The broader market experienced a significant drop, yet two encouraging signals have surfaced beneath the surface, suggesting a potential bottom could form in the latter half of this week.

Contrasting Fortunes Within the Market

Over the past two months, the market has been dominated by a peculiar dynamic where technology stocks absorbed nearly all liquidity. Regardless of whether the overall index rose or fell, thousands of stocks declined daily. Technology and the rest of the market have been locked in a seesaw relationship, with capital flowing to only one side. Because the index is tied to technology, investors face a binary choice: either the index rises while individual stocks drift lower, or the index falls while individual stocks rebound. This is a classic dilemma of choosing between "face" or "substance."

Comparing leading technology stocks, or the ChiNext and STAR Market indices, against small-cap and value stocks reveals a clear pattern. During the recent consecutive days of technology declines, small-cap and value stocks have actually been consolidating sideways. This is typical of a zero-sum game where only one side can thrive under limited liquidity.

Understanding the Downward Cycle's Progression

An upward trend is a marathon, and a downward trend follows the same principle. The weakest stocks fall first, then the decline spreads, eventually reaching the strongest. This selling process resembles a basketball play: a slow advance, a ball movement, and a final acceleration to the basket. The rhythm involves a fast start, a slower middle phase, and a final acceleration.

Where are we now? Two key details stand out. First, the small-cap and value stocks, which were the first to be sold off, have already completed the entire cycle and are now in a sideways consolidation. Second, the technology sector is reaching its third phase, preparing to replicate the final bottoming-out stage of the small-cap and value stocks. This creates a curious situation: despite the index's sharp fall, individual stocks are now nearly evenly split between gainers and decliners. This is analogous to a month ago, when the index could rise while 4,000 stocks fell. The market is now squeezing out excesses and seeking a new equilibrium.

Strategic Positioning for the Current Environment

In this environment, perspective is everything. It's a matter of high versus low. For those holding lower-priced positions, a decline in high-priced stocks is actually welcome, as those higher-priced holdings cannot provide new capital without falling first.

Given this situation, we offer two key judgments. First, consistent with our previous assessment, the rise in high-priced stocks is not a sign of stabilization but a short-covering rally, suggesting it is time to exit. For low-priced stocks, the move represents a retest of the 5-day moving average. Using small-cap stocks and the CSI 2000 index as examples, stocks that successfully broke out should be held, while those that failed should be sold. The results are clear: technology stocks, impacted by an overseas sell-off, gapped down and only briefly faked a rally before declining. Meanwhile, low-priced stocks have shown divergence, with white liquor (core stocks) and lithium batteries attempting to push higher. Ultimately, those that defended their intraday moving averages survived, while those that could not faltered, leaving the small-cap index in positive territory.

Second, the period of consolidation is still insufficient. This is akin to physical fitness: a young person can play basketball daily with good endurance, but a middle-aged person can only manage once a week. When the opportunity is not clear, it is wise to continue observing and waiting. As we have stated before, a large decline is not a reason to buy, and the fear of missing out is not a reason to enter a trade. If you cannot withstand the decline, you do not have the right to buy the bottom. Act when you understand the situation; wait when you do not.

Disclaimer: This article represents personal views and is for reference only. It does not constitute investment advice. Stock market investment involves risk, and caution is required.