The stock market's performance today has left many investors disheartened, as the A-share market experienced a significant correction with widespread declines across individual stocks, many of which saw substantial losses.
At the close, the Shanghai Composite Index and the Shenzhen Component Index fell by 2.06% and 3.48% respectively. The ChiNext Index and the STAR 50 Index dropped by 3.10% and 3.42%.
The total market turnover was 2.83 trillion yuan, a decrease of 576 billion yuan from last Friday. Only 801 stocks advanced, with the median change among all stocks being a decline of 4.19%. The average share price index fell by 5.11%.
Key Index Levels Breached
Today, six major broad-based indices, including the Shanghai Composite, Shenzhen Component, CSI 300, ChiNext, CSI 1000, and CNI 2000, all fell below their June lows.
Furthermore, the Shanghai Composite Index not only broke below the triangle pattern that had formed since March but also saw its moving averages align in a bearish formation. The critical annual moving average has been breached, suggesting the market still possesses downward momentum.
Historical Precedents for Market Recovery
Historically, the Shanghai Composite Index has breached its annual moving average during major bull markets, such as in July 2021 and February 2001. Following these breaches, the market rebounded and experienced sideways consolidation for five to six months.
Similarly, the ChiNext Index has either broken below or approached its annual moving average during significant rallies, for instance in March 2021, May 2014, July 2014, and January 2015.
The current situation with the ChiNext Index bears some resemblance to the first quarter of 2021.
After peaking in a wave in July 2020, the ChiNext Index consolidated for nearly five months, briefly dipping below its semi-annual moving average before embarking on a new upward trend.
In October 2025, following a wave peak, the index consolidated for about six months, also slightly breaking its semi-annual line before starting a rising phase.
Interpreting the Current Downturn
Based on this history, a breach of the annual moving line by the Shanghai or ChiNext indices does not necessarily signal the end of the bull market. However, any subsequent rally might represent a final upward wave, potentially including high-volatility, range-bound trading at elevated levels.
The major bull run since 2024 has rested on three macro foundations: global liquidity easing, fiscal expansion, and the AI technological revolution, supplemented by domestic policy efforts to boost capital markets. Notably, the AI bull market has been a global phenomenon.
On the policy front, the Politburo meeting on April 28 this year emphasized "stabilizing and boosting confidence in the capital market," a statement made just over three months ago.
However, expectations for continued global liquidity easing have weakened, primarily due to significantly heightened expectations that the US Federal Reserve may not cut interest rates further. Concerns about an AI bubble are also growing.
Market Dynamics and Sector Rotation
Since 2025, the market has shown pronounced divergence, which has become more evident this year. Apart from technology stocks, most other sectors have underperformed.
Just as the frenzy for tech stocks reached a peak, a style rebalancing occurred, with the securities sector playing a pivotal role during this shift.
Major funds have frequently rotated into lower-valued sectors like securities and insurance, continuously unsettling holders of technology stocks. What is the purpose of this?
The aim is clear: to maintain a market balance and narrow the performance gap between sectors, ensuring not only tech stocks reap gains while other sectors languish.
Navigating Market Volatility
Therefore, it's crucial to view the current market adjustment rationally. There is room for optimism regarding another potential market rally.
Nonetheless, the current market conditions are undoubtedly frustrating, with some investors becoming desensitized to the declines. Successful investing requires adaptability. In unfavorable market conditions, it's wise to be flexible, adopt a cautious approach, reduce activity, or maintain light positions.
It has been consistently emphasized that during a downturn in the main market theme, increased effort often leads to greater losses. Investors who have been aggressively trading or holding heavy positions recently to chase profits have likely suffered considerable setbacks.
Sector Performance and Key Indicators
In terms of sectors, oil, banking, and coal led gains among industry groups, all being defensive sectors. Previously leading sectors like components, semiconductors, and communication equipment were among the biggest decliners.
It was noted that the July 6 low for the semiconductor and communication equipment sector indices was a critical level. A breach would likely accelerate capital outflow from tech stocks. Today, both indices fell below their July 6 lows.
As the main theme recedes, most other sectors are also suffering. Whether the overall market or tech stock performance can improve likely hinges on a key bellwether: the AI sector leader, Zhongji Innolight.
In the rally since 2024, Zhongji Innolight's role has been analogous to that of Kweichow Moutai and Contemporary Amperex Technology (CATL) during the 2020-2021 period.
If Zhongji Innolight's performance improves, the broader market could see significant recovery. Conversely, if its stock price continues to decline, the market may remain relatively weak, particularly in the AI hardware and semiconductor sectors.
Final Assessment
In summary, today's market adjustment was not entirely unexpected. The breach of June's lows indicates the correction is not over. Given the global nature of the AI rally, subsequent focus should be on the trends in US and South Korean stock markets, alongside watching for any new leading sectors to emerge.
It is essential to approach market adjustments with rationality rather than complaint, as the latter offers no benefit to one's investment portfolio.
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