Crypto and Stock Market Drop: Seven Blades of the Downtrend - The Kill Style

Let’s talk about the last “knife” in the seven blades of the crypto and stock market decline—killing style. This knife is particularly important for short-term traders or those who like sector rotation, but relatively, it is the least important. Killing style is a type of intense short-term adjustment behavior unique to institutional investment or style rotation. It is not caused by deterioration in companies or industries, nor by earnings surprises, but by whether the market is in the mainstream trend. As Lei Jun said, “Standing at the windward side, even pigs can fly.” If you’re not in the wind, even if the company itself is fine, you may be abandoned by the market.

The so-called killing style refers to the style switching among various funds (large funds, small funds, etc.) in the market. For example, in China’s crypto and stock markets, funds often shift from growth stocks to value stocks, then from small-cap stocks to large-cap stocks, and so on. This year, small-cap stocks may be popular, but in two or three years, large-cap stocks may regain favor. Similar situations exist in the US crypto and stock markets, but in the past decade, the US has mainly been dominated by large-cap stocks, with a significant Matthew effect. In China, there is also a phenomenon of rotating speculation from thematic stocks to blue-chip stocks, because the number of truly valuable stocks is limited, and everyone wants to make money, so they can only profit through this kind of collective rotation and grouping.

Once the market experiences killing style, assets in the mainstream style will be collectively abandoned. This is because when funds shift from one style (say Style A) to another (Style B), assets in Style A will be sold off, causing stock prices to fall, which in turn leads to a decline in the stock index. Falling stock prices will worsen market sentiment, prompting more people to sell, creating a situation where the index and sentiment decline or rise together. This is not due to company problems but a change in market style preferences.

This style or sector rotation is not limited to sectors but also involves different business types, essentially a change in style. For example, investment style may shift from growth to value, reflected in funds moving from new energy, chips, pharmaceuticals, and other hot sectors to banking, coal, electricity, and other sectors; or from small-cap stocks to large-cap stocks. In recent years, investing in the ChiNext and STAR Market could earn significant profits, but now many investors face losses or even halts, and are turning to the SSE 50 and CSI 100 large-cap stocks. Similarly, investment themes may shift from popular concepts like the Metaverse and AI to defensive sectors like liquor, medicine, and infrastructure. There is also a shift from high-growth tracks to high-dividend sectors, from tech innovation stocks to dividend-paying “Zhongzi” stocks, with banking, insurance, and real estate sectors once receiving excessive attention.

The initiation of killing style usually stems from several factors:

Macroeconomic factors: Changes at the macro level are hard to analyze. For example, when an interest rate hike cycle begins, funds seeking high dividends tend to flow into undervalued assets.

Policy direction: National policies have a significant impact on China’s crypto and stock markets. For instance, when the country promotes infrastructure vigorously, traditional cyclical sectors like steel and chemicals will rise, while growth-themed stocks may be neglected; conversely, during economic prosperity, growth stocks are more favored.

Market expectations: Changes in market expectations can also lead to killing style. When investor risk aversion rises, market preferences change. In a bull market, investors are more risk-tolerant, enjoy stories and hot topics, and stock prices can be driven sharply higher; in a bear market, with poor stock performance, investors focus more on cash flow, earnings, and dividends. This risk attitude is cyclical, affecting stock preferences, seemingly random but actually influenced by market environment. During bear markets, investors naturally focus on cash flow, earnings, and dividends because lack of funds makes stories hard to support stock prices; in bull markets, they may prefer stock price gains over dividends. Therefore, market sentiment in bull and bear markets determines risk appetite and which stocks will rotate. These are not value investment issues, but for comprehensive explanation, they must be clarified.

Another factor is the situation where funds heavily hold popular stocks. When the concentration of these stocks loosens, investors who were heavily invested in them will collectively rebalance, triggering a market style shift.

This is the so-called “killing style.” For example, in a bear market, people tend to buy dividend-paying investment products; when the crypto and stock markets start rising, some speculative products are bought. Even value investors sometimes participate in this style shift. This is the last “knife” in the crypto and stock market decline, and for value investing, it is not the most important.

Here are some historical examples of killing style:

• 2022: Growth stocks collectively suffered setbacks, such as previously popular high-growth sectors like new energy, CXO (pharmaceutical outsourcing), and technology underperformed. The new style shifted to high-dividend, stable-growth sectors with cash flow, like banks, electricity, and oil. The reason was the Fed’s rate hikes in the US, which, to avoid risk, led the market to suppress growth stocks as interest rates rose.

• 2023: State-owned enterprise stocks surged, while small-cap stocks remained sluggish. Before 2023, the ChiNext and thematic sectors performed well. In 2023, stocks like PetroChina, China Communications Construction, and China Telecom rose. When I bought PetroChina, many doubted it, saying it would fall, as it had been depressed for over ten years, thinking it had no value—I bought it three or four years ago. So, often going against the trend is necessary, but the premise is to look at company performance and whether it is undervalued. Its surge was partly luck, and partly due to policy shift toward stabilizing growth, with funds clustering around state-owned enterprises.

• 2018: All consumer blue-chip stocks collapsed, and investors shifted to financial sectors for risk avoidance, which was a disaster. Previously, the style focused on white wine, pharmaceuticals, home appliances, and other consumer blue chips, known as the “Mao Index” stocks, which performed well. But after 2018, the style shifted to banks and infrastructure sectors. At that time, housing prices soared, and many believed real estate and crypto stocks were undervalued; later, in 2022-2023, the situation of real estate companies proved this wrong. The background was deleveraging combined with the US-China trade war, increasing market risk appetite.

During the “killing style” process, some situations often occur. Some companies have decent fundamentals but see their stock prices fall due to style shifts and are ignored by the market; some funds’ heavy holdings decline collectively, as mutual funds’ concentrated stocks no longer hold the same weight; new hot stocks appear, and regardless of their performance, they attract attention simply because of style transfer. Once stock prices rise, many, especially retail investors in China, follow suit, pushing the stocks higher. Therefore, misjudging the trend and timing is common; usually, only one hot style exists at a time, and most stocks are neglected, so missing the trend is normal. Some investors like to bottom-fish those once-hot but now out of favor stocks, which requires patience and resilience; otherwise, it’s hard to make money, and rushing in blindly may lead to catching the last wave.

For investors’ strategies, first, participating in style shifts is like dancing on the edge of a knife—very risky and requiring strong skills. I do not recommend ordinary investors to try lightly. Some so-called early signals of style change, such as volume changes, northbound capital flow, ETF momentum, industry capital flow, etc., are mostly useless and not worth spending time on. Investors should not cling to old styles; when the market style changes, they should know when to exit. But they should also avoid blindly chasing hot stocks. My personal advice is to allocate about 60% of funds to some less cyclical, neutral products, such as dividend-paying sectors like electricity, transportation, and medicine, balancing growth and value. The remaining 30% can try style switching operations, but overall, I recommend mainly dividend-related products.

Of course, this is just my personal view. Everyone has different investment approaches. If you are not sensitive to new styles, don’t follow blindly. The window for style change is usually only a few weeks to months. Waiting until the market confirms the style shift before entering may cause you to miss the first wave of profits and catch the last wave of increased risk. Rising stocks mean increasing risk; falling stocks mean risk is being released. In summary, “killing style” is not about company fundamentals but about market taste changes, style premium reversal, and is driven by trading structures. To avoid the “killing style” knife, investors are advised not to try to profit from it, as the probability of success is low and the odds are unfavorable.