In the tumultuous landscape of the Chinese stock market, recent developments have raised numerous eyebrows among analysts and traders alikeThis week, the Shanghai Composite Index once again dropped below the critical annual line, while trading volumes in the A-share market plummeted, remaining below the 1 trillion yuan mark for twelve consecutive daysDespite the overall lethargy engulfing the market, a peculiar trend has emerged, spotlighting the vibrant performance of small-cap stocks and micro-cap stocksThis resurgence of speculative enthusiasm in the market exhibits a curious blend of risk-taking behavior among investors, ignited by a renewed interest in “new stocks,” small cap stocks, poorly performing stocks, short-term trades, and restructurings—a phenomenon that can be summarized as the rise of the "Five Speculations." This fervor hints at a tantalizing chapter of short-term speculation that has gripped the minds of many investors.

Meanwhile, across the Pacific, the American stock market has been experiencing a bull market, notably bolstered by technology stocksThe Nasdaq has shown remarkable resilience, registering a significant rise and even hitting a new peak of 12,756 points this yearNot only has this marked the best start since 1998, but it has also brought a sense of optimism in a landscape where concerns about potential U.S. debt defaults seem to float by, barely causing a ripple in investor sentimentIn the first quarter of the year, however, only about one-third of large mutual funds managed to outperform their benchmark indices, principally pointing to a notable retreat in their holdings of major tech giants like Apple, Microsoft, Alphabet, Amazon, NVIDIA, Tesla, and Meta, which experienced an average reduction of 15 percentage points.

As of midweek, the performance of U.S. large-cap, mid-cap, and small-cap indices stood at respective gains of 7.29%, 0.21%, and 0.71% for the year—highlighting the overriding dominance of heavyweight tech stocks

Advertisements

Apple Inc., as the crown jewel of U.S. public companies, boasted a year-to-date increase of 31.84%, losing only a slight 6.9% from its peak in February of last year, a comforting statistic for legendary investor Warren BuffettBy the end of Q1, Buffett’s Berkshire Hathaway had a hefty 46.44% of its portfolio tied to Apple, showcasing the company’s critical role in the broader market.

Conversely, in China's stock market, a troubling trend has emerged wherein blue-chip stocks are struggling to keep pace with their smaller counterpartsThe indices for large-cap stocks in Shanghai and Shenzhen indicate paltry increases of 2.33% and 15.5% respectively this yearThe sentiment of collecting profits from smaller stocks has become the prevailing wisdom among many, as demonstrated by the performance of Kweichow Moutai, the A-share kingpin, which saw a decline of 1.51% this year, erasing 35.3% from its peak valueThe Shanghai 50 index has reduced by 37.6% from historical highs, underscoring the inherent challenges of adhering to value investment principles.

Remarkably, the micro-cap stock index has transformed the investment narrative, having achieved phenomenal annual gains of 44.8%, 20.31%, 42.69%, and 22.2% from 2019 to 2022. The closing price on Thursday marked an astonishing 4.43-fold increase from the troughs experienced in 2018, with staggering price-to-earnings (P/E) and price-to-book (P/B) ratios of 1092 and 2.26 respectivelyAs speculation reigns supreme, the market has adopted a rapid-fire approach, increasing the risks and rewards associated with trading behaviors.

As this speculative environment intensifies, it has become evident that the prevailing trading style can be characterized as a "short, fast, and brisk" strategy aimed at quickly harvesting profits, akin to harvesting chives that have been sownIn the recent days between Tuesday and Thursday, a standout stock in the robot concept sector, Baisheng Intelligent, dazzled investors with three consecutive daily limit ups, soaring 120% from its lows on April 25. Data from the Shenzhen Stock Exchange depicted a stark divide in buying pressure, with institutional and individual investors buying 23.73% and 76.27% of Baisheng Smart respectively from May 17 to 25.

Yet amidst this fervor of individual stocks, the overall sentiment in the market has been subdued

Advertisements

Daily trading volumes experienced a dramatic shift, falling from a staggering 1.2241 trillion yuan on May 9 to a mere 767.8 billion yuan on TuesdayThis slowdown hints at a growing sense of caution among investors who find themselves hesitating in the trading arenaOn that day, the Shanghai Composite Index fell by 1.52%, as short-term speculative trading took the center stageData from Le Gu Le Gu indicated that the average turnover rate of stocks hitting the daily trading limit reached 19.27% on Tuesday, marking the second-highest rate of the year, following just behind the record 19.7% on February 24 (when the index subsequently dropped by 0.62%).

Traditionally, the phase where bullishness begins to wane and bears emerge heralds an intense atmosphere characterized by rampant speculation — a time when the bubble of an "eyeball economy" reaches its pinnacleIf the effects of ST stocks and newly listed companies this year are discounted, the stock that has drawn the most limits this year is Nanjin Chuangyi, which has set off on an unprecedented ten consecutive limit-up streakThe stock’s speculative appeal arises from proposed plans for capital increases related to the new energy battery materials business, Jin Yuan ShengAfter soaring approximately 3.4 times from its last year’s low, the stock still maintains a price of around 23.78 yuan with a modest market capitalization of merely 5.7 billion yuan and a high P/E ratio of 117 times, drawing in speculative investments eager to enterHowever, with such investments, risks of adverse outcomes also loom largeJinzheng shares have already hit their limit down for two consecutive days due to a foiled restructuring plan, demonstrating the perils that investors face while riding the speculative wave.

Looking ahead, signs indicate an oncoming bull market in the A-share sectorAs speculative stocks climb ever higher, the prevailing influence in the stock market often shifts towards ST stocks, the hottest speculative theme being the process of "hat removal." On May 19, Taiwan Nuclear Power lifted its hat and witnessed a significant increase of 6.32% on the same day, followed by four consecutive limit-ups, establishing a new three-year high once adjusted for dividends

Advertisements

Advertisements

Advertisements