Coincidence? Chinese and American "group stock" adjustments in the same week

The stock markets in China and the United States are changing styles together, quite coincidentally.

The overnight decline of the seven tech giants in the US stock market led to a retreat in the US stock market, while small-cap stocks saw a significant rebound. A similar scenario is also happening in the Chinese stock market, where high-dividend large-cap blue-chip stocks that have been popular this year have recently experienced a pullback. A lot of funds have flowed into small-cap stocks and Chinese concept stocks that were sold off earlier. Is this planned?

Tech giants in the US retreat, small-cap stocks celebrate

Starting with the United States, the core CPI for June released on Thursday was lower than expected. Investors now expect that the Fed will cut interest rates by 25 basis points in September, and it is expected that there may be three rate cuts within the year.

Data from the CME FedWatch Tool shows that traders currently believe there is over a 90% chance of a 25 basis point rate cut by the Fed in September. This has led to investors speculating on small-cap stocks that were previously not favored, while the tech giants that were previously thriving have been sold off. Tesla closed down 8%, NVIDIA down 5%, Microsoft, Apple, and Amazon all down over 2%.

According to Dow Jones Market Data, this means that the market value of the seven tech giants in the US has decreased by over $500 billion, the largest single-day market value shrinkage since a $557 billion decrease on September 13, 2022.

Jay Hatfield, CEO of Infrastructure Capital Advisers, said, "Today you will see many hedge funds in a lot of pain, especially those funds that have strategies of being long on large-cap tech stocks and short on small-cap stocks."

In the first half of 2024, this trading strategy was viable during the tech giant-led market rally. However, when the rubber band is stretched too far, it will rebound. Small-cap stocks that have been on the floor for a long time retaliated on Thursday with a sharp rise, with the Russell 2000 small-cap index surging 3.6% in a single day, while the previously surging Nasdaq index fell by 2%, and the S&P 500 index also fell by 1.4%.

According to Dow Jones Market Data, this is the largest single-day performance difference between the Russell 2000 index and the Nasdaq since 1986.

For investors, the question is whether this market style rotation is temporary or will last for some time.

Bob Elliott, Chief Investment Officer of Unlimited Funds, posted on the social media platform X, stating that Thursday's rotation was largely caused by hedge funds. The drop in bond yields has led some hedge funds to face a short squeeze in their holdings of small-cap stocks, which may continue for some time

Carson Group's global macroeconomic strategist Sonu Varghese is also optimistic, believing that the pullback in tech stocks on Thursday made the S&P 500 index "a bit extreme", but this decline will not be sustained, as while the seven tech giants fell, 80% of the stocks in the S&P 500 index rose on the same day.

"Even as the tech seven giants start to pull back, the remaining 493 stocks in the S&P 500, especially large-cap value stocks, may rebound and drive the index higher."

Sharing a similar view is Hatfield, the fund manager of InfraCap Small Cap Income ETF, who has been waiting for the uptrend in US stocks to continue expanding. Given the cooling of inflation and signs of economic slowdown, he believes the Fed will eventually start cutting interest rates. In this scenario, he is not shorting large-cap tech stocks but hopes that other US stocks will rebound and continue to push the stock market higher. He has also raised the year-end target for the S&P 500 index to 6000 points.

Signs of sector rotation seem to be emerging in China's A-share market as well

Despite the overall performance of A-shares this year being mediocre, high-dividend blue-chip stocks started to perform well in April, with stocks like Yangtze Power and CNOOC hitting historical highs. On July 11th, Yangtze Power closed above the 30 yuan mark for the first time in history.

West Securities' strategy analyst Ci Weiwei stated, "Since late April, the trading congestion of high-dividend industries represented by banks, coal, transportation, steel, and utilities (the proportion of turnover in the A-share market over the past 3 years) has been consistently above the 70th percentile, peaking at nearly 90%, reflecting high dividend trading activity. Among them, utilities, banks, and coal are more crowded."

After months of strong performance, following the PBOC's intervention in the bond market in July, high-dividend blue-chip stocks began to decline. Banking stocks collectively retreated for two consecutive trading days, with coal stocks leading the decline. Meanwhile, small-cap stocks and internet-related stocks, which had been sold off earlier, saw continuous rebounds.

Micro-cap stocks rose by 4.2% on Thursday, triggering a wave of limit-up stocks, and continued to rise by 1% in early trading today.

Baidu, JD.com, Tencent, and other tech stocks have been rising for several days, driving up the Hang Seng Tech Index and a series of Chinese concept stock ETFs. For example, the KWEB ETF rose by 2.4% on Thursday, the CQQQ ETF rose by 1.8%, the HXC Index rose by 2.2%, breaking through 6100 points to a near four-week high.

But does this mean that high dividend blue-chip stocks are about to "cool off"?

Not necessarily. Ci Weiwei pointed out that during the market sentiment bottoming process, there may be a possibility of a correction in high dividend dividends, but in the medium to long term, high dividend value remains a favored direction for funds. In the short term, a market style switch may need validation after important meetings. The spread between China and the US has continued to widen this year, with "stabilizing the exchange rate" being the current policy focus. After the Fed's interest rate cut, the space for policy rate cuts is expected to open up, and there has been no major shift in the medium to long-term logic of high dividends.

The strategy team at CICC also released their views, pointing out that after the previous period of volatile adjustments, the crowding level of most high dividend assets is at a medium to low or low level. Among them, the crowding levels of the CSI Dividend, coal, oil and petrochemicals, highways and railways, shipping, cement, steel, and textile and apparel industries are at a relatively low level; the crowding levels of low volatility dividends, hydropower, thermal power, insurance, white goods, and publishing are at a medium to low level; while the crowding level of banks is at a medium level; only the crowding level of operators is at a medium to high level