A-Share: Post-Rally Worry Revealed by High-Low Pattern

Medicine is not about quantity; it's crucial to address the condition effectively.

Yesterday, the "one line, one bureau, and one association" launched a market-rescue combination punch that greatly exceeded market expectations, reviving the market instantaneously and causing a certain level of excitement. This was more effective than the more than 50 institutional measures introduced over the past year.

Firstly, the impact of the combination punch is much greater than the gradual release of favorable news, akin to squeezing toothpaste. Secondly, this time, the focus is directly on the root cause, concentrating efforts to increase the market's capital supply.

Yesterday, the Shanghai Composite Index surged by 4.15%, marking the largest single-day increase in four years. The strength is not to be underestimated, far exceeding the rise on July 31st, so it is unlikely to fall the next day. As expected, the morning session indeed saw a gap-up surge, but the issue was that the opening was too high, and the short-term effort was too strong, leading to insufficient short-term capital to continue the rally, resulting in a high retreat. However, the closing still rose by 1.16%, which is a very good trend. Of course, if you chase high today, you will naturally be hurt.

Statistical data shows that since 2000, the Shanghai Composite Index has risen by more than 4% on a single day 56 times, with the most recent occurrence being four years ago, on July 6, 2020. After the previous 55 significant increases, the market continued to rise the next day, and within a month, the index also rose. Today, the Shanghai Composite Index naturally rose, and I believe it will not disappoint everyone in the next month.

From the perspective of historical patterns, it indeed gives investors a reassuring pill. As long as you do not excessively chase highs in the short term and hold firm to your stocks, you are likely to reap rewards.

The intensity of this policy-driven market rescue is unprecedented. Never before has so much good news been released in a single day, and most of it directly targets the capital side. It has truly achieved a targeted approach. The concentrated release of significant favorable news naturally brings an unprecedented level of market stimulation. Of course, we do not want to see the market explode in the short term; we prefer the market to advance steadily and slowly, truly entering a slow bull market.

In addition to the central bank's measures of lowering reserve requirements and interest rates, and directly injecting liquidity into the market by reducing existing housing loans, external factors affecting the market have also changed significantly. As the Federal Reserve enters the interest rate reduction channel, the renminbi exchange rate has appreciated sharply, returning to the vicinity of 7 yuan. Today's morning session even broke through the 7 yuan mark, returning to the 6 yuan range, and it is a general trend for it to stabilize in the 6 yuan range in the future. The sharp appreciation of the renminbi exchange rate has also triggered a surge in overseas Chinese assets.

Although the market experienced a high retreat today, there were still more than 4,000 stocks rising, and the trading volume continued to increase significantly to 1.16 trillion yuan. However, the rapid increase in trading volume in the morning led to insufficient follow-up capital, resulting in a high retreat. The ideal trend for today would have been to retrace downward and then rise again. But the market continued to attack with a significant gap-up opening, which is naturally greatly related to the further fermentation of the news. This fully demonstrates that the current investor sentiment has been activated. However, this rapid rise is not conducive to the development of short-term trends, but as long as the market can continue to release a large volume, there is no need to overly worry about the adverse effects of short-term high retreats.

The only thing that causes unease today is the attitude of institutional funds. Domestic institutional funds continued the inflow trend from yesterday in the morning session, with the maximum inflow exceeding 10 billion yuan, but they soon began to outflow. By 2 pm, the outflow exceeded 10 billion yuan. The net outflow for the day was 14.4 billion yuan. Over the past year, domestic institutional funds seem to have never had a net inflow for two consecutive trading days, and it seems that this time is no exception. It is unclear why such a strong market rescue measure cannot arouse the interest of domestic institutional funds. It is really intriguing. In fact, when the market surged yesterday, domestic institutional funds only inflowed by more than 2 billion yuan, giving the impression that the institutions lacked confidence. Unexpectedly, today they began to outflow significantly again. However, the selling pressure of institutional funds seems insignificant in the face of a large number of retail purchases. But when the enthusiasm of retail investors is almost exhausted, if institutional funds continue to insist on a net outflow, it will be difficult for the market to rise again.Short-term trading doesn't require too much contemplation; just go with the flow, as long as you don't chase highs excessively. There's no need to worry if you get caught in a short squeeze.

Although there have been issues with the rhythm of short-term trading, which inevitably leads to an extended adjustment period for short-term market trends, there is still confidence in the upcoming market movements. This confidence is not only based on historical patterns following a single-day surge but also stems from faith in the rational policy measures.

The current market intervention has surpassed the efforts made in 2015, when liquidity was only injected into four or five funds. This time, all securities firms, fund companies, and insurance companies are allowed to pledge stocks and ETFs for re-lending from the central bank, with a loan interest rate of just 1.75%. The initial quota is 500 billion, and if needed, another 500 billion can be provided, with the possibility of a third round and so on. Essentially, it's akin to unlimited liquidity injection. Additionally, there are special loans for listed companies to increase holdings and repurchase shares, with an initial quota of 300 billion, which can also be increased based on market changes.

These rescue measures are unprecedented and have overturned many people's perceptions. Previously, loan funds were not allowed to enter the stock market, but this time, it's explicitly stated that the funds must flow into the stock market.

Of course, the current market intervention cannot be compared to the four rounds of quantitative easing by the Federal Reserve in 2008. However, for the A-share market, it's not really about a lack of funds; it's about a lack of confidence. With the government's policy stance, people feel more secure and immediately feel empowered. Understanding the policy intentions, the market is far from helpless; there are plenty of solutions. We have the advantage of our system, so market intervention should not be a significant issue. However, the precondition for market intervention must not be artificially forcing growth or further damaging the market's ecological environment. Intervention should focus more on restoring the market's self-regulation capabilities rather than constant interference.

The goal of market intervention is to restore the market's self-sustaining capabilities, so this process will definitely be slow. It's also important not to fall into the psychological trap of thinking that the market will immediately continue to rise significantly, with the national team rushing to buy shares, and worrying about whether you can get on board or not. Of course, the transition from the quiet market interventions of the past to the more publicized ones this time is also aimed at stimulating the sensitive nerves of retail investors, giving them strength, and helping them regain confidence. However, the issue is that the market has always been dominated by institutional funds, and the performance of domestic institutional funds is inevitably concerning. This attitude of domestic institutional funds is enough to warn retail investors that there's no need to worry about a significant market surge in the short term; yesterday's high-volume big阳线 does not immediately signal the start of a bull market.

Yesterday, Governor Pan also stated that the "stabilization fund is 'under study'," which is naturally a long-term strategic move, ensuring long-term stability and positive development. Once the stabilization fund is introduced, it will be akin to a stock market participant, acting as a stabilizer for the market, similar to the function of a "damping device" in a skyscraper. The stock market will then have an additional natural regulatory function, preventing extreme market movements with significant ups and downs. After a decline, there's no need to panic and scramble, which often leads to a messy situation.

When will the stabilization fund be introduced? It can only be said that good things take time. However, we must not forget the pain once the wound is healed. Every time the market plummets, the stabilization fund is put on the agenda, only to be shelved each time. It has been at least five years since there has been any news. The hope is that this time it will truly be introduced to provide a safeguard for the long-term healthy and stable development of the A-share market. The A-share market has never been synonymous with a bear market. The reason it has been bearish for so many years is not due to the A-share market itself but due to the artificial destruction of its ecological environment.

Now, both domestic and foreign capital have become the main force in driving down the market. Since the last closure of the northbound capital channel, northbound capital has been short-selling continuously. Originally, there was a net inflow of 90 billion this year in the first five months, but in the end, there was still an outflow of more than 40 billion. Foreign capital has gone from being a lifesaver to a troublemaker. Of course, the outflow of foreign capital is also out of helplessness. If the market moves steadily upward, foreign capital would naturally not flow out significantly. Yesterday, the northbound transaction volume increased by 18%, which must have been a significant inflow, and today will be no exception.

Believe in the power of policy. If various institutions can inject a large amount of capital and the stabilization fund can provide protection, I believe the A-share market has the potential to enter a slow bull market track.Back to the market, after the volume increase and price lift yesterday, it is important not to rush into action. In the short term, haste makes waste, and if you rush, the price may rise quickly but fall just as fast. The key to a bottom volume lift is to establish confidence. However, to effectively reclaim the 2900-point mark, there must be ample fluctuation, turnover, and consolidation.

The market opened with a rapid volume increase and a significant rise, warning investors that the short-term effort was too aggressive, and it would be difficult for subsequent funds to continue the momentum. Therefore, it is crucial not to chase highs. As expected, the market fell back in the afternoon. It is essential to maintain a calm mindset and not blindly chase after price increases. For me, I only seize opportunities after a pullback and never chase the rise. I do not believe the market will declare the start of a bull market with a single big upward candle.

In terms of opportunities, focus on high-performing, undervalued quality companies with net asset value breaks; companies with strong market value management requirements; high-quality companies expected to upgrade through the acquisition of new productive forces projects; and the new productive forces sector with超跌 low valuation and high-quality growth, such as Huawei concept, information technology innovation, computer calculation, computing power, domestic substitution, artificial intelligence, and digital economy, which are particularly worth investors' attention at this stage to seize opportunities.

Now, only by thoroughly understanding the policies can one avoid blind optimism in the short term and pessimism in the medium term.