Guosen: Market stabilization requires three opportunities.

Guosen released a research report stating that A-shares have continued to adjust since late September, with the decline even accelerating this week. The Shanghai Composite Index briefly fell below 3700 to hit a new low for the year, and the ChiNext Index also hit a new low for the year. Market stabilization and upward movement require attention to three opportunities: Opportunity 1: Improvement in external disturbances, such as easing overseas inflation pressure, improvement in liquidity tightening expectations, and weakening suppression of risk appetite. Opportunity 2: Alleviation of crowded tech positioning. Currently, long-term foreign capital and private equity holdings have clearly declined, while short-term foreign capital and leveraged funds still need further clearing. Opportunity 3: Improvement in the stock market funding situation and easing of fundamental concerns form a synergy, such as market stabilization forces entering the market + positive fundamental expectations, boosting market confidence. Guosen's main views are as follows: A-shares entered an adjustment in late September and have not shown signs of stabilization after the National Day holiday. The decline further accelerated this week, market sentiment remained sluggish, and total A-share turnover has shrunk to about 1.5 trillion. This round of adjustment is the result of both internal and external factors: externally, high oil prices have pushed up US inflation and rate hike expectations, and US Treasury yields remain elevated, suppressing risk assets. Internally, the positioning and sentiment in the tech sector have not yet been fully cleared, and insufficient stock market funding support has amplified market volatility. Starting from the reasons for the market adjustment, analyze the opportunities for subsequent market stabilization. Opportunity 1: Clear improvement in the external environment. Overseas disturbances were the trigger for the recent A-share adjustment. Repeated Middle East conflicts and persistently high international oil prices have increased market concerns about recurring inflation. US September CPI rose to 3.7% year-on-year and PPI rose to 6.3% year-on-year, both exceeding market expectations. As inflation pressure heats up, the market has begun increasing bets on two Fed rate hikes within the year. Combined with the 10Y US Treasury yield still at a high level above 5%, stock valuations and risk appetite continue to come under pressure. In addition, confidence in the AI narrative has been shaken, and overseas tech sectors have seen large fluctuations. Since early October, the Philadelphia Semiconductor Index has had a maximum drawdown of 16%. Against this backdrop, external disturbances have transmitted to A-shares through channels such as valuations, industry mapping, and sentiment, intensifying the A-share market adjustment, with telecom, electronics, and other tech directions falling the most. A clear improvement in overseas factors is expected to boost market risk appetite. Oil prices are the core variable affecting the current US inflation level. Going forward, attention should be paid to whether the Middle East conflict can substantially ease, pushing international oil prices down, thereby reducing inflation pressure and alleviating market concerns about further Fed tightening. Inflation and livelihood pressures brought by high energy prices may strengthen the US willingness to promote de-escalation, so the period around the US midterm elections may be an important observation window. Recently, the 10Y US Treasury yield has slightly retreated from a high of 5.3% to 5.1%. If subsequent geopolitical risks ease, oil prices decline, and inflation expectations cool in resonance, driving US Treasury yields to continue falling, the suppression of A-share valuations and risk appetite is also expected to gradually weaken, and the market may then usher in an opportunity for repair. Opportunity 2: Crowded tech positioning is substantially alleviated. The poor positioning structure in the current A-share tech sector is an important factor dragging on recent performance. Drawing on history, high-prosperity tech growth rallies usually have two opportunities when peaking, showing an M-shaped double-top characteristic, "Revisiting the Tech M Top: When Will the Second Tech Wave Come? - 20260808". Before the second wave begins, the positioning structure and sentiment heat have both been significantly cleared. We can compare the current clearing degree of the tech sector's positioning structure versus the high in late June this year with the period before the second wave of high-prosperity industries in history, to observe whether the current tech crowding has clearly eased. Historically, in the two waves of the tech sector, before the second wave began (that is, at the trough between the double tops), the corresponding holdings of various types of funds needed to be cleared to 70-80% of the first-wave peak. Arranged in ascending order of clearing degree, the average holdings at the low point for leveraged funds / active equity public funds / stable foreign capital / flexible foreign capital / private equity / fixed income+ / insurance funds were 86% / 85% / 84% / 77% / 77% / 73% / 72% of the first top, respectively. In addition, valuations and trading crowding also need to decline by 40%-50%. This round of tech positioning and sentiment clearing may have gradually reached an appropriate level. The tech holdings of most funds have clearly loosened from previous highs. Long-term foreign capital, private equity, and fixed income+ holdings have clearly declined; active equity public funds and insurance funds are also close to historical clearing levels; short-term foreign capital and leveraged funds have a slightly lower degree of clearing: Long-term stable foreign capital held 23% in electronics + telecom in Q3, clearing about 30% from the Q2 high. Estimated insurance fund holdings in electronics + telecom are about 16.4%, clearing about 20-30% from the high. Among current margin balances, electronics + telecom are about 590 billion yuan, accounting for 25.1% of the total, clearing about 10% from the high in late June. In addition, the turnover rates of electronics and telecom are 2.7% and 1.3%, respectively, and their PEs are 51x and 41x, with clearing magnitudes near historical averages. Therefore, Guosen believes that the clearing process of this tech rally may have reached the latter half. See "Tech Positioning Clearing: Where Are We Now? - 20261017" for details. Opportunity 3: Improvement in the stock market funding situation and positive fundamental expectations form a synergy. The recent continued A-share adjustment and shrinkage in turnover reflect weak market sentiment, with incremental funds becoming cautious about entering the market. During periods of sluggish market sentiment, an imbalance between fund supply and demand can easily amplify stock price volatility: first, off-market funds tend to wait for clearer policy and fundamental signals; second, continued declines may trigger product redemptions and passive position reductions. Without incremental funds to absorb supply, negative feedback can easily occur. The tech sector's fundamental advantages are obvious. In 26Q2, the cumulative year-on-year growth of tech net profit attributable to parent was 72%, significantly higher than the 18.6% for all A-shares. However, affected by concerns that the US FCC may restrict Chinese tech products, the market has some doubts about the tech fundamental outlook. In the current predicament, improvement in fundamental expectations is needed, as is support at the funding level. If subsequent macro policies and stock market stabilization measures can work together, they may help the A-share market emerge from the dilemma. From a fundamental perspective, growth-stabilization policies are gradually being implemented, and subsequent observation should focus on whether concerns about tech fundamentals ease. A package of policies was concentratedly implemented before the National Day holiday, releasing signals of stabilizing growth and stabilizing real estate. At the same time, with AI-related electronic products maintaining high growth and the improvement in traditional goods broadening, the September export growth rate in USD terms rebounded to 36.3%. Most recently disclosed third-quarter reports of tech stocks remain impressive, and the consensus expectation for ChiNext net profit growth in 26 is 67%. In the future, if market concerns about overseas restrictions ease and the AI narrative regains cohesion, the high growth in tech sector fundamentals may boost market sentiment. At the funding level, market stabilization forces are gradually entering the market and playing a role. On October 10, CSRC Chairman Wu Qing held a symposium, proposing to strengthen the construction of market stabilization mechanisms and study and reserve more incremental policy tools. Recently, broad-based ETFs have seen increases in volume. As of 10/16, CSI 300 ETFs saw a net inflow of 39.8 billion yuan this week; listed companies have also released buyback announcements, such as Eoptolink Technology Inc., Suzhou TFC Optical Communication, and other industry leaders. The current micro-liquidity environment in the stock market is relatively tight. If broad-based ETFs continue to see increased subscriptions at key moments going forward, the liquidity environment will improve and create a bullish atmosphere. Overall, if future macro policies improve profit expectations, positive performance of tech stocks boosts sentiment, and stabilization funds break the negative feedback to form a synergy, A-share confidence is expected to be boosted and the market may gradually emerge from the shrinking-volume adjustment pattern. If the above three opportunities gradually appear, A-shares are expected to stabilize and recover, and there will also be a year-end rally in the fourth quarter. As mentioned above, the current continued A-share adjustment is the result of multiple internal and external factors. Whether the market can stabilize and move upward requires observing changes in the overseas environment, while improvement in the stock market funding situation and the digestion of tech stock positioning pressure are also core variables. The above opportunities may materialize in sequence, and market bottoming may still be accompanied by fluctuations. But if existing selling pressure is digested, external suppression weakens, and incremental funds enter, the A-share market is expected to usher in repair in the fourth quarter, and the year-end rally can still be expected. See "Autumn Colors Deepen, Climb Higher Again - 2026 Fourth Quarter Stock Market Outlook - 20261006" for details. Structurally, dividends are better in the short-term volatile phase, and tech is expected to usher in a second opportunity after the market stabilizes. The valuation level of CSI Dividend relative to Wind All A is still at a historical low, and the dividend yield is also at a historical median level. The current market environment may still see periodic fluctuations. Combined with policy guidance for long-term funds to enter the market, dividend assets with relative cost-effectiveness may see sustained performance. Attention can be paid to resource-type dividend assets with improved supply-demand patterns, such as coal and utilities. After the market stabilizes, tech is expected to usher in a second opportunity. First, pay attention to oversold AI hardware. After the previous adjustment, the positioning structure of the A-share computing power hardware sector has improved, and the performance growth of AI tech hardware in the third-quarter reports is expected to remain impressive. If the overseas liquidity environment improves subsequently and the market gradually stabilizes, overseas demand expansion and domestic substitution will form a resonance, and computing power hardware is expected to usher in a second wave. Second, tech will spread to AI applications. With improved model performance and lower inference costs, the space for commercial AI applications is expected to further open up. At present, personal AI agents represented by Muse, as well as AI-enabled scientific research (AI4S), are expected to become important catalysts for the next stage of accelerating AI demand again, and the subsequent AI tech rally is also expected to spread to the application side. Risk warning: The stock market's micro-funding situation deteriorates beyond expectations, and the Fed's monetary policy tightens substantially.