A-Share Market Diverges: Should Investors Step Aside or Start Positioning?

Preface

On October 26, mainland China’s A-share market opened lower, fell further, and then recovered during the session. Strength in oil and petrochemical companies and banks helped the Shanghai Composite turn positive, while weakness in electronics and communications weighed on growth-oriented indexes. Although the market had staged a V-shaped rebound the previous Friday, losses remained widespread and turnover contracted. This divergence has left investors weighing whether to exit positions or use the pullback to build them. Market commentators describe the move less as a collapse in bullish sentiment than as a rebalancing of trading positions. The near-term outlook, however, remains dependent on earnings, market liquidity, global technology shares, geopolitical developments, and oil prices. This article summarizes the session, the risks under discussion, and the portfolio approaches proposed by market participants.

Lazy bag

The market’s headline recovery masked a broad decline: 3157 stocks fell and trading value decreased to 1.62 trillion yuan. Defensive areas, including oil and petrochemicals and banks, outperformed as technology shares retreated. Analysts generally see the market as being in a volatile repair phase rather than a confirmed reversal. They recommend avoiding both panic selling and impulsive buying after a rebound, monitoring third-quarter earnings and liquidity, and balancing high-dividend defensive holdings with carefully selected growth investments. Any allocation should account for overseas interest rates, technology-stock volatility, geopolitics, and oil-price risks.

Main Body

The session: a modest index recovery amid broad losses

On October 26, A-shares opened lower and moved down before finding support at around 10:30. They recovered somewhat and traded within a narrow range in the afternoon. The Shanghai Composite Index closed up 0.19% at 3697.52 points. The ChiNext Index fell as much as nearly 3% intraday before narrowing its loss to 1.71%, closing at 2638.23 points. The Shenzhen Component Index fell 1.19%. The CSI 300 slipped slightly, while the SSE 50 edged higher. The STAR 50 and Beijing Stock Exchange 50 both declined by more than 2%.

The number of declining shares showed that the index-level recovery did not translate into broad gains. A total of 3157 stocks fell, including 27 that closed at their daily limit down. Meanwhile, 2252 stocks rose, with 59 reaching their daily limit up. Trading value across the Shanghai, Shenzhen, and Beijing markets decreased by 3500 billion yuan from the previous session to 1.62 trillion yuan. As of October 23, the combined balance of margin financing and securities lending across the three markets had fallen to 2.43 trillion yuan.

Defensive sectors rise as technology retreats

Traditional and defensive sectors helped support the market. Oil and gas, shale gas, banks, ports, and shipping performed relatively well. Among the 31 primary Shenwan industry groups, 16 finished higher. Oil and petrochemicals gained more than 2%, while banking, transportation, and real estate also strengthened. Commercial retail, food and beverage, non-bank financials, and beauty and personal care each rose by more than 1%.

The remaining 15 industry groups closed lower. Electronics was weak throughout the session and fell 3.79%. Communications and non-ferrous metals each lost nearly 3%, while building materials, machinery, electrical equipment, basic chemicals, and national defense and military industries also declined. Semiconductor companies, electronic equipment manufacturers, communications equipment providers, consumer electronics, electronic components, high-bandwidth memory, optoelectronic devices, printed circuit boards, and memory chips were among the weakest areas.

Several actively traded stocks illustrated the uneven performance. Five stocks recorded daily turnover exceeding 100 billion yuan. Zhongji Innolight fell nearly 3% to 594.5 yuan per share; Eoptolink dropped 3.57% to 251.69 yuan per share; ChangXin Technology declined 0.44% to 42.66 yuan per share; CATL edged up 0.17% to 238 yuan per share; and Cambricon gained 3.84% to 968 yuan per share.

Position rebalancing or a lasting change in direction?

The session followed a V-shaped rebound in A-shares on the previous Friday. The subsequent decline and partial recovery, accompanied by lower turnover, prompted questions about whether that rebound could continue. Chen Xingwen, chief strategist at Black Rock Capital, characterized the move as a rebalancing of positions rather than a retreat by bullish investors. In his view, contracting turnover suggested that panic selling had not surged, and the clearing of short-term speculative holdings could gradually narrow differences between buyers and sellers.

Chen also described the sector rotation as a shift in institutional preferences: away from crowded, high-valuation growth areas and toward sectors with comparatively clear valuations or earnings. Communications and computing-hardware companies were among the session’s weakest groups, while oil and petrochemicals, liquor, food, and utilities provided support. This interpretation does not eliminate the possibility of further volatility; it frames the move as a change in market structure rather than proof of a decisive trend reversal.

JURONG Asset Management said a short-term oversold rebound could continue, but characterized it as more likely to represent a “stage bottom” than a V-shaped reversal. Technical indicators had broadly weakened and the market’s ability to generate gains had deteriorated. In this view, the rebound’s durability depends on whether fresh capital enters the market and sustains demand.

Chen expected a period of consolidation and gradual repair after October, while noting external and domestic considerations. He cited the Federal Reserve’s resumption of rate hikes in September and the 10-year U.S. Treasury yield rising above 5%, its highest level since 2007. Higher global rates may place pressure on the valuations of growth assets, including domestic technology shares. At home, he pointed to the potential for consumption and investment to stabilize and recover in the fourth quarter, as well as structural bright spots in third-quarter reports. He also cautioned that leverage reduction by margin investors and insurers, uneven earnings, and changing overseas monetary policy could trigger further swings.

Other analysts emphasized confirmation rather than prediction. Zhang Pengyuan, a researcher at PaiPaiWang Wealth, said that the market’s recovery reflected some investors testing opportunities after a prolonged adjustment. For the rebound to last, he argued, turnover must recover, new capital must continue to arrive, and the market’s ability to deliver gains must improve. He also flagged overseas technology shares, geopolitical developments, and international oil prices as potential influences on risk appetite, with third-quarter results likely to shape performance across industries and individual stocks.

Fang Lei, deputy general manager of StarRock Investment, said the sharp October pullback had already absorbed a considerable portion of concerns related to AI credit and had cleared some trading positions. That could create an opportunity for a short-term oversold recovery. However, he emphasized that near-term trading remained sensitive to sentiment and that investors should watch whether confidence improves and whether capital supports sectors with strong growth prospects.

Key risks and information to monitor

Third-quarter earnings are a central near-term test. Results can help distinguish companies whose business performance supports their valuations from those whose investment cases rely primarily on expectations. The reporting period may therefore produce further differentiation even if the broader indexes stabilize. Investors are also watching whether market turnover and incoming capital recover after the contraction seen on October 26.

International developments add uncertainty. The discussion among analysts included U.S. interest rates and Treasury yields, volatility in overseas technology stocks, geopolitical tensions, and oil prices. Yang Ziyi, research director at Zhongrui Heyin, highlighted renewed concern about financing needs and returns on AI capital expenditure. He also noted that disruption to supply from the Middle East had pushed oil prices back above 110 U.S. dollars, while fluctuations in Treasury yields and global risk appetite added pressure to markets.

Yang pointed to developments in physical AI and robotics as potential sources of longer-term industry growth. Domestic industrial robot production increased 29.1% year over year in the first three quarters. Nvidia released a humanoid-robot reference platform, datasets, and simulation tools. Tesla’s Optimus had entered small-batch trial production on a scaled production line and reached basic quality standards, although shipment data had not been announced. Meta and SpaceX earnings offered evidence of AI-related revenue in advertising and computing infrastructure. In China, high-speed interconnect, advanced-process, and liquid-cooling projects continued to progress. Yet Yang stressed that whether large capital expenditures eventually generate adequate returns still requires confirmation from subsequent earnings.

Positioning: avoid the two extremes

For investors deciding whether to sell or enter, Chen advised against indiscriminate stop-loss selling and suggested taking a longer-term perspective, building positions in stages during market adjustments. His proposed “barbell” approach combines defensive holdings with selective growth exposure. The defensive end could include banks, utilities, oil and petrochemicals, coal, and consumer sectors with higher dividends, intended to provide a stabilizing base. The growth end could focus on hard technology, advanced manufacturing, and innovative medicines after valuations have adjusted sufficiently and business prospects remain sound. He suggested maintaining a position of around 70% while retaining ample cash to manage volatility and add selectively if opportunities emerge.

Zhang cautioned against chasing prices solely because of a short-term rebound. He recommended reducing dependence on a single market style and paying greater attention to diversification and fundamental evidence. In technology and growth, investors could examine computer, electronics, communications, and advanced manufacturing companies with identifiable industry drivers and stronger prospects for earnings delivery. At the same time, elevated valuations, crowded trading, and results that fall short of expectations could increase volatility. For balance, reasonably valued companies with relatively stable cash flow and profitability, including high-dividend and lower-volatility areas, may offer defensive characteristics.

JURONG Asset Management said the medium-term market thesis remained intact and that structural growth validated by third-quarter results could continue to guide stock selection. It advised waiting for trading congestion in AI hardware to ease. Its suggested approach was to consider an oversold rebound in the ChiNext and STAR Market areas in the short term, with close attention to timing, and to use dividend-oriented holdings such as home appliances and banks as a medium-term foundation. It also cited potential opportunities in turnarounds in consumer sectors and Hong Kong-listed technology, as well as AI applications and military-related themes.

Mingyu Asset Management observed that fund positioning and sentiment indicators had fallen considerably. Support from state-owned funds could help stabilize expectations, but uncertainty remained, and fully clearing market positions would take time. It expected continued divergence and advised investors to follow third-quarter reports, focusing on companies with sound performance, substantial previous declines, and reasonable valuations. It also said technology’s long-term industrial trends remained relevant, particularly in areas where earnings downgrades had already been substantially reflected in prices, alongside dividend sectors such as finance and utilities.

Yang’s approach placed defense first while retaining flexibility to participate in future opportunities. He recommended prioritizing industries with clear progress and results that can be verified, rather than relying on broad narratives. Taken together, the assessments do not establish a single inevitable market direction. They instead point to a volatile repair phase in which earnings, liquidity, valuation, and external conditions matter more than a single day’s index move. Investors may therefore benefit from setting position sizes to match their risk tolerance, diversifying across sectors, and reassessing assumptions as new data becomes available.

Key Insights Table