Daily Market Watch | Bull and bear signals intertwined, low-volatility assets may become safe havens

Thursday’s A-share market showed a pattern of oscillation with the center of gravity falling. Among them, insurance stocks opened lower and kept sliding, pulling major indices such as the Shanghai Composite Index into a step-by-step decline. At the same time, iteration in storage technology also caused the AI main theme to accelerate its pullback during the session; the STAR Market 50 Index and the ChiNext Index continued to fall further as well. As a result, the A-share market saw a broad sell-off. However, trading volume shrank quickly: the total trading value across the Shanghai and Shenzhen markets was less than 2 trillion yuan, which is rare for this period. This indicates that investors’ willingness to hold still remains relatively intact, and the energy for further downside selling in the short term is gradually fading.

Long-and-short trading logic alternates

In recent times, global assets have inevitably been affected by geopolitical conflicts. After all, geopolitical conflicts are a core factor driving current fluctuations in international oil prices, and international oil prices in turn have a strong impact on global economic growth. Therefore, once news emerges that geopolitical conflicts are marginally easing, international oil prices fall accordingly, and global risk assets rise accordingly. Just like the rebound trend in A-shares and U.S. stocks during Tuesday and Wednesday. Conversely, if geopolitical conflict information tightens again, international oil prices rise, and global risk assets then adjust—just as seen in Thursday’s trading session.

It can be seen from this that the current geopolitical conflict has not been fully resolved yet. In this process, sometimes easing information will surface, and sometimes tension-related information will surface again. For participants in global risk assets, until they receive “a signal that can be trusted and is definite in resolving it,” their trading strategies will shift with the direction of the news flow. This causes long-and-short trading logic to alternate, and even appear simultaneously on the same trading day. Against this backdrop, the volatility of A-shares, U.S. stocks, and even the entire global risk-asset complex has clearly increased. Moreover, because long-and-short trading logic alternates and even appears at the same time, the correlations among different assets also begin to break down. As a result, not only does this intensify market volatility, it also makes market participants hesitant to increase positions lightly.

On Thursday’s tape, on one hand, Asia-Pacific stocks fell sharply again, and Chinese assets such as A-shares and Hong Kong stocks also adjusted downward. On the other hand, trading value began to contract: on Thursday, the total trading value across Shanghai and Shenzhen was only around 1.9 trillion yuan, already below the recent average daily level of about 2.2 trillion yuan.

Low-volatility assets may become a safe haven

In light of this, the environment facing the current A-share market is indeed complex and changeable. Not only is the international backdrop mentioned earlier intertwined and complex, and the long-and-short trading logic alternating, but the information around crowded trading themes is also not very optimistic at present. For example, during Thursday’s session, it was reported that storage has new iteration technology: it can significantly compress data stored in memory and reduce the demand for memory. Affected by this, the memory sector fell sharply, and the Korea KOSPI index led the Asia-Pacific market lower with a decline of 3.22%. This further shows that when stock prices are at high levels and trading is overly crowded, “ghost stories” are most likely to appear. Once such a “ghost story” emerges, the selling pressure can be huge, which in turn brings a broader range of volatility. Against this backdrop, major participants in the A-share market have all reduced the frequency of their operations, which is one of the reasons why A-share trading volume shrank rapidly on Thursday.

For the outlook on subsequent performance, this of course means that the trading frequency of momentum capital will decrease, and market activity will also decline accordingly. But from another angle, it also indicates that the volatility of A-shares will quickly converge. After all, a contraction in trading volume means high-volatility assets will rapidly reduce their volatility due to lower participation from quant capital, which is conducive to narrowing short-term price swings in A-shares. At the same time, the risks in high-volatility assets will further push the A-share style toward low-volatility assets. This has actually been supported by the price action over the past several trading days—for instance, the low-volatility dividend theme such as bank stocks, as well as consumer staples like food and beverage and healthcare-related consumption themes that have been in sustained adjustment in recent years; these themes have been repeatedly active during the session.

In summary, in the current backdrop where long-and-short trading logic alternates, A-shares’ volatility is unavoidable. But as trading volume contracts and low-volatility assets strengthen, the A-share trading range will continue to narrow, and it may quickly find support and accumulate new upside “jump” energy. Therefore, in terms of positioning, you can still hold stocks; however, in terms of allocation, you need to further increase the weighting of low-volatility assets.

(Credential: A1210623100001)

Source: Jinbailin Consulting, Lu Na

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