weaken, the downward momentum will continue to strengthen."

Furthermore, in a market rife with instability, even a strong leading sector is unlikely to remain unaffected.

The major infrastructure sector has reached a point where a round of adjustments is due.

Only through a sustained period of adjustment can some profit-taking be cleared out, allowing for a lighter load and a smoother start. Otherwise, with too many people holding onto their positions, the burden will be too heavy to lift.

"Well, your analysis isn't too flawed logically," Lu Xiangxiang chimed in. "Our investments in major infrastructure projects should be showing considerable unrealized profits by now, right?"

Yu Xiaolu replied, "Indeed, the unrealized profit is already quite substantial. Overall, the position in this direction has a profit of over 30%."

“Okay,” Lu Xiangxiang said. “Then let’s gradually reduce some of our positions to further lower our cost basis. This will free up some cash, so no matter what market trends we see, we can handle them calmly. Have you seen any unusual activity from 'Huayi Capital' lately, judging from the market movements?”

Yu Xiaolu replied, "I feel that the funds from 'Huayi Capital' haven't made any significant moves in the major infrastructure sector. There haven't been any unusual movements in the stocks that these funds are heavily invested in, or in the recent list of top traders in the two markets. Moreover, given the size of these funds, if they were to adjust their portfolios or take profits, they would definitely leave some traces on the market or in the list of top traders in the two markets."

"They really know how to keep their composure." Lu Xiangxiang remarked upon hearing that Huayi Capital had not made any moves yet. "This is completely different from their previous investment style."

Yu Xiaolu said, "Aside from the major infrastructure sector, it seems that 'Huayi Capital' has not made any moves in its positions in the liquor and white goods sectors."

"This fund has truly hit the jackpot in the two core sectors of consumer goods and infrastructure," Lu Xiangxiang said. "What about the new energy industry chain? Didn't this fund rebuild its position? What's the latest news?"

Yu Xiaolu said, "In the new energy industry chain, apart from the initial positive news when 'Huayi Capital' clearly intervened, it seems that this fund did not continue to buy afterward. It is estimated that this fund's position in this line is not very large. At least compared with the two main themes of large-scale infrastructure and large-scale consumption, this fund's layout in the new energy industry chain is relatively small."

"Hmm." Lu Xiangxiang nodded slightly and continued, "Judging from the investment strategy of 'Huayi Capital,' this fund should still be optimistic about the two core themes of large-scale consumption and large-scale infrastructure at this point in time. As for the new energy industry chain, it is estimated that this fund feels that it is not yet time for a clear reversal, so it has slightly intervened in the position, but the degree of intervention is not deep. Let's continue to keep an eye on it. In terms of market sense, this fund's sense of the market is still first-class. I think as long as this fund does not make large-scale adjustments to its positions or take profits, the overall market trend should not be a big problem."

"But judging from market sentiment and trading volume..." Yu Xiaolu responded, "a short-term correction is likely to happen at any time, right?"

Lu Xiangxiang said, "From an emotional perspective, since it has been unable to go up and break through, it will definitely have to go down further to test the 3000-point level to confirm the support. At the same time, it will consolidate the chip structure, further release the pressure from the trapped positions above, and clear out some of the profit-taking positions."

“Yes, that’s what I think too,” Yu Xiaolu said. “If the Shanghai Composite Index can retest 3000 points again, I think it will not only not be bad for the overall market trend in the long term, but will actually be quite beneficial.”

"Looking at the long-term market trend, that's definitely going to happen," Lu Xiangxiang said.

“But…” Yu Xiaolu paused, then continued, “Given the current market structure, if the Shanghai Composite Index retraces to 3000 points, which is close to a 3% correction, the Shenzhen Component Index and the ChiNext Index will likely see even steeper declines. It is estimated that many small and medium-sized stocks that have already been abandoned by major funds will hit new lows during this correction.”

Lu Xiangxiang said, "The market style is like this, there's nothing we can do about it. Small and mid-cap stocks and micro-cap stocks are areas with increasingly scarce liquidity. With various funds in the market increasingly concentrating on large and mid-cap stocks and heavyweight stocks, these small-cap stocks with insufficient liquidity will gradually hit new lows even if the index doesn't fall. This trend will not be affected by anyone's will, nor will it change due to short-term fluctuations in the market. This is the force of the current macro trend in the market. The various funds involved have no other choice but to flee or avoid it."

"I'm thinking..." Yu Xiaolu pondered for a moment and said, "Among these small and medium-sized stocks that have fallen so much, are there any undervalued stocks that have overshot their lows and have value? I feel that although the current market trend is gradually leaning more and more towards large and medium-sized stocks, and even more certain weighted stocks, it seems that at the deeper level of fundamental logic, it is following the growth stock line."

Among the many small and mid-cap stocks that are currently experiencing a continuous decline.

Even the weakest performing sectors, such as film and television media, internet software, internet applications, and electronic information, which are more technology-oriented, have shown improvement.

There are also many hidden leading companies in niche industries that have experienced significant and excessive price drops.

I think there's a possibility that these types of stocks have been oversold.

“In a market where everything is falling together, there will inevitably be a few stocks that are being unfairly sold off,” Lu Xiangxiang said. “However, given the overall macro trend, these unfairly sold stocks are mixed in with those that are not unfairly sold off, making them very difficult to distinguish. Generally speaking, in this situation, it is difficult for the dominant institutional investors in the market to focus their attention on these individual stocks.”

Large institutions, especially major institutions with funds in the tens of billions.

They typically engage in industrial planning.

Those who are optimistic are often driven by the logic of industry reversal and the trend changes in the entire industry.

Even in industries in a downturn, there may be one or two stocks that can buck the trend and deliver strong performance.

This is influenced by the continuously declining industry average valuation.

Pulled down by the continuous decline of other similar stocks.

It's also difficult for these stocks to attract much capital attention, and they often exhibit a trend that moves against the industry sector. Of course, it's acceptable to maintain a high level of attention towards these types of stocks.

For such stocks, during a downturn in the industry cycle and a general decline in similar stocks, they will not show a particularly obvious independent trend. However, if the industry cycle reverses and begins to show a general upward trend, then the explosive power of these stocks will be quite strong.

Therefore, it's fine to keep an eye on industries in a downturn, but you should be cautious about making investments.

For industries in an upward cycle.

Then you should decisively target stocks with high earnings elasticity and the most rapid expansion.

In short, when it's time to defend, defend; when it's time to attack, attack decisively.

“Mr. Lu is right.” Yu Xiaolu thought for a moment and nodded in response. “Then I will continue to pay attention to the downward cycle sectors where the current loss effect is still expanding and make cautious investments. However… I feel that the steel and coal sectors have gradually deviated from their previous weak performance recently. It seems that there is a potential buying force gradually following up and investing. I wonder what Mr. Lu thinks about these two sectors?”

"The steel and coal sectors?" Lu Xiangxiang pondered for a moment and said, "These two sectors seem to have received very little attention. After all, they are traditional industries that are generally considered to be sunset industries."

Yu Xiaolu smiled and said, "It is indeed the least favored sector among traditional industries, but I think that although these two sectors are so-called sunset industries, looking to the future, whether it is ten or twenty years, there will still be no new industries to replace these two industries. Since they cannot be replaced in the long run, there is no such thing as a sunset industry."

"Yes, that makes sense." Lu Xiangxiang nodded.

Yu Xiaolu paused for a moment, then continued, "I feel that the futures markets for these two industries have shown signs of continuous abnormal fluctuations recently. Thermal coal prices have been gradually rising, and the National Development and Reform Commission has also issued new documents. I feel that coal prices are approaching a cyclical reversal."

"Under the supply-side reform, the underlying logic for the turnaround of these two industries is the same, right?" Lu Xiangxiang said. "Everything is cyclical. As investors, we really can't look at all industry sectors with prejudice. As long as an industry sector is not replaced by a new industry sector, there is no such thing as a dead end. In other words, no matter how difficult the industry is, it will always get through the winter and usher in the spring. After two years of massive overcapacity clearing and a large number of mergers and acquisitions... these two industries do have the opportunity to turn around."

"Mr. Lu, do you think these two industry sectors are worth investing in and allocating some funds to?" Yu Xiaolu asked.

Lu Xiangxiang thought for a moment and said, "Since there are major funds gradually laying out their positions in the shadows, and these two major industry sectors are slowly breaking away from the trends of other weaker sectors, while the overall industry expectations are gradually reversing, then it's worth investing in. Moreover, these two sectors didn't rise much in the last bull market, and after several stock market crashes, their stock prices have continued to fall significantly compared to their original consolidation levels. Most of the core stocks in these industries are currently at absolute historical lows, and their valuations are quite low even when the industry is at its most difficult. Under these circumstances, even if these two major industry sectors don't fully recover and their stock prices continue to fluctuate around these historical lows, we won't lose much. From a speculative perspective, the return on investment is still very high."

“Okay, in that case, I’ll reduce some of our holdings in the major infrastructure sector and gradually invest in the core leading stocks in the steel and coal sectors,” Yu Xiaolu said. “Let’s also follow the example of Huayi Capital and make early investments at the bottom to predict the future.”

“Sure,” Lu Xiangxiang smiled and said, “but we don’t have the same market appeal as Huayi Capital. After we make our move, we can only patiently lie low and wait for the market to turn around.”

Yu Xiaolu said, "Our current capital size is not yet large enough to influence the direction of the market, so we can only lie low and wait. However... I believe that as we improve our performance, as the net asset value of our fund products continues to rise in the ranking of the domestic fund industry, as investors' trust in us increases, and as new products are launched in the future, I think... our capital size will grow bigger and bigger, eventually reaching the current capital size of 'Huayi Capital'. And that day should not be too far away."

“It’s great that you think so optimistically,” Lu Xiangxiang said. “I also believe that day will come. Okay… let’s do it your way. You can decide on the specific trading strategies and stock selections. You don’t need to tell me too many details.”

“Okay, Mr. Lu,” Yu Xiaolu replied.

He then continued to lower his head to do analysis and research.

As the two talked, it gradually got to 6 p.m. in the market.

As time goes on, a large number of retail investors, both inside and outside the market, as well as a large number of speculative funds and institutional investors, are still engaged in heated discussions, with significant differences in their views on the future trend of the market.

And amidst this huge division.

As time went on, around 7 p.m., a series of new positive developments emerged in the news.

Firstly, in the real estate sector, news of record-breaking land prices, lotteries for buying apartments, sell-outs on the first day, and even apartments sold out within hours has been constantly emerging.

Secondly, some leaks from Apple's new product launch event are also generating heated discussions.

In the liquor industry, there has been further price adjustment for Qianzhou Moutai's flagship product.

And the prices of futures contracts for ferrous metals such as thermal coal and rebar rose further.

There are also some rumors about the central bank increasing market liquidity...

In short, among the numerous news items, most of what people see are positive, while the corresponding negative news has received relatively little attention.

"It seems that people are more willing to dig into and accept positive news," Zheng Jinming said in the Suzhou-based major speculative investor group, noticing the heated discussions surrounding the main positive and negative news. "This indicates that the overall market sentiment is still leaning towards the bulls. Today's rapid sell-off did not trigger widespread panic after the market closed. This sentiment response is better than I expected." (End of Chapter)