2.3 Reflections After the Big Drop!

Brief note: The index chose to move downward under the pressure of a sharp decline in precious metals. Last weekend, promising sectors such as aerospace and AI, as well as the high-performing electric power sector, failed to drive the market recovery. After the market volume shrank and lacked follow-up funds, some funds chose to follow the decline on Monday afternoon, causing the index to hit new lows repeatedly. The sharp drop on Monday was a significant decline after emotions reached a freezing point. Positively, it worsened the sentiment further, with many funds passively stopping losses and losing the motivation to continue participating. Conversely, this was precisely the bottom of the emotional cycle, so we see many stocks in previously oversold sectors like AI applications and aerospace closing in the red but not hitting new lows. Instead, funds are gradually participating. For this market condition, I recommend following the trading strategy outlined in previous articles: buy at the emotional bottom and sell during recovery. Since Monday afternoon saw a sharp decline to new lows, if Tuesday morning continues to decline significantly and emotions hit a bottom, then Tuesday morning becomes a good point for strategic trading. Selling during recovery means when the index begins to form small positive candles and sentiment starts to recover, you can consider selling, which is a relatively good strategy during the ebb tide. As for the sector direction, it is still advisable to focus on performance and earnings expectations. During this phase, avoid over-participating in concept sectors. Next, let’s analyze the index levels and sentiment cycles:

1. Index Cycle Thinking:

The previous forecast for the index was incorrect. In the context of a plunge in precious metals, a certain sector did not choose to defend the market, leading the index to collapse directly due to a batch of limit-down stocks in precious metals. As previously mentioned, when a sector shows limit-down stocks, special attention is needed because quantitative strategies will execute collective sell-offs based on limit-down stocks. Clearly, Monday was such a day, and in the afternoon, many funds triggered passive stop-losses. What we saw was the index dropping in the morning, continuing to fall in the afternoon, and without any defending funds, it created the largest decline recently. Regarding the future trend of the index, in the medium to long term, after a big drop, a decline with shadowing (阴跌) is inevitable. In the short term, after a sustained big decline, a recovery is certain. Therefore, short-term rebound and medium-term adjustment are the main expectations. This is my thinking on the index cycle.

2. Sentiment Cycle Projection:

First, Dragon Analysis: On the first day of February, the index plunged, sentiment hit a freezing point, with over a hundred limit-down stocks. This is a typical early-month trap. It can be compared to January 2nd last year, which also saw a large downward candle at the start of the month, followed by a month of consolidation. After new themes emerged before the New Year, the market gradually entered an upward trend. The early-month decline indicates that both the index and sentiment this month are unlikely to be good. It’s important to note that in a weak market, crowded positions are common, so February’s true dragon is likely to be a crowding dragon. From Monday’s sector perspective, stocks in AI, aerospace, and electric power sectors are starting to show signs of emergence; observe for two days before making further judgments.

Second: Opportunity Analysis: After the decline on Friday, the index fell sharply again on Monday, with over a hundred limit-down stocks, indicating very low sentiment. Theoretically, whether it opens lower or significantly lower on Tuesday, bottom-fishing funds will likely enter. The key is to observe the sectors these bottom-fishing funds participate in. Based on the article’s logic, after January’s various sector hype, February should focus on performance and earnings expectations, avoiding pure concept plays. The best-performing sector on Monday was electric power, supported by official media and solid actual performance. Next are AI applications and aerospace. These sectors are large, with many stocks, but few with actual earnings expectations and revenue, so investors need to be cautious. Regarding AI applications, focus on GEO-based stocks and those with revenue. During a weak index period, participate more on the left side of the cycle, buying at emotional lows and selling during recovery. As for aerospace, I’ve written about it multiple times; the three main directions are recyclable technology, SpaceX suppliers, and the domestic satellite industry chain. Overall, with two weeks until the Lunar New Year, decreased trading volume during this period is normal. The market will mainly be dominated by crowded positions, so pay attention to trading rhythm. It’s recommended to adopt small positions, quick entries and exits.

Special Reminder: The above information is for reference only and does not constitute investment advice. There are no stock recommendations! Investment involves risks; please trade cautiously!