The market has recently experienced a relatively significant adjustment, particularly among technology stocks, which saw substantial gains earlier and have now retreated sharply under profit-taking pressure, leading to a shift in market style. Previously lagging blue-chip stocks have staged a strong rebound, which aligns with the analysis I have shared previously.
Since late May, I have consistently highlighted that excessively high market concentration, with the top 5% of stocks accounting for 50% of daily trading volume—a record high—has pushed the market to the brink of a style rotation. Historically, there have been five instances in the A-share market where the top 5% of stocks accounted for over 45% of trading volume, each followed by a style rotation, with two even leading to a bull-to-bear transition. Therefore, since late May, I have advised taking profits on overextended technology stocks in a timely manner, reducing positions to 50-60%, to maintain a flexible stance. Diversification across sectors is crucial, avoiding overconcentration in any single area—balancing technology with traditional sectors like dividend stocks provides both offensive and defensive capabilities. With a half-position and diversified allocation, the impact of this correction should be relatively limited. However, leveraged investors likely faced greater losses during this decline, which is why I have consistently emphasized the importance of deleveraging. Once leverage is introduced, time becomes an adversary rather than an ally. Deleveraging is essential for all investors, as leverage can drastically alter one's mindset during downturns.
The technology rally is likely not over in the long term, with AI and tech remaining major industrial trends. However, due to excessive short-term gains and accumulated profit-taking pressure, a correction was inevitable. In such circumstances, it is vital to prioritize risk control and navigate through this adjustment to capitalize on the next market upswing. Otherwise, excessive drawdowns during declines can undermine confidence and disrupt future positioning. The current market decline, in my view, represents a significant mid-to-long-term trend correction, comparable to the pullback triggered by tariff tensions on April 7 last year. Following that date, technology stocks embarked on a substantial rally. After this correction concludes, the technology sector may see renewed momentum, but with increased differentiation. Leading tech companies with solid earnings delivery and industry dominance may continue their upward trajectory, while speculative, concept-driven stocks could struggle to recover.
Additionally, sector rotation is expected to accelerate. In the first half of the year, technology stocks largely dominated, while other sectors adjusted, with some even entering bearish territory. Post-adjustment, market dynamics will likely diverge, with sectors rotating more actively. The typical sequence for this rally involves technology leading the initial surge, followed by sectors like new energy and commodities such as non-ferrous metals and coal, and finally rotating to established sectors like baijiu, pharmaceuticals, and tech internet. This is a normal rhythm. Investors should maintain confidence, as this is not the end of a slow bull market but rather a significant mid-term adjustment. However, misjudging the timing could lead to substantial drawdowns, a risk that warrants attention.
In recent sessions, we have observed notable volume increases in many ETFs, indicating that institutional capital is gradually entering the market to stabilize it. The CSI 300, a major ETF, has seen significant inflows, contributing to its relative resilience, while some small and mid-cap indices have experienced sharper declines. This divergence is linked to earlier performance gaps, as the first half of the year featured extreme polarization, with technology and innovation sectors surging while the CSI 300 saw limited gains. The current market split below the 3,800-point threshold has significantly impacted investor sentiment, particularly due to tech stock declines. I have actively advocated for institutional capital to stabilize not only major indices like the CSI 300 but also small and mid-cap indices such as the ChiNext and STAR 50, as most investors hold exposure to these segments. If the CSI 300 rises while small and mid-cap indices fall, it could further dampen sentiment and exacerbate tech stock declines, undermining market stability.
Since September 24, 2024, the technology sector has been the market's main theme, a point I have repeatedly emphasized. Over the past year-plus, many tech stocks reached new highs. However, no market rises indefinitely without corrections, nor falls indefinitely without rebounds. The recent tech pullback is a natural result of excessive prior gains and profit-taking, while traditional sectors rebounded from oversold conditions. This style rotation may persist for a period but is unlikely to be permanent. Once tech stocks adjust sufficiently and traditional sectors accumulate new profit-taking pressure, another rotation may occur. Investors should remain confident that genuinely earnings-supported technology and innovation sectors will eventually regain upward momentum.
Successful investing requires mastering contrarian strategies. During rallies, especially when others chase highs, it is crucial to remain rational and consider reducing exposure. Conversely, when tech stocks plummet and many investors capitulate, it often presents favorable entry points. Contrarian investing is a key method for value investment success. The renowned contrarian investor Sir John Templeton once stated that true long-term returns come from going against the crowd. He outlined three principles for navigating market downturns: first, exercise patience—avoid buying at the initial stages of a decline and wait for the market to bottom out, or as Buffett says, until people are reluctant to answer their phones; second, select truly quality companies—those with solid earnings prospects and leadership positions that can drive new highs; third, after buying on dips, ignore short-term volatility and hold for a sufficient duration. No one buys at the absolute bottom, and further declines may follow, requiring patience. Templeton held stocks for an average of four years, though in the more mature U.S. market. In the A-share market, holding for over six months is generally considered a decent cycle, as trends often last about half a year.
Charlie Munger humorously remarked that investing is simple: it involves buying stocks from desperate sellers and selling to euphoric buyers. This insight is worth reflecting on. During the recent market surge, I advised maintaining rationality and even cautioning against chasing highs, as overconcentration in a single sector risks being trapped at peaks, and leverage should be avoided. Buffett famously noted that with leverage, time becomes an enemy, not a friend. I previously shared the analogy of a bubble as a party where everyone drinks champagne and dances, reluctant to leave early, hoping to stay until 11:50 p.m., as after midnight, everything turns to mice and pumpkins. Unfortunately, there is no clock in the room to tell the time. During a Wall Street exchange, a Morgan Stanley executive humorously advised clients to "dance near the exit." This metaphor underscores the importance of recognizing risks, avoiding狂热, and maintaining rationality in investing. While bubbles may be believed in, one must not get too deeply involved; if signs of a bubble bursting appear, exit decisively. I previously suggested a reference indicator: reducing half-position if the Nasdaq index falls by 5%. Recently, the Nasdaq dropped 4.93% in one session, nearly hitting that threshold. Acting on such a signal could have mitigated much of the decline. Thus, during market euphoria, overcome greed; during pessimism or despair, maintain optimism. When most are pessimistic, sellers have likely exited, and remaining holders are prepared for the long term, suggesting a bottom may be near. Therefore, during sharp declines, conquer fear.
In summary, the technology rally is not over, nor is the broader market uptrend; only the phase of tech sector dominance has ended, giving way to sector rotation. Truly quality companies will regain momentum later, while speculative, concept-driven stocks may not recover. Investors should reassess their holdings: if they hold solid companies, stay invested and await the next upswing; if holding speculative stocks, even after significant declines, consider selling and switching to companies with strong earnings. This is a prudent strategy to navigate the current substantial market adjustment and prevailing uncertainty.
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