This week, mysterious capital continued to control the pace and sentiment, yet small and mid-cap stocks attracted a significant influx of funds. The micro-cap stock index and the CSI 500 Index both surged over 4% for the week, while the National Index 2000 and CSI 1000 Index posted weekly gains of around 3%.

Will this pattern of controlling the pace and sentiment undergo any changes? Are small and mid-cap stocks likely to become more favored by capital? Where do the future opportunities lie? Today, Brother Da and Dr. Niu delve into these topics of widespread interest.

Dr. Niu: Hello, Brother Da. It's time for our weekend market discussion. This week, while mysterious capital suppressed large and mid-cap stocks, small and mid-cap stocks on the other end saw a rise. With ample market liquidity, funds are actively seeking opportunities. First, please review this week's market performance and share your outlook for next week.

Da Ge: Indeed, because the mysterious capital holds relatively few chips in small and mid-cap stocks, the market has naturally chosen the path of least resistance.

It has been eight trading days since the mysterious capital began selling broad-based ETFs on January 14. I believe the phase of controlling the pace and sentiment may be gradually nearing its end, or at least the subsequent intensity is unlikely to remain this strong.

I base this view on several reasons.

Firstly, speculative market sentiment has clearly been suppressed. The overheated speculative fervor in the commercial aerospace and AI application sectors has returned to normal levels.

Secondly, historically, barring special circumstances, interventions by mysterious capital do not typically last very long. For instance, during January-February 2024, the period of significant volume driven by mysterious capital buying ETFs lasted 16 trading days; the current round has already reached 8 days.

Finally, the behavior of controlling pace and sentiment by mysterious capital carries the risk of being exploited by some futures market funds. Such blatant "arbitrage" behavior is unsustainable.

For example, this past Friday, each brief, high-volume decline in broad-based ETFs was not only shorter in duration compared to previous days but also smaller in magnitude. The chart below shows the Friday trading pattern of the Huatai-PineBridge CSI 300 ETF (510300), which clearly illustrates the point I am making.

However, it is important to note that even as the control over pace and sentiment winds down, there remains a possibility of intervention during sharp rises in the Shanghai Composite Index. For instance, during the latter three trading days of this week, the invisible hand became active whenever the Shanghai Composite showed significant gains.

The impact on small and mid-cap indices was noticeably less pronounced compared to the large and mid-cap indices.

In my article on January 11, I mentioned that the CSI 500, CSI 1000, and National Index 2000 all hitting new highs since 2021 strongly suggested the arrival of a spring season for small and mid-cap stocks. Their recent performance has confirmed this view.

This past Friday, the CSI 500, CSI 1000, and National Index 2000 all gapped up and reached new highs for the current market cycle.

This strong momentum is likely to sustain upward movement in these three indices for some time. Against this backdrop, the strategy should focus less on the broader market and more on individual stock selection.

Nevertheless, we must acknowledge a peculiar market phenomenon: the upward continuity in institutionally-favored trending sectors has not been ideal, often characterized by a few days of gains followed by a few days of pullbacks.

This serves as a reminder to avoid chasing stocks that have already experienced several consecutive days of sharp, short-term rallies.

Dr. Niu: Thank you for sharing, Brother Da. Given the emphasis on sectors and individual stocks, which sectors do you believe hold better opportunities looking ahead?

Da Ge: The primary focuses are two major themes: Commercial Aerospace and AI Applications.

On Friday, the commercial aerospace sector index gapped up, suggesting a high probability that this leading theme is initiating a second wave. In the AI application space, several leading stocks have already shown signs of stabilization.

As I mentioned before, this market cycle is predominantly led by the commercial aerospace sector, with other sector movements subordinate to its cycle. The status of the commercial aerospace sector is comparable to that of the communications equipment sector from last April to September.

In early September last year, the communications equipment sector index found support near its 20-day moving average; recently, the commercial aerospace sector index has similarly stabilized around its 20-day moving average. A comparison between the Communications ETF then and the Satellite ETF now near their respective 20-day moving averages makes this parallel even more evident.

Next is the AI hardware industry chain.

The AI hardware supply chain has recently witnessed numerous positive developments and encouraging signals.

First, sectors like memory and PCB equipment have seen leading companies report earnings that significantly exceeded market expectations.

Second, individual stocks within various sub-sectors continue to hit new highs, such as in liquid cooling, power supplies, optical chips, CPO equipment, and OCS components.

Third, price increases have emerged across multiple products or segments of the AI hardware chain, including CCL, memory, electronic cloth, CPUs, optical fiber preforms & fibers, substrates, MOSFETs, logic foundry, and packaging & testing. Beyond AI hardware, other electronic industry segments like analog ICs, MLCCs, carrier tapes, LCD panels, and polarizers are also experiencing price hikes.

Regarding memory, according to South Korean media reports, Samsung Electronics raised supply prices for NAND flash memory by over 100% in the first quarter of this year, a hike far exceeding prior market expectations.

Then there are institutionally-favored trending sectors, such as non-ferrous metals, chemicals, semiconductors, and humanoid robots. These sectors follow their own rhythms and are prone to pullbacks after consecutive gains.

Finally, companies that have reported earnings exceeding expectations. Recent performance indicates that such companies have generally fared quite well.

On Friday, the space-based solar power theme surged significantly. This industry is currently in its early exploratory and R&D stages, with its industrialization path facing considerable uncertainties. Given the heightened hype over the weekend, one must be cautious of potential short-term profit-taking by investors.

In conclusion, the simultaneous new cycle highs achieved by the CSI 500, CSI 1000, and National Index 2000 indicate the market has chosen the path of least resistance. In this context, the strategy should be to focus less on the broader market and more on individual stocks. If trading capability is insufficient, consider opting for leading broad-based index ETFs or thematic ETFs tied to the main trends.

Sector-wise, commercial aerospace shows potential for a second wave; keep an eye on the two main themes of commercial aerospace and AI applications. Simultaneously, monitor institutional sectors like AI hardware, non-ferrous metals, chemicals, semiconductors, and humanoid robots, but preferably time entries during pullbacks rather than chasing highs. Furthermore, during the annual report season window, attention can be paid to companies that exceeded expectations in their Q4 2024 earnings.

According to the latest regulations from relevant national authorities, this market commentary does not constitute any operational advice. Investors bear their own risks when entering the market.