A-shares are pulling back in the middle of the day

Although the A-share market followed its usual midday plunge today, the overall trend remained relatively strong, especially the ChiNext Index, which at one point rose by more than 4%. My warning about risks yesterday turned out to be a misjudgment, but I still believe that the two issues I mentioned—the cooling expectations for a Fed rate cut and the U.S. elections—are objectively present. Moreover, a single day does not tell the whole story; as the elections approach, the pressure will undoubtedly increase.

Additionally, the two logics I mentioned were also confirmed by today's market, with the healthcare and new energy sectors surging. Although the Beijing Stock Exchange 50 Index once rose by more than 10% during the trading session, all gains were lost by midday, merely ephemeral riches. High-flying stocks like Runhe Software and Changshan Beiming did not continue their strength, indicating that speculative sentiment may be peaking and waning.

Let me explain why I support the rise of core assets such as consumer goods, pharmaceuticals, and new energy, but not the rise of speculative stocks.

Advertisement

Firstly, as everyone knows, A-share speculation often follows a pattern of rising and then falling, with few stocks that can truly deliver on performance. The end result is that a small number of large funds with information and capital advantages make a fortune, while most retail investors are left holding the bag at high levels, trapped by their positions. This is inherently a vicious game of wealth extraction.

After spending time in the A-share market, you'll find that the game is quite simple: it involves finding sectors that are at low levels and have clean ownership structures, then using logic that everyone can agree on to attract as much capital as possible. This logic can be based on fundamentals that can be realized or concepts that cannot be realized, as long as it can form a consensus among some people.

During the rise, there will be a continuous influx of capital and a continuous realization of gains. Generally speaking, the higher the stock price rises, the more steadfast retail investors' beliefs become. Until the funds that exit exceed those that enter, the stock price gradually forms a top, and eventually, the bubble bursts.

After this round of the game ends, capital will start another round, repeating a similar story. Of course, the winners from the previous round may not be the winners in this round, and not all winners are institutions; it is also common to see institutions getting caught in the trap.

Value investors might say that I am insulting value investing. Value and price are two sides of the same coin; we may invest based on value, but from a trading perspective, it is the exchange of chips.

Therefore, I am a staunch cyclicalist, with no bias towards any sector and no faith in any sector. I buy low as if it were precious jade and sell high as if it were dung. When prices rise too much, they will fall; when they fall too much, they will rise. Soros once said, "The history of the world economy is a continuous drama based on illusions and lies. To gain wealth, one must recognize these illusions, participate in them, and then exit the game before the illusions are recognized by the public."I've digressed; let's return to why I believe the so-called "tech innovation bull market" is not a true bull market.

After the Spring Festival in 2021, the CSI 300 reached its peak. With the Federal Reserve ending QE and embarking on the path of interest rate hikes, the bubbles formed by the pandemic's liquidity injections in global major asset classes burst one after another. However, the U.S., Japanese, and European stock markets had already hit new highs, while the A-share and Hong Kong markets were still a significant distance away from their 2021 peaks. Even with the sharp rise in A-shares before the festival, the CSI 300 still fell by 30%, and the Hang Seng Technology Index fell by 54%.

Have you ever wondered why? You might say it's due to economic downturns, and the European economy is worse than ours, with Germany in recession and Japan previously in a technical recession. The initial decline in A-shares might be due to the bursting of core asset bubbles and short-term economic downturns, which are cyclical factors. But as time went on, long-term factors such as the bursting of the real estate bubble, population aging, and insufficient resident demand took the lead in the narrative.

I remember last year, grand narratives like "deflation" and "the lost thirty years" were rampant, and this long-term pessimism suppressed the valuations of A-shares. The market once thought that after falling for three years, it would continue to fall for another four years, with core assets at 20 times high stock prices still considered expensive, and 10 times still too dear. Capital was not spent on consumption or investment but instead went to buy bonds, with the 50-year government bond yield lower than that of Japan, which is quite pessimistic.

So, what is the core contradiction of the economy and the market? It is insufficient demand, damaged balance sheets, and pessimistic expectations of low prices, as well as an unreasonable income distribution structure. Can technology solve this problem? Judging from past practices, it cannot. Over the past three years, high-end manufacturing exports such as photovoltaics, new energy vehicles, and semiconductors have made rapid progress, but the stock market is still in a bear market. Too strong exports can also trigger backlash from other countries; didn't the EU add tariffs on new energy vehicles?

Therefore, for A-shares and Hong Kong stocks to have a bull market, the core contradiction must be resolved. As I've mentioned before, this bull market in A-shares is inevitably complementary to reversing the vicious cycle of damaged balance sheets and low prices, and it must also be accompanied by the repair of core asset valuations. If it's merely a so-called technology innovation or thematic bull market, it indicates that the core contradiction has not been resolved, and it will still fall.

I've heard before that the National People's Congress, originally scheduled to be held at the end of the month, has been postponed until after the U.S. election. Yesterday, there were institutions saying that to protect market expectations, an additional meeting would be held at the end of the month. I just saw that the NPC has indeed been moved to November 4th to 8th, and the U.S. election results will be announced on the 5th. At this time, one could actually invest in the domestic demand sector. If Trump takes office, domestic demand policies might be intensified, and more uncertainty would lie in the export line.

The third-quarter reports are about to be disclosed, and performance will be shifted to next year. The stock market looks at marginal changes; if this year's performance is poor, next year's might be good. Consumption, pharmaceuticals, and new energy all have the potential for a turnaround in difficulties, and institutions have already entered the market to grab shares today.

Risk warning:The stock market carries risks, and investment should be approached with caution. This article does not constitute investment advice, and readers must think independently.