GF Securities sees A-share AI multi-top, 94% rebound ratio

Single tops are rare in bull markets, and A-share AI assets do not meet the conditions to form one, GF Securities said, leaving room for recovery after July's selloff.

"A single top requires either an irreversible funding shock, or a rapid reversal in the earnings cycle," the GF Securities strategy team wrote in a research note, citing the two conditions that have historically preceded one-time peaks.

A-share broad indices have formed a single top only once, in 2015, while the Dow Jones Industrial Average and S&P 500 have never done so in more than a century of trading. The Nasdaq Composite recorded its only single top in 2000, when the dot-com bubble burst on a confluence of factors including Barron's naming 51 cash-strapped companies, Microsoft's antitrust ruling, and inflation data that triggered a liquidity squeeze. The U.S. energy sector's 1980 single top followed two oil shocks, a supply-demand reversal and Volcker's aggressive rate hikes.

The distinction matters for positioning. In past A-share topping processes, the Shanghai Composite's secondary peak averaged a 94 percent regression ratio to the primary peak, with peaks 72 trading days apart and an average drawdown of 13.6 percent. The CSI 300 averaged 95 percent, 80 days and 15.9 percent, while the ChiNext averaged 88 percent, 77 days and 25.7 percent — evidence that complex multi-top structures, not single peaks, are the historical norm.

Industry tracks and stable assets rarely form single tops

GF Securities' review found that A-share industry tracks rarely form single tops. The 2020-2022 new energy rally — covering EVs, lithium, solar and wind — all ended in complex multi-top structures, as did mobile internet and semiconductor tracks. Stable assets with predictable earnings, such as dividend, banking and hydropower names, also rarely form single tops because price deviations from value stay contained.

By contrast, cyclical assets are more prone to single tops. Petrochemicals, basic chemicals, non-ferrous metals and steel often fail to recover to prior highs after supply-demand reversals. Non-ferrous metals have repeatedly shown regression ratios below 90 percent at past peaks, and steel has shown similar behavior. These single tops are driven by irreversible fundamental changes, not swings in market mood.

Fund allocation spike tops are also rare

The debate over whether funds' heavy Q2 buying of electronics will trigger concentrated selling echoes past cases. GF Securities found that fund-allocation spike tops are rare, occurring only when a heavily-held industry's fundamentals deteriorate quickly and irreversibly.

Two cases stand out. In 2012, baijiu (white liquor) fund holdings climbed to 16 percent as industry revenue and profit growth accelerated from 2009. But the "three public consumption" crackdown, falling Moutai terminal prices and the plasticizer scandal rapidly broke the fundamental logic, and fund holdings collapsed from 16 percent to below 4 percent within two quarters. In late 2014 to early 2015, non-bank financials saw fund holdings jump from 4 percent to 16 percent in a single quarter on margin-trading-driven earnings expectations, before regulatory checks on margin financing and penalties on 12 brokerages capped both earnings and valuation.

More commonly, institutional allocation tops in major industry cycles oscillate at highs for extended periods. GF Securities cited three reasons: industry cycles evolve gradually as technology, policy and business-model innovations require verification; broad supply chains benefit different segments at different times, so multiple allocation peaks correspond to different heavy positions; and slowing momentum often faces market disagreement, so allocation ratios digest slowly rather than crash.

Based on this, GF Securities said A-share AI assets are hard to compare to 2012 baijiu or early-2015 brokerages, because their fundamental logic has not essentially deteriorated. Referencing mobile internet, core assets and new energy cycles, the report said new-technology-revolution rallies tend to "rise through setbacks and advance through disagreement." A single-quarter pulse correction does not change the medium-term trend, making it more important to track industry developments and commercial progress.

This article is for informational purposes only and does not constitute investment advice.