Source: Zhitong Finance
Guosen Securities released a research report stating that selling pressure in the tech sector is disrupting market trends. Approximately 1–2% of leveraged funds, equity-focused mutual funds, short-term foreign capital, and insurance assets have been cleared out from their peaks. Meanwhile, private equity, long-term foreign capital, and "fixed income plus" holdings have seen about 3–4% clearance. Tech rallies typically offer two waves of opportunity: from the first peak to the trough, 2–3% of chips are cleared. Generally, the less clearance during this phase, the higher the chip accumulation in the second wave. Currently, the clearance of tech sector chips and emotional release is more than halfway done. Future market direction will depend on changes in industry fundamentals, chip distribution, and overseas liquidity conditions.
Guosen Securities' key views are as follows:
Market selling pressure persists, limiting a broad recovery in the tech sector. Recently, A-share technology stocks have continued to pull back. However, within the tech sector, small- and mid-cap tech stocks have shown relative resilience, with declines significantly smaller than those of large-cap tech stocks. On one hand, looking at concept indices, using the CPO index as an example: as of 10/16, the index has risen cumulatively by 8.6% since 8. In contrast, leading CPO stocks such as Zhongji Xuchuang and Eoptolink have fallen 25.6% and 22.5%, respectively, significantly underperforming the index itself. On the other hand, institutional holdings in tech stocks increased noticeably in the second quarter. Large-cap tech stocks overlap heavily with institutions' top holdings. Further analysis shows a significant negative correlation between institutional ownership of overseas computing power targets in 6Q2 and market performance since 8. Additionally, examining intraday market movements after the holiday, net purchases of broad-based ETFs have surged since late 9, providing liquidity support to the market. However, the number of instances where tech stocks rallied sharply only to reverse course has increased notably after the holiday, such as on 10/13, 10/14, and 10/16.
Overall, the underperformance of technology stocks with heavy institutional holdings in recent days has hindered a full recovery in the tech sector. Combined with frequent intraday rallies followed by sharp pullbacks after lunch following the holiday, Guosen Securities attributes this to lingering institutional selling pressure and incomplete clearance of positions and sentiment within the sector.
Guosen Securities has analyzed in reports such as "Revisiting the Tech M-Top: When Will the Second Wave Arrive? - 20260808" that every historical tech rally unfolds in two waves, forming an M-shaped double top. From the first peak to the trough, valuations and crowding levels drop significantly: PE falls by an average of 52%, PB by 50%, while turnover share and turnover rate decline by nearly 40%. In the following section, we will again draw on lessons from past high-growth sectors. By examining capital clearing across different samples, we assess whether institutional holdings in tech have been sufficiently reduced this time.
From the first peak to the trough, historical data shows that capital chips typically clear down to 7–8% of their levels at the previous high. Using the holding ratio at the left peak of an M-top as a baseline, most capital types cleared down to 7–8% of their peak holdings at the low point. Specifically, leveraged funds, public mutual funds, and foreign investors generally saw lower clearance rates, while private equity, insurance funds, and "fixed income plus" products experienced higher clearance rates. Ordered by clearance intensity (ascending), average holdings at the low point relative to the previous high were: leveraged funds (86%), active equity public funds (85%), stable foreign capital (84%), flexible foreign capital (77%), private equity (77%), fixed income plus (73%), and insurance funds (72%). However, clearance patterns vary significantly across capital types. For instance, during the consumer electronics rally in 10-11, active equity public funds cleared up to 5% of their peak positions at the low. In contrast, during the 2014 semiconductor rally, M-top lows were reached even without a significant drop in their holdings. Similarly, insurance funds cleared up to 6% of peak holdings during the 2015 semiconductor rally but only down to 9% during the 2017-2018 battery sector rally.
During the phase from the trough to the second peak, a lower degree of capital liquidation corresponds to a higher rebound in chip distribution. Typically, there is an inverse relationship between the extent of capital liquidation at each fund's low point and the magnitude of the rebound at the second high. Ordered by descending height of the second peak, the average holdings at the second peak for flexible foreign capital, stable foreign capital, active equity funds, leveraged funds, insurance funds, private equity, and fixed income-plus funds were 143%, 131%, 116%, 111%, 98%, 87%, and 78% of the first peak, respectively. Specifically, active equity funds experienced minimal liquidation in photovoltaic equipment from 21 to 22, with holdings at the second peak rising 57 percentage points above the low. Conversely, fixed income-plus funds saw thorough liquidation in communication equipment in 15, with holdings at the second peak falling 7 percentage points below the low. However, historical exceptions exist where more complete liquidation led to larger rebounds. The most notable example is foreign capital: long-term foreign capital liquidated only 1 percent during the semiconductor rally in 21, resulting in a subsequent rebound of just 15 percentage points; short-term foreign capital underwent significant liquidation during the energy metals rally from 21 to 22, with holdings rebounding approximately 123 percentage points from the low to the second peak.
Back to the present: with data disclosure becoming more complete, we analyze the latest tech sector cleanup from two dimensions: institutional holdings and sentiment indicators.
From a chip perspective, the degree of capital clearance for most funds is approaching or has exceeded historical averages. Different funds show varying levels of clearance; they are categorized into three groups based on these levels. Specifically:
(1) shows significant de-risking: long-term foreign capital, private equity, and fixed-income-plus. ① Long-term stable foreign investors held 23% of electronics and communications in Q3, reducing exposure by approximately 3 percentage points from the Q2 peak. ② Based on sector allocation data for CREFI index component funds from China Resources Trust, private equity technology holdings as of 8 have decreased by about 3 percentage points from prior highs. ③ Among fixed-income-plus funds heavily invested in technology, an estimated 60% may be adjusting positions; technology allocations have already declined by 4 percentage points from the Q2 peak. Overall, the extent of de-risking across these capital sources is significantly above historical averages.
(2) Moderate De-risking: Actively Managed Equity Funds and Insurance Capital. ① Currently, funds heavily invested in technology and suspected of rebalancing represent approximately 30% of the total scale of actively managed equity funds; under the same methodology, this reflects a de-risking of about 1–2 percentage points from the Q2 peak. ② For insurance capital, we used constrained robust regression comparing industry index gains against net asset value changes of active equity-style insurance asset management products. Summing the coefficients for Electronics and Communications serves as an estimate of their position size. As of 10/15, estimated holdings in Electronics plus Communications stood at roughly 16.4%, representing a de-risking of about 2–3 percentage points from the peak. Overall, the de-risking level for these funds is close to historical averages.
(3) Limited Depletion: Short-term Foreign Capital and Leveraged Funds. ① In Q3, short-term flexible foreign capital held 26% in Electronics + Communications, representing a depletion of approximately 2 tenths compared to Q2. ② Current financing balances for Electronics + Communications stand at 5900 billion yuan, accounting for 25.1% of the total. Compared to the peak in late 6, this reflects a depletion of roughly 1 tenths. The current level of fund depletion remains near historical lows.
From the perspective of sentiment indicators, trading heat has declined to near historic lows, while valuation metrics remain slightly above average. As of 10/16, turnover rates for Electronics and Communications stood at 2.5% and 1.2%, respectively—both representing declines of nearly 60% from their respective end-of-6 highs, approaching the maximum historical drawdown. Regarding valuations, PE ratios for Electronics and Communications are 50x and 41x, with PB ratios at 5.2x and 4.8x. The PE ratios have fallen to 50% of their previous peaks, and PB ratios to 57%, bringing both metrics close to historical averages.
Building on the previous analysis, the current phase of tech sector deleveraging may be entering its latter half. Long-term foreign capital, private equity, and "fixed income plus" products appear largely cleared out, while active equity-focused mutual funds, insurance assets, short-term foreign capital, and leveraged funds may still have room for adjustment. Additionally, trading congestion has eased significantly. As capital flows and sentiment indicators normalize, historical patterns suggest substantial upside potential for these sectors. Should new catalysts emerge in industrial fundamentals or if overseas liquidity conditions stabilize marginally, the concluding phase of the A-share market could prove promising, paving the way for a second wave of tech-driven rallies.
Risk Warning: Historical data does not guarantee future results. Some financial figures are estimates and may differ from actual values.
