A-Share Market and Human Nature: No Greed in Surges, No Fear in Pullbacks

It has been only three weeks since then.

Since September 24th, the fear and despair before the market explosion have quickly evolved into the fervor and madness after the outbreak, and then to the restlessness and frenzy amidst the divergences after the holiday. Emotions have been expressed as if in a tidal wave, vividly and thoroughly, making it a rare case in behavioral finance.

The brand of a bear market can only be reversed by a majestic actual rise; the market indeed needed such a surge. However, after the intense scramble for shares, the rare rapid rise has also to some extent overdraw the short-term space, and the market is experiencing the "cost" of returning to normalcy.

Sudden surges and sharp declines often lie in a single thought. Standing at the present moment with increasing divergences and complex investor sentiments, qualitatively speaking, the "thousands of stocks hitting the daily limit" and the "Shanghai Composite Index surging 600 points in five days" that we have experienced, what kind of market trend is this? What about the outlook? And how should we respond?

The market is fragile yet resilient, fearful yet fanatical.

No one could have anticipated that in just a week, the hottest narrative in the market would have changed so drastically; nor could anyone have foreseen that the long bear market from 3,500 points to 2,700 points took three years, but returning from 2,700 points to near 3,500 points only took six days. (Data source: Wind)

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The week starting on September 24th saw a comprehensive rise in major Chinese stock indices, with A-shares and Chinese concept stocks leading the charge, followed by the consumer, healthcare, and real estate sectors. The Shanghai Composite Index surged by over 600 points, with a gain of more than 20%, which is also rare in history.

The market needed such a surge. What exactly changed behind the surge? Behind the policy combination before the holiday was a directional change in policy orientation; some facts have been seen clearly, and some decisions have already been "launched."

If the long-term downturn and historically low valuation levels were the conditions for a rapid outbreak, then the enthusiastic response to the policy's unexpected benefits was the core. And the overall background and atmosphere were the high market sentiment, the expression of people's hearts, and a strong correction to the pessimistic "linear extrapolation."Qualitatively speaking, this round of market movement is set against the backdrop of a decline in the risk-free interest rate, with a policy shift as the core driver, and opportunities arising from the joint improvement of domestic and foreign risk preferences. If fiscal policy continues to exert force and the economic fundamentals gradually improve, we are inclined to believe that the market will have the potential to transition from a rebound to a reversal, which will not be a simple and short-lived increase.

It is undeniable that the prices of current high-quality assets still have a significant room for valuation repair, and there may be good returns in the medium to long term. Therefore, for investors, it may be more important to maintain a base position and choose to hold stocks rather than cash.

However, after the rare rapid rise before the holiday, investors generally made profits and recovered their losses. The emergence of an inflection point led to an urgent need to sell, causing some divergence in the market. In the first few trading days after the holiday, it was evident that there was a significant divergence in trading ideas, with a back-and-forth between cashing out and chasing highs. On the first day, the market opened high and then fell back; on the second day, the market adjusted significantly; on the third day, driven by news, there was an N-shaped trend; and today, the market fell again, coming below 3300 points.

In the short term, the market's direction is mainly determined by changes in funds and investor expectations. During the waiting period for incremental information, fund sentiment tends to be rational, and the market shows signs of "returning to normal," which means that the short-term "crazy rise" may cool down marginally. Of course, "returning to normal" does not mean that the market "stops here," but rather indicates an increase in the game-playing element. Historically, when the market enters the post-lift game period, key signals will announce the winner between "cashing out" and "chasing highs," thereby affecting the direction of the subsequent market movement.

Looking back at previous rounds of "high volatility main rising market movements," it is quite normal to have such adjustments after a rapid short-term increase. Since 2014, there have been six index-level market movements: in the initial stage of 10-20 trading days, achieving a 20%-40% increase, then entering a consolidation adjustment phase, and then entering another round of increases, continuing the bull market.

In the long term, we remain relatively optimistic. The overall valuation level of A-shares is still attractive, and the inflection point of the valuation cycle has just appeared, similar to what everyone says is the first wave of the bull market. After the explosive rise driven by policy and sentiment, and the repair of valuations from a low point, the market needs to return to calm. However, the prelude to the continuous improvement of the medium-term valuation center may have just begun. Therefore, for short-term highs, one can gradually take profits, but under the optimism for the long term, one should also maintain an appropriate base position and replenish positions after emotions gradually cool down and the index adjusts.

Perhaps a "crazy bull" has already fulfilled its mission, the equity market has awakened, the bull market thinking has planted seeds in people's hearts, and the direction has been seen. After the initial general rise and repair, the market is likely to enter a stage of fluctuating "prolonged war." Therefore, one should have confidence strategically but still needs to be a bit patient tactically.

Vulnerable yet resilient, fearful yet fanatical. In such a market, focusing on fluctuations is merely technical analysis, and the more critical aspect is strategic choice. The significance of the fluctuation period is not in short-term gains and losses but in the medium-term structural adjustment. This is also what is referred to as "it is more important to embark on the bull journey than to reach the summit."

Human nature:

Do not be greedy because of a sharp rise, and do not be fearful because of a retreat.Bull markets are often seen as a golden period for making money, yet historical experience suggests that the truth is often more complex than imagined. The investment guru Graham once said, "Bull markets are the main cause of losses for the average investor."

After discussing the market, what should we do? We focus on the present. Following the recent market surge, a rare phenomenon has begun to emerge: regardless of the level of investment, investors seem to have fallen into a general state of anxiety.

The reason behind this is that gains and losses have the same origin. Those investors who have benefited the most from this wave of growth are often those who have experienced the deepest trials in the previous bear market. They are worried about how to operate after breaking even. For investors with lighter positions, although they successfully avoided the previous decline, they are also prone to miss sudden surges and feel confused about the timing of getting on board after missing out.

Rational analysis shows that the current situation we face is: even after a significant increase, A-shares and Hong Kong stocks' broad-based indices are still in a relatively undervalued "lowland" on a global scale, which can be determined; and the unprecedented attention to the capital market at the policy level is also certain.

Of course, behind this liquidity-driven "water bull" market, it is the market's investment enthusiasm that truly ignites the market. In other words, the uncertainty we face may be precisely the most unpredictable human nature.

Therefore, at this moment, the importance of investment discipline surpasses everything. What we need to do is not to "predict" the future but to learn to "respond" to changes.

Firstly, manage emotions well. The more eager you are to break even or enter the market to make a profit, the more you need to remain calm.

Since the correction in 2021, many assets have been falling for nearly three years in a row. The probability of another "bear" year seems much lower than the possibility of going up. Therefore, investors who are already in the market may want to abandon bearish thinking and focus on the long term.

At the same time, we should recognize that too fast a rate of increase may to some extent overdraw the space for a phased increase. The cycle's evolution is often not smooth sailing but constantly moving forward in twists and turns. Therefore, investors who have missed out need not be overly anxious in the short term, as the market is never short of opportunities.

In addition, use leverage cautiously. The fluctuations in the right side of the bottom often amplify, and once unreasonable financing and leverage are used, complex mindsets and emotional changes can easily affect operations, which is more likely to amplify damage and cause "permanent loss of principal."Secondly, based on the concept of asset allocation, make a good layout and manage positions well in conjunction with market valuations.

The more confused the times are, the more one should ignore the noise and adapt to changes through diversified allocation. The core of deciding whether to add or reduce positions at present does not lie in the outside noise, short-term fluctuations, nor in the longing for a grand narrative about the future, but should focus on two key "anchor points":

One is the market valuation - that is, the current level of the index;

The second is the individual's investment portfolio - especially the allocation ratio of equity assets.

On this basis, we need to find a balance between market fluctuations and personal asset allocation to decide whether to take profits and convert assets at a relatively high level, or to lay out positions at low levels and wait for further return of value.

For example, if the direction you are optimistic about is still not highly valued and you still have room in your equity position, you might as well buy in batches and gradually increase your position to the long-term target ratio of equity assets; the opposite is also true.

Of course, on the specific operational level, you can also learn from some methods with higher winning rates. For investment, if there are two simple and wise "Ockham's razors", one is the "timeless" fixed investment, and the other is the "stock-free" index fund. They may seem ordinary, but they may be the most simple and unadorned in investment, yet they can stand the test of time and are "difficult but correct".

Do not be greedy because of a sharp rise, and do not be afraid because of a drawdown. In the carnival dance, investors are often easy to lose their way, ignore risks due to overconfidence, and cause greater losses under heavy bets; in the torrent of drawdowns, fear rises to the heart, and even the loss of gains increases pain, and the operation deforms, amplifying the loss of profits. In fact, these emotions are unnecessary.