Crypto and Stock Market Drop: The Fifth Blade—Suppressing Emotions

Talking about the “Seven Knives” in the crypto circle and stock market, this is already the fifth episode. We’ve discussed four knives so far: the first is killing valuation, the second is killing logic, the third is killing performance, and the fourth is killing expectations. Today, I want to talk about something different from before, called killing sentiment. Deterioration of market sentiment can trigger risk aversion and panic selling, dragging down even stocks of good companies. This kind of decline is not based on fundamentals; it’s entirely due to market panic and chaos, a delayed reaction. Sentiment usually arises after stocks have already started to plummet and is the most irrational behavior. If you become a victim of this situation and get cut by this “knife,” it shows you haven’t yet entered the crypto and stock market.

Typically, sentiment is first killed, then logic, followed by valuation, and finally performance also crashes. People panic, some don’t even look at financial statements, blindly chase gains and sell in the crypto and stock markets. These people are among the last affected. Like pyramid schemes, when it hits the fifth knife, the killing of sentiment becomes the most irrational and uncontrollable, and it’s also the easiest way to be wrongly caught in a decline. The previous declines may have reasons, but the decline caused by killing sentiment is neither due to deteriorating fundamentals nor overvaluation or logical breakdown; it’s purely driven by spreading panic, market sentiment collapse, loss of confidence, and everyone just wants to run away quickly.

Therefore, killing sentiment refers to a sharp decline in the overall market risk appetite, where emotions dominate everything, causing irrational drops in individual stocks or sectors. Sometimes, even if a company’s performance, valuation, and logic remain unchanged, its stock price still falls, even if undervalued, with reasonable logic and solid performance, yet it still crashes. This is especially evident in bear markets. Slight market movements in the crypto and stock markets can cause declines, even without news, and sometimes good news doesn’t stop the fall. Continuous decline in stock prices is a typical sign of killing sentiment, not because the company itself is bad, but because the market is too crazy.

The triggers for killing sentiment are quite simple. Sometimes, macro-level panic factors such as geopolitical tensions or wars, sharp drops in stock prices, rising interest rate expectations, or rumors of financial crises, act as triggers. For example, on May 13, 2025, last month on April 2 and 3, Trump announced tariffs, and the crypto and stock markets immediately plummeted—this is a typical example. There are also regulatory crackdowns, such as the implementation of the “Double Reduction” policy and anti-monopoly measures. When these news come out, stock prices tend to fall.

Additionally, extreme market situations can also trigger killing sentiment, such as ETF (Exchange-Traded Fund) related issues. As I mentioned before, three years ago in the US, a crude oil margin call led funds to sell stocks in the crypto and stock markets to cover debts, ultimately causing a sharp decline in stock prices.

Rumors spread on social media and self-media channels can also trigger panic, along with black swan events online, capital flight, and other situations, all causing temporary killing sentiment. Some rumors are deliberately spread, and through continuous dissemination, they lead to a decline in overall market liquidity, tightening of market funds, margin calls on leveraged investors, and causing even high-quality assets to fall together, regardless of their quality. In fact, for investors, this can be a good buying opportunity. Buffett likes this kind of killing sentiment, often summarized as “be greedy when others are fearful.”

A typical market phenomenon of killing sentiment is that most investors (many of whom are retail investors) sell as soon as they see prices falling, regardless of fundamentals. The main theme becomes falling prices, leading to a wave of limit-downs, no rebounds after declines, and sudden crashes on the one-word limit. These are all manifestations of emotion-driven behavior. If it were normal fund selling, unless forced by margin calls, it would be a gradual process.

Just like Zhuge Liang’s retreat after losing at Jieting—if he retreated, it would be orderly and slow, not chaotic. In the crypto and stock markets, sudden limit-downs, one-word limits, and retail investors blindly following the trend to sell off are either caused by unexpected bad news or purely driven by emotion. In such cases, even high-quality leading stocks can crash, with no one willing to buy, and capital withdraws completely. Even if the company is fundamentally strong, due to emotional excitement, large participation, and huge trading volume but no one to take over, panic spreads across the sector, and no one is spared, leading to a sharp decline and increased volume. Sometimes, prices fall even without volume, which is even more frightening.

Let me give some examples of killing sentiment. In 2015, China’s stock market crash was caused by margin calls. Market sentiment changed rapidly with the tightening of leverage policies. After banning margin trading, the ChiNext index dropped from 4000 points to 1500 points, and all stocks were sold off regardless of reasons, because many investors were margin called or forced to liquidate by brokers.

Another example is the outbreak of the Russia-Ukraine war in 2022, when the A-shares plunged across the board, especially some Chinese concept stocks, with investors frantically selling. In the US, Chinese concept stocks in education, technology, and other sectors fell 20%-40% when the war started in early 2022. In 2023, the first half saw a boom in AI concepts, sparking market frenzy, but in the second half, funds started to flow out. Stocks related to AI that had no earnings support but surged wildly also fell sharply. Because initial buying was driven by optimism, but during the decline, emotions turned pessimistic, ignoring fundamentals. Even some companies with seemingly good fundamentals, like iFlytek and Cambrian, were affected. In such sentiment-driven markets, if you can find good companies, it can actually be a good opportunity.

Killing sentiment is a double-edged sword. It’s different from the drivers of killing valuation, killing logic, killing performance, or killing expectations. Killing valuation involves P/E compression; killing logic involves the collapse of investment rationale; killing performance is due to deteriorating company results; killing expectations involves waning confidence in the future; while killing sentiment is caused by market panic leading to irrational behavior. Valuation, logic, performance, and expectations all have rational bases—valuation depends on high or low; logic is well-founded; performance is supported by data; expectations can be somewhat fuzzy but still show trends. Only killing sentiment is entirely irrational, driven by herd behavior.

In terms of duration, they also differ. Killing valuation is often short- to medium-term; killing logic can have long-term impacts if the logic collapses; killing performance depends on the speed of recovery, generally medium- to short-term; killing expectations is medium-term, changing when macroeconomic or industry cycle issues arise, but can restart later; killing sentiment, however, is always short-term and explosive. Many short-term traders exploit sentiment-driven markets because technical analysis essentially reflects market sentiment, expressed through technical signals. So, many short-term traders are good at grasping sentiment and controlling their own emotions.

Valuation can rebound after being overextended (at 09:25, the phrase “豆包这句话读起来语意逻辑有点拗口，需复核，音频原意是估值过高，杀完估值后，还会回来” suggests that after overvaluation, it can recover); if a mistake in logic is discovered, the impact is significant; performance declines are less common; expectation kills are more frequent; and sentiment kills are often misjudged because emotions are collective and market is a game of winners and losers. The crypto and stock markets are designed for a few to profit at the expense of many. Herding is dangerous; don’t follow the crowd blindly. If you can operate against the trend of killing sentiment, you might make money. Otherwise, following the crowd’s emotions will likely lead to being wrongly caught, which is the worst case of chasing highs and selling lows.

Therefore, the specific strategies to deal with killing sentiment are: first, when facing sentiment-driven declines, don’t rush to bottom-fish; avoid buying as prices fall, as this is prone to errors. Don’t think about selling now and rebuying later repeatedly. Be patient, wait until prices drop to a reasonable level before buying, and if they fall further later, don’t sell easily—this assumes the company is a good quality one, which can lower costs. No one knows exactly where the bottom is. The worst is buying and then selling at a lower price, missing out on profits. So, have a margin of safety—buy more as prices fall, but control overall position size.

Second, from a technical perspective, wait for signs of stabilization, such as decreasing volume or steady prices (not going into detailed technical indicators here), then consider building a position. If the chart shows continuous decline, wait patiently for consolidation before buying. Don’t always expect a reversal tomorrow; such situations are rare. Good stocks tend to move up slowly, with quick bottoming and short correction periods, while bad stocks often have sharp tops and wide bottoms.

Another approach is to observe whether certain aspects of the stock are deteriorating. If fundamentals are intact and only the stock is oversold, this emotional decline can be an opportunity for small companies. Also, pay attention to sentiment indicators, not just valuation metrics. Nowadays, many indicators measure popularity, capital flow sentiment, and trading behavior. For short-term trading, if you want to leverage others’ emotions, these sentiment indicators can be more useful than financial statements, and combining both is best. When investing, some say you should consider both fundamentals and technicals. Also, plan your position size reasonably—don’t go all-in blindly. Since sentiment-driven declines can cause limit-downs in a day, wait until prices are near bottom before adding positions, even in sentiment-driven markets.

In summary, if killing valuation is rational correction, killing logic is a collapse of belief, killing performance is a reality check, and killing expectations is a confidence slide or a premonition, then killing sentiment is mass panic and collective madness, mostly resulting in wrongful declines.

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