Following the sharp correction in technology stocks during July, market confidence is gradually recovering. With the Federal Reserve's rate hike decision now in the rearview mirror, investor sentiment toward the outlook has improved, and the broader market is poised for a rebound. I have consistently maintained, in agreement with Bridgewater founder Ray Dalio, that the prospects for AI technology development are vast and beyond doubt. However, this is not directly related to the market overheating in the short term and then correcting through a pullback to squeeze out bubbles. In other words, against the backdrop of significant AI technology growth, the market is likely to trend upward in a volatile manner rather than in a straight line, which can be summarized as mean reversion.
Earlier this year, AI-related stocks may have been trading at overheated levels, rising too quickly, particularly when the sector became crowded. For example, in May and June, when I warned of risks, the top 5% of stocks accounted for 50% of trading volume, with widespread retail enthusiasm and slogans like "Stand in the light, keep it in your heart" and "Don't just stand there, stand in the light." These catchphrases, combined with overly euphoric market sentiment, led to excessive gains. At that time, I advised a three-step strategy to mitigate the risk of bubble deflation: first, deleverage; second, reduce positions to half; third, avoid betting on a single sector by holding both tech and dividend stocks. This strategy helped many avoid the July decline.
In fact, the U.S. stock market decline in July was not severe, and the Nasdaq remained quite strong. However, the South Korean stock market, which had seen widespread retail participation and leverage, experienced multiple downside circuit breakers in July. This exacerbated the correction in China's A-shares and served as a warning to leveraged investors: once you add leverage, time is no longer your friend but your enemy. In just one or two months of decline, nearly 1.2 million accounts in South Korea were liquidated due to leveraged positions, a painful lesson. This downturn is not a bubble burst but a process of squeezing out froth, so there is no need for excessive worry.
Professor Gao Zhikai has predicted that the U.S. stock market might see a bubble burst before July 1 next year, but that is merely a forecast. Rather than guessing when a bubble might burst, we should observe. As long as the U.S. market remains stable, all is well. Overnight, U.S. stocks rose again, with the Nasdaq hitting new highs, particularly the chip sector led by Nvidia, which surged once more. This indicates that the U.S. market is still in a strong uptrend with no signs of a bubble burst. Many have asked, including in a live discussion with Professor Li Jinming last night, why we follow the U.S. market: when it rises, we gain less, but when it falls, we decline faster. In reality, foreign investment in A-shares totals less than 3 trillion yuan, accounting for only about 3%, so the impact is mostly psychological. My understanding is that the AI industry chain's leaders are in the U.S., such as the "Da chain," "T chain," and "Apple chain." If the leader's stock drops 20%, stocks in the supply chain could easily fall 50%. This was evident in April last year when a sudden trade war triggered by then-President Trump led to a near 20% Nasdaq correction, and many A-share tech stocks fell 30-50%, which is normal. Now that these U.S. leaders are surging again and may set new highs, our supply chain stocks are likely to regain momentum and rally.
Yesterday, I wrote an article titled "Fed Rate Hike Decision Lands, a New Rally Is on the Horizon." We are still in a volatile uptrend, not a bear market. Some financial influencers are shouting "bear market," but I believe they have not deeply grasped the logic behind this long-term rally. Whether from policy support or household deposit migration, this long-term uptrend is expected to continue. We must closely monitor U.S. market performance. I have shared a benchmark: if overnight U.S. stocks are stable, all is well. If the Nasdaq falls 5% in a single day, you should reduce positions by half at the 9:30 open. If it drops over 7%, triggering a circuit breaker, or even 10%, consider whether a crash is underway and clear positions decisively at the 9:30 open. In June, there was a trading day when the Nasdaq fell over 4%; applying this standard to halve positions would have reduced losses. We cannot predict the exact top or bottom, but we can use strategies to attempt to exit at highs and enter at lows.
The top-exit strategy I outlined in May, the three-step approach, has proven effective. At lows, the strategy is phased position building: if you hold less than half a position, add on dips, but keep total positions below 80%, always retaining flexible cash to handle unexpected declines. Market movements are rarely smooth, with many fluctuations along the way. Slow gains with sharp pullbacks are characteristic of a bull market, especially a slow-bull scenario. This is a normal pattern, not a trend reversal, so there is no need for undue concern. In the fourth quarter, a rebound rally is highly likely, and we can look forward to sector rotation. For instance, AI technology, which has earnings and orders, may see a solid rebound, with sectors like chips, servers, optical modules, and liquid cooling already starting to recover. Other sectors may also rotate upward: humanoid robots are showing early signs of life, with Musk's new Optimus V3 robot potentially debuting in Q4 as a key catalyst. Innovative drugs are experiencing a second wave of recovery, solid-state battery technology is making breakthroughs with mass production possible next year, and commercial space is advancing rapidly—SpaceX plans the 14th Starship launch by month's end. China has applied for 200,000 satellite frequency bands with the International Telecommunication Union in one go, making orbital slot preservation a strategic priority, as both China and the U.S. treat commercial space as a key strategic direction. Once orders and earnings materialize, these sectors could perform well.
Since early last year, I have highlighted six major tech sectors benefiting from AI as key areas to watch. While not all have released earnings yet—only chips and computing power have so far, with the other four still pending—they serve as a guide for this technological rally over the next two years, and I offer them for reference. Recently, Warren Buffett officially retired, with his son Howard Buffett as chairman and Greg Abel as CEO overseeing investments, separating ownership and management. This unique model preserves Berkshire Hathaway's culture while letting professionals do what they do best, which should reassure the market. Berkshire's semi-annual report shows Buffett remains cautious: aside from adding about $30 billion in Google (Alphabet) this year, he has bought few stocks. Cash and Treasury holdings still total $350 billion, equivalent to over 2 trillion yuan, with equity exposure below 40%. As U.S. stocks climb, Buffett has been reducing positions. His cautious approach—buying only certainty and avoiding trends—has been key to emerging unscathed from past tech bubbles. For smaller investors like us, we don't need to cut positions as early or as aggressively as Buffett. We should dance closest to the exit, closely watching U.S. market moves. If the Nasdaq is stable, all is well. We shouldn't be intimidated by warnings from big names; their concerns are long-term, not imminent. We can gauge when risks materialize by observing the U.S. market, as the world's smartest money trades there. As long as the U.S. market is fine, there's no need to worry. If a financial crisis hits, the U.S. market reacts first and plunges. Conveniently, U.S. trading hours are opposite to ours—while we are in daytime, it's nighttime in Beijing time—so make it a habit to check U.S. markets every morning upon waking. That's my advice.
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