Big Turmoil Strategy 3 / Bull Counterattack or Humanitarian Corridor? The Real Bottom for Taiwan Stocks Depends on 4 Key Signals
Photos and text: Mirror Weekly
After Taiwan stocks plunged and then rebounded sharply, is this a bull counterattack or the opening of a humanitarian corridor? Gu Hai Lao Niu (Stock Sea Old Bull) reminds that a single day's big gain can only be viewed as a preliminary test of stabilization, and investors should not rush to conclude that the market has bottomed. Investors should watch whether margin financing continues to decline, whether small- and mid-cap stocks can stabilize, and whether foreign capital and trading volume return before deciding to raise holdings.
Having experienced violent ups and downs in Taiwan stocks in July, the undefeated guru Chen Chung-ming believes that in the third quarter the biggest thing to guard against remains price-hike concept stocks such as memory and passive components. “When such stocks are at peak earnings, their P/E ratios are often the lowest. Once manufacturers accelerate capacity expansion, supply climbs and quotes turn lower, earnings estimates are revised down; a cheap P/E ratio is instead a warning to exit.” He reminds investors that in future operations they should keep a close eye on two things — the speed of capacity expansion and product pricing — and not hold on to stocks stubbornly just because of a price-increase theme.
Gu Hai Lao Niu further stressed that after Taiwan stocks rapidly soared in the second quarter, the deviation from the monthly and quarterly moving averages became too wide, and a moderate consolidation would help the market go further. “The index may not immediately stage a V-shaped reversal; it is more likely that choppy consolidation and sector rotation will replace an across-the-board rebound.” He said there are four signals to watch for in this stabilization. Until those conditions are in place, he advises investors to keep cash, deal with leveraged positions first, enter the market in batches, and not chase highs.
First, margin balances must decline continuously and significantly, allowing overheated chips and forced-selling pressure to be fully released. “During this pullback at the end of July, margin balances fell by NT$20–30 billion per day for several consecutive days. From the previous level of more than NT$600 billion, they have now been cut by more than NT$100 billion, which is quite noticeable.” He believes that leverage must continue to exit before subsequent forced liquidation and margin-call selling pressure can be reduced. Investors using margin should keep their maintenance ratio above 200% to avoid being forced to sell at lows if the market retests again.
Second, it cannot be just heavyweight stocks like TSMC holding the line; small- and mid-cap stocks must also stabilize. For example, when the market soared on July 31, groups such as memory, passive components and substrates rebounded strongly, which is indeed more positive than the market being propped up only by heavyweights. But it is still necessary to watch the subsequent buying support and whether small- and mid-cap stocks can hold their lows over the next few trading days. If the index rises while individual stocks break to new lows again, it can only be regarded as an index rally manufactured by heavyweight stocks.
Third, foreign investors must turn from selling to buying, and their net buying must be continuous; during the rebound, turnover should ideally climb step by step from NT$800–900 billion back above NT$1 trillion, not a volume-less sharp rebound. During the previous decline, foreign investors were consistently on the sell side, becoming a major force weighing on heavyweight stocks. In the future, we must see whether foreign investors can post net buying for several consecutive days and simultaneously cover their short positions in Taiwan stock index futures before there is an opportunity to confirm that funds are returning.
Fourth, the index must climb back above the quarterly moving average. Because the quarterly moving average is the mid-to-long-term lifeline of the broader market, conservative investors can wait for three consecutive days of holding above it before confirming whether the medium-term trend has been repaired, and the volume-price structure must be healthy. If the index surges but volume quickly shrinks, it means chasing appetite is insufficient; only with sustained volume and shrinking selling pressure on pullbacks will a bottom be able to gradually take shape.
Gu Hai Lao Niu said that until all four signals are fully in place, a short-term surge is better viewed as an “initial test of stabilization,” and investors should not rush to conclude that the bulls have fully returned.
