The third quarter saw a significant pullback in the A-share market, with the AI technology sector, which had rallied strongly in the first half of the year, experiencing profit-taking and substantial declines. Many tech stocks that had risen considerably have now retreated deeply from their highs, and overall market sentiment has been affected, with many investors questioning whether the tech downturn signals a trend reversal or the end of the bull market.

Let's first review this tech rally. Since late September 2024, the market has been gradually recovering, particularly after the six major sectors were proposed early last year. AI tech sectors, including chip semiconductors and computing power, surged significantly, delivering strong returns for investors. This momentum continued until June of this year, but it also made the sector overcrowded in terms of trading. Historical experience shows that when market trading becomes excessively concentrated in a few hot sectors, the risk of style rotation or even market corrections increases.

Given this, I timely warned of risks and proposed a three-step strategy to mitigate tech stock declines: first, resolutely deleverage; second, reduce positions; and third, hold a balanced portfolio of tech and dividend stocks to spread risk. In June, margin financing balances were at high levels, and leveraged funds were heavily involved in hot tech sectors, making risk particularly noteworthy. Once leverage is added, a tech stock decline could trigger margin calls, so I strongly oppose investors adding any leverage. Following the three-step strategy could have greatly reduced losses for many investors during the July crash.

Entering August, dividend sectors led by banks rose, partially offsetting the impact of tech stock declines. The Shanghai Composite Index didn't fall much overall, but investors concentrated in single sectors with heavy tech exposure experienced significant losses. Banks and other dividend stocks have large market caps, and their stability or gains provided substantial support to the index; however, many investors with skewed allocations still suffered considerable damage.

Now, with the September Federal Reserve meeting approaching, market concerns about a rate hike have further suppressed performance. The entire third quarter has been characterized by volatile adjustments, which can be seen as a correction to the overheated tech speculation of the first half. However, this doesn't signal the end of the rally. This slow, long-term bull market is supported by deeper logic, including policy support and the shift of household savings toward capital markets amid low interest rates and real estate adjustments. This downturn should be viewed as a process of squeezing bubbles in tech stocks, not a bubble burst, and thus confidence in the future should not be lost.

Currently, several factors are influencing the market, with the primary focus being whether the Fed will raise rates in September. As the world's central bank, the Fed's every move impacts global markets. The recent rate hike by the European Central Bank has also raised fears that the Fed might follow suit, putting pressure on equity markets. The Fed is in a dilemma: raising rates to combat inflation could lead to a U.S. stock market decline, while easing too early could increase inflation pressures. With core inflation still elevated, market views on policy direction are divided. The Fed must make a difficult choice among controlling inflation, maintaining financial market stability, and preserving monetary policy independence.

For the markets, the recent adjustments have partly priced in potential Fed rate hikes. Therefore, even if a hike occurs, its impact may not be overly severe, and it doesn't necessarily mean the end of the rally; instead, it could trigger short-term volatility. Once the decision is announced (the so-called boots landing), there might actually be room for a rebound.

The fourth quarter often presents repair opportunities in the A-share market, particularly with blue-chip sectors performing relatively well, which aids index recovery. Additionally, given the deep corrections in tech stocks, those with solid earnings and orders may rebound first. We should also monitor third-quarter earnings reports, especially preannouncements from popular tech stocks; strong performance could lead to earlier recoveries.

This year, resource stocks like oil and coal, as well as sectors with high dividend yields such as non-ferrous metals, power, and banks, have shown rotational opportunities. Geopolitical tensions in the Middle East have pushed international oil prices higher, with Brent crude briefly approaching $110 per barrel, benefiting oil and gas sectors. Combined with the tech sector adjustment, some dividend stocks, including those with net asset values below book, heavy assets, and low volatility industries, are seeing notable rotations.

Thus, a balanced approach of holding both tech and dividend stocks remains a sound investment strategy. While these traditional sectors may not offer the same upside elasticity as tech, balanced allocation helps control risk. Currently, I recommend maintaining around half positions rather than higher exposure, considering the market's repeated volatile adjustments. High positions could lead to significant pressure; it's better to wait for market stabilization and rebound before gradually increasing positions. This creates a pyramid-shaped position structure: keeping higher positions at market lows and gradually reducing or fully taking profits when the market rises, especially during periods of market euphoria. Following this strategy, the first half of this year proved effective in avoiding the July tech stock crash, highlighting the importance of position management in A-share investing.

Since June, I've emphasized balanced allocation—one hand in tech, one hand in dividends—which effectively spreads risk compared to betting on a single sector. In the tech innovation arena, sectors capable of explosive earnings growth remain AI tech related to chips and computing power, such as domestic chips, storage chips, optical modules, liquid cooling, and PCBs. These are infrastructure needs driven by computing power demand growth and increased capital expenditure. After the recent sharp declines, leading companies in these industries, if they continue to deliver strong earnings, can digest high valuations and potentially remain leaders in the next rally. The long-term driver of stock prices remains corporate earnings; if performance can be realized and sustained, AI hard tech representing new productive forces stays a key focus for investors.

Attention must also be paid to macroeconomic growth slowdown, especially changes in consumption and investment growth. Recent data shows fixed asset investment weakening, with the decline in real estate development investment remaining a major drag. Authorities have recently introduced new real estate policies to stabilize the market, including extending the maximum personal housing loan term from 30 to 40 years to ease repayment pressure, optimizing commercial housing sales rules, and strengthening pre-sale fund supervision to protect buyers' rights and restore confidence. While these measures won't have immediate effects, they can help stabilize the real estate market to some extent and support improvements in related industrial chains. Future real estate markets will show clear divergence: core properties in first- and second-tier cities with genuine demand may stabilize and rebound first, seeing increased transaction volumes and rising prices, while properties without real demand may continue to languish with shrinking volumes and falling prices.

Massive rallies in real estate like before are unlikely, and it's hard to see household savings flowing heavily back into property. This actually presents opportunities for the capital markets. As the market recovers and wealth effects gradually return, some investors will be attracted to enter via stocks or funds, bringing additional liquidity to the market.

The fourth quarter, especially with the Mid-Autumn Festival and National Day approaching, is traditionally a peak consumption season, potentially driving demand growth in some sectors, though overall consumption growth is unlikely to surge significantly. Boosting consumption requires not only raising current incomes but also improving future expectations to gradually restore consumer confidence and capacity. Finding ways to raise residents' income levels is key to breaking the current slowdown. The fourth quarter warrants close monitoring of relevant economic data.

On the exchange rate front, a phase-wise pullback in the U.S. dollar index is favorable for the appreciation of the RMB. RMB appreciation is influenced by multiple factors; generally, increased capital inflows and higher real demand for RMB will drive a rebound in RMB assets. Periods of RMB appreciation often coincide with larger foreign capital inflows, which is beneficial for RMB assets. Of course, the RMB shouldn't appreciate too quickly to avoid affecting export competitiveness. Maintaining modest fluctuations within a reasonable range is an optimal scenario. China's significant breakthroughs in technological innovation have boosted global investor confidence in Chinese tech, another reason for foreign capital inflows into RMB assets in recent years.

On overseas markets, the U.S. stock market shows no signs of a tech bubble bursting; it's in high-level consolidation. This indicates the U.S. market remains in a strong, volatile phase. Unless there's a clear bubble burst, I advise paying close attention to U.S. stock movements. Each morning, check overnight U.S. performance: if Wall Street is stable, it's a good sign, and A-share adjustments may be limited. If U.S. stocks drop sharply, especially the Nasdaq, appropriate position reductions are warranted; if declines persist, risk awareness should be heightened. Currently, the U.S. market is strong and volatile without bubble signals, so the tech rally isn't over. For investors, sticking to the dumbbell strategy of balancing tech and dividend holdings, with sound position management, can help seize structural opportunities amid volatility.

This content is for reference only and does not constitute investment advice. Investors should act at their own risk.