Guosen: Tech chips clearing out, how far along are we?

Guosen released a research report stating that tech selling pressure is disrupting market trends. Leveraged funds, active equity public funds, short-term foreign capital, and insurance capital have cleared out roughly 10-20% of their holdings from peak levels, while private funds, long-term foreign capital, and fixed income+ products have cleared out roughly 30-40%. Tech rallies typically present two waves of opportunity, with holdings clearing out 20-30% from the first peak to the trough. In most cases, the less the clearing, the higher the rebound in holdings during the second wave. The current clearing of tech sector holdings and sentiment release is already more than halfway through. Going forward, market direction will depend on changes in three major factors: industry fundamentals, holdings, and overseas liquidity. Guosen's main views are as follows: Market selling pressure still exists, constraining a full recovery of the tech rally. The A-share tech sector has continued to pull back recently, but within tech, small- and mid-cap tech stocks have been relatively resilient, with declines notably smaller than large-cap tech stocks. On one hand, looking at concept indices, taking the CPO index as an example, as of 10/16, the index itself had risen 8.6% cumulatively since August, while CPO leaders Zhongji Innolight and Eoptolink Technology Inc. fell 25.6% and 22.5%, respectively, both significantly underperforming the index itself. On the other hand, institutional holdings in tech rose markedly in Q2, and large-cap tech stocks overlap heavily with institutions' heavily weighted holdings. Further examining the institutional ownership ratio of overseas computing power names in 26Q2 and their market performance since August, the correlation between the two is significantly negative. In addition, looking further at intraday market performance after the holiday, net subscriptions to broad-based ETFs have increased notably since late September, providing support for market liquidity, but the tech sector has frequently surged and then pulled back after the holiday, such as on 10/13, 10/14, and 10/16. In summary, tech stocks with concentrated institutional holdings have performed poorly recently, dragging down a full recovery of the tech rally. Combined with the tech sector frequently surging and then pulling back in the afternoon after the holiday, Guosen believes this may be related to lingering institutional selling pressure and holdings and sector sentiment not yet being fully cleared out. Guosen has analyzed in multiple reports, including "Revisiting the Tech M-Top: When Will the Second Tech Wave Come? -20260808," that historically each round of tech rally has presented two waves of opportunity, exhibiting an M-shaped double-top pattern. From the first peak to the trough, valuations and crowding will fall significantly, with PE declining by an average of about 52%, PB by 50%, and the share of trading value and turnover rate declining by an average of nearly 40%. Below, drawing again on the experience of historically high-growth industries, we analyze the clearing of holdings across different samples to see whether institutional tech holdings have been sufficiently released this round. From the first peak to the trough, historically capital holdings have on average cleared to 70-80% of the prior high. Using the holdings share at the left-side peak of the M-top as the baseline, the holdings structure of various types of capital mostly clears to 70-80% of the peak at the low point. Specifically, leveraged funds, public funds, and foreign capital have on average seen a lower degree of clearing, while private funds, insurance capital, and fixed income+ have seen a higher degree of clearing. In ascending order of clearing degree, the average holdings share at the low point as a percentage of the prior high for leveraged funds/active equity public funds/stable foreign capital/flexible foreign capital/private funds/fixed income+/insurance capital was 86%/85%/84%/77%/77%/73%/72%, respectively. However, differences in the clearing of various types of capital objectively exist. For example, in the 2010-11 consumer electronics rally, active equity public funds cleared at most to 50% of the peak at the low point, while in the 2021 semiconductor rally, the M-top low was reached even without a notable decline in their positions; insurance capital in the 2021 semiconductor rally cleared at most to 60% of the peak at the low point, while in the 2021-22 battery rally it cleared only to 90% of the peak at the low point. From the trough to the second peak, the smaller the degree of capital clearing, the higher the rebound in holdings. Typically, the degree of clearing at the low point for each type of capital is negatively correlated with the rebound magnitude at the second peak. In descending order of second-peak height, the average holdings share at the second peak as a percentage of the first peak for flexible foreign capital/stable foreign capital/active equity public funds/leveraged funds/insurance capital/private funds/fixed income+ was 143%/131%/116%/111%/98%/87%/78%, respectively. Specifically, active equity public funds in the 2021-22 photovoltaic equipment rally had a smaller degree of clearing, with the second peak rising 57 percentage points from the low point; fixed income+ in the 2015 communications equipment rally cleared relatively fully at the low point, with the second peak even falling 7 percentage points from the low point. But there are exceptions in history, where the more thorough the capital clearing, the larger the rebound instead. The most typical example is foreign capital: long-term foreign capital in the 2021 semiconductor rally cleared only 10%, and the subsequent rebound was only 15 percentage points; short-term foreign capital in the 2021-22 energy metals rally cleared heavily, rebounding about 123 percentage points from the low point to the second peak. Back to the present, as data disclosure becomes more complete, we analyze the latest clearing of the tech sector from two dimensions: institutional holdings and sentiment indicators. From the holdings perspective, most capital has cleared to near or above the historical average level. The degree of clearing differs across capital types, which can be divided into three categories. Specifically: (1) High degree of clearing: long-term foreign capital, private funds, fixed income+. Long-term stable foreign capital held 23% in electronics + communications in Q3, clearing about 30% from the Q2 peak; based on the sector allocation ratios of constituent funds of the China Resources Trust CREFI index, private fund tech holdings in August cleared about 30% from the prior peak; among fixed income+ funds estimated to be heavily weighted in tech, the share of fund scale that may have adjusted positions is already close to 60%, and estimated tech positions have cleared 40% from the Q2 peak. The clearing degree of the above capital is already significantly higher than the historical average level. (2) Medium degree of clearing: active equity public funds, insurance capital. The share of active equity public fund scale currently heavily weighted in tech and suspected of adjusting positions may reach 30%, clearing about 10-20% from the Q2 peak under the same methodology; for insurance capital, using a constrained robust regression of industry index returns against the NAV returns of active equity insurance asset management products, and taking the sum of the coefficients for electronics + communications as the estimated position, as of 10/15, insurance capital's estimated holdings in electronics + communications were about 16.4%, clearing about 20-30% from the peak. The clearing degree of the above capital is relatively close to the historical average level. (3) Low degree of clearing: short-term foreign capital, leveraged funds. Short-term flexible foreign capital currently held 26% in electronics + communications in Q3, clearing about 20% from Q2; among current margin balances, electronics + communications account for about RMB 590 billion, or 25.1% of the total, clearing about 10% from the peak at the end of June. The clearing degree of the above capital remains near the historical minimum. From the sentiment indicator perspective, trading heat has fallen to near historical lows, while valuation indicators remain slightly above the average. As of 10/16, in terms of trading heat, the turnover rates for electronics and communications were 2.5% and 1.2%, respectively, with average declines from their respective end-June peaks of nearly 60%, close to the largest historical declines; in terms of valuation indicators, the PE for electronics and communications was 50x and 41x, respectively, and PB was 5.2x and 4.8x, with PE down to 50% of the prior high and PB down to 57%, already relatively close to historical average levels. Combining the analysis above, the current round of tech holdings clearing may have entered the latter half. Holdings in long-term foreign capital, private funds, and fixed income+ have cleared relatively fully, while active equity public funds, insurance capital, short-term foreign capital, and leveraged funds may still have room to clear. In addition, trading crowding has also eased significantly. As capital holdings and sentiment indicators gradually clear, historical experience shows that the relevant sectors already have considerable room for rebound. If subsequent industry fundamentals see new catalysts and overseas liquidity conditions stabilize marginally, favorable factors may emerge, and an A-share year-end rally is worth anticipating, with the second tech wave gradually unfolding. Risk warnings: Historical data does not represent the future; some capital data are estimates and may differ from actual conditions.