Against the backdrop of a liquidity-driven bull market, traditional fundamental analysis struggles to explain short-term market fluctuations. In such scenarios, tracking capital flows and sentiment shifts becomes crucial for assessing the potential upside of the rally.
**Tracking Capital Flows Through Investor Behavior** On one hand, net inflows into equity ETFs reflect the stance of institutional investors. Specifically, inflows into broad-based index ETFs indicate stabilizing market expectations. Significant outflows during market downturns may signal weakening stabilization efforts. Meanwhile, sustained inflows into thematic ETFs suggest heightened risk appetite among large investors, with sector-specific ETF flows revealing their preferred allocation directions.
On the other hand, retail investors' aggressive buying sprees often precede weaker market performance. Current retail buying volumes remain moderate, but consecutive large-scale purchases warrant close monitoring.
Additionally, margin debt balances serve as a barometer for market risk appetite. Persistent outflows may signal an impending correction.
**Assessing Market Sentiment via Implied Volatility and Microstructure** Implied volatility, reflecting speculative fervor, has retreated from late-August highs, suggesting easing投机情绪 and renewed market consensus.
The concentration ratio—measured by the top 5% stocks' trading volume as a percentage of total market turnover—highlights crowding risks. Historically, levels above 45% (seen in 2008, 2018, and 2021) have foreshadowed market turning points.
Similarly, the proportion of stocks trading above their 95% historical valuation percentile (historical warning threshold: 15%) gauges overextension risks, having flagged corrections in 2016, 2020, and early 2025.
**Post-Adjustment Opportunities Emerge** October saw amplified volatility driven by structural risks: the concentration ratio hit 43.15% (near the 45% threshold), while overvalued stocks accounted for 16.79%. However, bullish potential persists—implied volatility has returned to mid-August levels, indicating renewed sensitivity to catalysts, and margin debt (2.54% of A-share float) remains well below 2015's peak (4.72%).
**Investment Strategy** 1. **Defensive Positioning**: Increase exposure to high-dividend stocks to hedge against ongoing volatility. 2. **Thematic Opportunities**: Await improved structural metrics (concentration ratio and overvaluation indicators) before targeting rebounds in tech, metals, and policy-driven sectors.
**Key Risks**: Unexpected regulatory changes or shifts in A-share investor composition.
**Market Context** Since July 2025, liquidity-driven gains have outpaced weak fundamentals (Q3 demand growth averaged -0.6% vs. production's 5.7%). The rally—initially led by semiconductors and AI—persisted through September despite volatility, supported by new themes like solid-state batteries and robotics. October's mid-month correction, triggered by trade tensions, gave way to late-month stabilization amid policy support.
This report provides actionable metrics to navigate the liquidity-fueled advance, emphasizing capital flows and sentiment over traditional fundamentals.
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