Chapter 136: Sector Rotation Begins

Things don't go as planned, as if there is an eye watching you in the dark. The trend of the stock market is often beyond everyone's expectations.

Since July 27, 2016, the Shanghai Composite Index has been adjusted for three consecutive trading days with shrinking volume, setting a temporary low of 2931 points.

Just when many investors were worried.

The Shanghai Composite Index continued to rise, breaking through 3,000 points in just five trading days. After that, it continued to rise without stopping, and on August 12 and August 15, it drew two large positive lines, directly breaking through 3,100 points and closing at 3,125 points.

After that, the Shanghai Composite Index adjusted slightly for more than three months, and continued to break through 3200 points and 3300 points, and even reached 3300 points on November 29, 2016!

In this way, starting from the lowest point of the year, 2638 points, the Shanghai Composite Index has risen by nearly 28% this year!

This increase is definitely a small bull market.

However, the liquor sector has been adjusting during the same period. After Kweichow Moutai hit a temporary high of 326.6 yuan in July, it has been falling all the way to 288 yuan in September, and then rose all the way to more than 320 yuan.

The increase is 0.

Wuliangye is almost a replica of Kweichow Moutai. It fell from its highest point of 38.8 yuan on July 11 to 32.02 yuan on September 12, and then climbed all the way to its highest point of 37.57 yuan on November 29.

The increase is almost 0.

Jiugui Liquor was even worse. It fell all the way from its highest point of 25.11 yuan on July 11, directly falling to 18.04 yuan on September 26, and never recovered. It closed at 19.96 yuan on November 29.

The drop reached a staggering 20%!

"This, this is just profiting from the index and not the money itself!" In the trading room, Zhao Xinyue looked at the Shanghai Composite Index and then at her holdings, muttering non-stop, "Li Feng, look, I made the right move, didn't I? Liquor stocks haven't risen since July. Sigh... I should have bought something else earlier..."

Li Feng smiled and said:

"Stocks that only go up and never go down only exist in dreams. Normal stock market trends are like this: up, down, up again. There are no stocks in the world that only go up and never go down, and there are no stock markets that only go down and never go up."

"When you encounter this kind of situation, the first thing you should do is not to sigh or complain, but to focus on the causes of this trend. You should carefully analyze the emergence of this situation and decide whether it is a change in the overall situation, a problem in the industry, or a problem in the production and operation of the enterprise."

"If there's a problem with one of these factors, the investment logic will fundamentally change, and you should resolutely stop the loss and exit the market. If the logic is sound, then continue to hold the stock and wait for it to rise."

"Well, then tell me if there is any problem." Zhao Xinyue didn't want to think.

Li Feng knew that she had this temper and it would take a while for her to change, so he continued:

"Let's talk about the general trend first. We all know that this economic cycle was driven by real estate. I don't need to explain how hot the real estate market is right now, right? The general trend is correct."

"Let's talk about the industry and individual stocks, Menghan, tell me about it. Haven't you been going to your dad's place to help out often recently?"

Li Feng threw the question to Lin Menghan who was sitting next to him.

Lin Menghan thought for a moment and said:

"High-end liquor, especially Kweichow Moutai, is already in short supply. The retail price has been rising again and again. It was 870 yuan in the first half of the year, but now it has exceeded 1,000 yuan and is still rising. My father is worried that he won't be able to get the goods next year, so he has already planned to pay in advance to place an order."

"Then why haven't liquor stocks risen in the past few months?" Zhao Xinyue started arguing with Lin Menghan again.

Li Feng laughed and said, "Come, let's take a closer look at what sector has risen in the past few months to make Miss Zhao so unhappy."

Zhao Xinyue pouted when she heard that.

Li Feng smiled and opened the brokerage software to analyze:

"Look, in the past few months, the sector with the highest increase has been the construction and decoration sector (BK0016). It has risen from its lowest point of 3752 points in August to the current 4949 points, a full increase of 32%. The second highest increase has been the building materials sector (BK0015), which has risen from its lowest point of 3255 points in August to the recent 4319 points!"

"Take the leading stock, Oriental Garden, for example. Its price was 8.34 yuan on June 24th, but it soared to 17.14 yuan in October, doubling in value."

Li Feng opened the K-line chart of Oriental Garden.

It started to start on June 27th, and began to explode in volume on July 21st. Both volume and price rose all the way, doubling to 17.14 yuan in one wave. The graph was so pleasing to the eye.

During the same period, the overall market climbed from 2890 points to 3061 points, a mere 6% increase. Oriental Garden's performance can be said to be going against the trend and surging!

Zhao Xinyue looked at its trend and liked it more and more. She couldn't help but ask, "Why did it rise so much?"

"From a technical analysis, it means there's a market swindler involved. From a value analysis, it means there's been a huge change in the fundamentals," Li Feng continued, opening the information on Oriental Garden.

"This company is engaged in garden landscape construction. Look, its first quarter report showed a loss of 67 million yuan, but its interim report reached 297 million yuan, a year-on-year increase of 88.87%!"

"The current market focus has shifted from the home appliance and liquor sectors in the early stages to the building decoration and building materials sectors within the real estate industry chain. That's why our holdings only earn us money from the index but not from the real estate itself."

"This is normal sector rotation."

Li Feng concluded.

"What is sector rotation? Do we need to adjust our positions?"

Zhao Xinyue asked. She had been trading stocks for a short time and had never experienced or heard of sector rotation.

Li Feng knew she was confused, so he thought about it and explained in detail:

"I once said that the stock market is fundamentally an inflationary phenomenon, a manifestation of rising monetary policy that lifts all boats. Sector rotation is very similar to this."

"Capital is like water, rushing into the stock market, first lifting up some light stocks, then other heavier stocks, and finally the heavier stocks... wave after wave, like rain, first soaking the ground, then flowing into small streams, and finally gathering into large rivers, and finally flowing into the sea."

"The same is true for sector rotation. When the market comes, various sectors in the stock market will rise, some first, some later, some faster, some slower."

When Zhao Xinyue heard this, an idea flashed in her mind and she said:

"If, if we can find the pattern of this sector rotation, can we rotate it perfectly? First buy the sector that rises first, then sell the sector that rises later. In this way, won't the rate of return of our funds rise like a rocket, continuously rising in turn? Li Feng, you are good at stock trading, tell me, how to rotate sectors!"

As she spoke, her eyes flashed with golden light, and she opened her mobile phone, as if she was about to place an order.

But Li Feng was so angry that he laughed.

"Xinyue, do you think this stock market belongs to my family? You can even calculate which sector will rise first and which will rise later, and seamlessly switch stocks. If I had that ability, why would I still be sitting here? I'd have achieved financial freedom and traveled across five continents and six oceans."

"So, how do we do it?"

"Just wait. In a market cycle, the first test is your stock selection ability, and the second is your holding ability. Both are indispensable and mutually reinforcing. If you fail to select mainstream sectors and leading stocks, you may only make money from the index but not from the market, wasting your time and market. If you don't have the ability to hold stocks well, you will always try to be clever and go in and out, just like you do, trying to seize every opportunity and every fluctuation, frequently doing short-term trading, and going in and out. The end result is that you will work hard all the time, but in the end, you might as well not hold your stocks, or even lose money."

"Investment guru, J.J. Livermore, once said that money comes by sitting and waiting."

"You just sat and waited?" Zhao Xinyue was very surprised and a little unconvinced.

Li Feng continued:

"Well, Xinyue, if you have time, backtest the super bull market from 2005 to 2007 and you'll know."

"At that time, all major sectors in the stock market also soared and soared again under the pursuit of wave after wave of funds. Banks, real estate, steel, nonferrous metals, coal, papermaking, shipbuilding and other sectors all soared, and I saw another wave of rise, and then another wave of rise. Under the price comparison effect, stocks with a PE ratio below 10 were eliminated first, then stocks with a PE ratio below 20, and finally stocks with a PE ratio of 30. Even stocks below 5 yuan were eliminated..."

"Not only do sectors rotate, but individual stocks within the sectors also rotate. These few days you're the big brother, the next few days I'll be the leader, and in the next few days it'll lead the sector."

"Eventually, the gains of individual stocks within a sector will be similar."

"The best option for investors is to hold their shares."

"So, when will the liquor sector start to rotate back?" Zhao Xinyue continued to ask, "No, it won't come back, right?"

"I'll be back,"

Li Feng analyzed carefully, "Liquor stocks, especially Kweichow Moutai, are primarily consumed by individuals now. They represent a true consumer upgrade. Now that the real estate cycle has begun, money is driving inflation, flowing out of banks and into dozens of real estate-related industries. After circulating through layers of liquidity, it ultimately becomes RMB in everyone's hands. Now that everyone has money, how can they not spend it?"

"In fact, to a certain extent, the terminal price of Kweichow Moutai is also a manifestation of inflation."

"This year, if there are no unexpected events, inflation will rise, and next year, Kweichow Moutai's sales volume will rise further."

Zhao Xinyue was confused and didn't understand a bit.

I just know to continue holding the shares.

But I still have tens of thousands of yuan in my hands. Should I continue to buy Kweichow Moutai or buy other stocks?

She really had no idea what to do.

She asked Li Feng, who thought for a moment and said, "Wait until mid-December before making a decision."

"Why?" Zhao Xinyue was puzzled.

"Because, in mid-December, the annual Central Economic Work Conference is coming up again," Li Feng emphasized. "Remember, the end of each year is the most important time for investment and the best time for investors to sow in winter."

"It really is... another year, it's coming up so soon." Lin Menghan muttered to herself.

Zhao Xinyue also felt as if she was in a dream.

At the end of last year, after careful analysis, several people sowed in the two major sectors of liquor and home appliances in winter and obtained considerable profits. What should they sow in winter this year?

Zhao Xinyue and Lin Menghan couldn't help but feel a little excited.

———

Fellow investors, did you pay attention to the Central Economic Work Conference a few days ago? Are you doing any winter sowing?