The first trading session after the National Day holiday was volatile. At the opening call auction, many stocks hit limit-up and the Shanghai Composite touched 3674. It pulled back during the session but still closed near 3500, up 154 points on the day. That was a high open and a low close, with volume shrinking. I thought the market might keep rising slowly on shrinking volume, or at least grow for a few days, trade in a narrow range, adjust, and then launch a second leg. Instead, today it opened lower and kept sliding, closing at 3259—a 231-point drop. That is a serious fall.
Since this rally began, I have been uneasy about how fast it was moving. When prices run up that quickly, ordinary investors cannot keep pace, money inevitably fails to follow, and the market becomes vulnerable to a sharp drop. A rally can turn into a matter of a few days. Yesterday showed a turning point, but I had not expected things to become this bad, so I sold nothing. Today's low open and low close felt like a real correction. I sold everything I held except banks, media, and WuXi AppTec; the sale accounted for roughly 40% of my position. I kept banks because their prices still look low relative to their value, they have room to rise, and if the market is going to keep climbing, banks remain a good lever. I kept media simply because the media holdings I own are still worth far more than their market price. They barely moved in this rally, and they are likely to lead the next one. I kept WuXi AppTec for the same reason—I think it can keep rising—but unlike banks and media, I may sell it at a suitable opportunity in the near future.
Looking at the whole move from the start of the rally through today's partial sale, I do not think my overall operation was badly wrong, though there were countless small problems. I did not sell into yesterday's strength because I cannot judge the market accurately or seize that kind of opportunity. Selling today is not wrong in itself, even if the market surges again tomorrow. But one part of today's selling was a serious mistake: Wuliangye.
I sold Wuliangye near limit-down. In the afternoon it had traded at a loss of 4%, and I could have sold there, but an order missed by a few cents and I did not hit the current price afterward. That cost nearly another 6%. Wuliangye opened limit-up yesterday and closed roughly flat; today I sold it at limit-down. The two-day paper loss was about 20%—not exactly that number, since consecutive limit-down moves compound rather than simply add. The first 14% does not torment me. It was outside my understanding, and I can only learn from it. The extra 6% came from hesitation and laziness, and that needs correcting.
In this trade, the gain in Wuliangye offset the earlier loss on my holding, and I exited with a small profit of a few points. Having held it for so long, I may have earned only the equivalent of interest. Tongwei was down less than 5% at one point yesterday; today I cleared it at a 15% loss, turning a paper loss into a realized one.
Overall, this rally produced decent gains. The next few days may bring more downside, and my remaining position may shrink; that is unavoidable. I will not clear banks and media just because of a possible drop. After a stretch of declines, I plan to add back to transportation, energy, mining, and media.
For now, I still care about intrinsic value—being undervalued. I am not much interested in hot themes. Chip manufacturing and brokerages are still hot; I used to hold some and cleared them today. To me they are too expensive.
Today's volatility pushed me to rebalance and free up some capital so that I can buy cheaper stocks when a suitable chance appears. For the market, I think it may stabilize around 3100 and then try to rise again. My ideal path is narrower declines tomorrow and the day after, with the index holding around 3100 for a while. I do not want several consecutive sharp drops, nor a contrarian surge tomorrow; I would not buy in either case. Simply put, I prefer a moderate market. In a market that goes crazy, opportunities are hard to find and even harder to grasp.