What happened with the sudden drop in A-shares this afternoon?
In the morning, the ChiNext index opened lower but still showed a brief process of bottoming out and rebounding during the session, with the main index closing up 0.5%, demonstrating strong market resilience. However, the mood shifted dramatically at noon. At 13:34, the three major indices suddenly dropped, with the ChiNext index falling over 2% at one point, and the market entered a phase of volume-weighted decline.
Moreover, there are still as many as 55 stocks hitting the daily limit-up, while limit-down stocks are not many. The A-share sentiment has not yet reached the freezing point, the decline in the ChiNext is likely due to some institutions accelerating the pace of capital outflow, leading to a weakening period in the midday trading.
Then, tomorrow, July 31st, a crucial moment is coming, mainly for two reasons.
The first reason is that the midday decline on Wednesday saw a volume surge of over 41.6 billion yuan. Although this has a relatively small impact on the daily average trading volume of 1.7 trillion to 1.8 trillion yuan, today’s midday plunge is the second abnormal trading session in the past two weeks.
Previously, on July 23rd, the main index peaked at 3,613 points and similarly experienced a midday plunge, ultimately closing with an inverted hammer candlestick. During this period, the ChiNext only declined by 0.01%.
But today, the ChiNext index declined while the main index maintained a strong trend of operation. It’s very clear that in just the past two weeks, some large funds have once again accelerated their exit signs.
After the close, domestic funds net outflowed more than 79.2 billion yuan today, marking the largest net outflow in three months. On July 23, the net outflow was 63.4 billion yuan.
Clearly, as the main index and ChiNext index approach their 2024 high regions, the phenomenon of the index rising while individual stocks fall, or the index fluctuating and then pulling back after a surge, is quite common. This suggests that the short-term trend is already lifting the index, and there may be a need for a pullback.
If we need to avoid the arrival of another round of decline, tomorrow is a critical moment. It requires the three major indices to rise broadly, with the ChiNext index surging by more than 1.5%, to mitigate the impact of today’s midday plunge on the recent trend.
The second reason, the sectors that rose today, such as oil, banking, and coal, have strengthened, including some sectors that have not been particularly strong recently leading the rise.
Meanwhile, sectors like diversified finance, new energy, and aviation, which have seen a stronger decline, not only suggest that the market is rotating between high and low-performing sectors but also indicate that once the weight sectors experience a shakeout and rebound, some active themes and concepts may face short-term declines.
After all, the A-share market has seen increased divergence in the first half of this year, and the trend in the second half will require a series of consecutive gains, which might not be an easy task.
However, if the short-term trend sees some banking and other weight sectors rise, while the ChiNext returns to a temporary weak fluctuation, it could lead to the main index challenging the high point region for 2024 during the weight sector rally. At least in the short term, the index may adjust, but it is unlikely to experience a deep decline for now.
So, if tomorrow the sectors that led the decline today rotate to rise, and the banking sector dives again, the pattern of Shanghai strengthening while Shenzhen weakens on Wednesday may be a temporary phenomenon rather than a signal of the stock market entering a faster round of correction, which can avoid another sharp dive in the near term.
Therefore, based on today’s midday market performance, two points can be concluded.
1, The market earlier showed characteristics of weakness during the trading session. Tomorrow, it needs to reverse many of today’s signals that affected the potential for later gains, including the expected bottom reversal and volume increase in the ChiNext tomorrow, and individual stocks showing more gains than losses by the close. Otherwise, A-share may continue to enter a consolidation phase in the near term.
2, There is no need to overworry about the medium-term trend. The current rally in A-share has not changed from the previous few months to now. After a rapid rise, there is inherent demand for a pullback. During periods of active trading, whether the market falls from the current level or reaches the previous high level, it is still expected to rise later.
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