Guangfa Strategy: Insight on Technology Adjustments and the Duration and Magnitude of Sector Declines Report Summary This week, we discussed two main questions about the primary sectors: ① Which main trends are still strong? Which sectors may be facing a consolidation period? ② Referring to historical trends, how long and deep are the adjustments when in a consolidation phase? 1. Reviewing Historical Main Trends Often Go Through a Process of "Trend-Consolidation-Trend Continuation" Moving averages are the lifeline of trends; trends above the moving average are often healthy. However, if the market significantly falls below the moving average in the short term or oscillates too long around it, there is a high probability of entering a consolidation phase. Nonetheless, consolidation does not mean the end of the main trend; historically, many trends after a consolidation phase have reached new highs. In hindsight, "consolidation" often becomes an "upward continuation." Notable examples include the TMT150 from 2012-15, new energy vehicles from 2020-21, and optical modules in 2023, which all experienced consolidation phases, often more than once.

The 【moving average deviation】 of the primary trend primarily determines the short-term market movement, while the 【industry trend】 fundamentally influences whether new highs follow a consolidation. Historically, a slow weakening or a rapid short-term decline does not signify the complete end of the trend; it only indicates a temporary consolidation. As long as the industry trend remains, there are still opportunities for the primary trend to reach new highs. Reviewing past trends, if the moving average deviation falls below -5%, the average returns for T+20/T+60 are -0.50%/+5.25%.

2. Which Current Main Trends Are Still Strong? Which Sectors May Enter a Consolidation Phase? Sectors such as batteries (-2.2%), innovative chips (-2.2%), and non-ferrous metals (+3.3%) remain slightly above or marginally below their moving averages. In contrast, optical modules (-7.3%) and PCBs (-6.8%) have rapidly fallen below their moving averages, while innovative drugs began to flatten and enter consolidation on September 23.

For the sectors in consolidation, we believe the trend is not over, and new highs are still possible for two reasons: ① Industry trends for optical modules, PCBs, and innovative drugs remain positive, and as the third-quarter reports approach, high-growth areas are more likely to see performance catalysts; ② The short-term decline is primarily due to tariff impacts, and with Trump's softened attitude towards China this Friday, the likelihood of the current "TACO trade" has increased.

3. Reviewing Historical Main Trends: How Long and Deep Are Adjustments When in Consolidation? In reviewing the adjustment situations of 11 primary trends over 33 consolidation phases, we found: ① The average adjustment duration for main trends is 20 days with an average adjustment magnitude of 18.1%; ② Focusing only on technology and high-end manufacturing sectors, the average adjustment duration is 21 days, with an average magnitude of 19.2%. (All are trading days)

Comparatively, the adjustment duration for optical modules and PCB indices has reached 13 trading days, with adjustment magnitudes of 17% and 16%, respectively. The duration has not yet attained the historical average, but the adjustment magnitude is approaching it. In contrast, the innovative drug index has shown a gradually weakening trend since September 2, with an adjustment duration of 28 days and a magnitude of 11%. Compared to historical trends, the duration exceeds the average, but the magnitude has not yet met it.

From a trading perspective, there are two strategies to deal with the sectors potentially entering a consolidation phase, without any better or worse options: ① Exit the market and wait for new catalysts, a new price high, or reduced divergence before re-entering; ② Relax stop-loss thresholds and hold steadfastly through the consolidation process.

The first option sacrifices ratios for higher probabilities, focusing on how to allocate positions post-reduction. It requires strategic selling and buying to achieve higher excess returns; (for a detailed perspective on Q4 styles, see “How to View Q4 Calendar Effects: Two Allocation Strategies Every Year”). The second option sacrifices probability for ratios, hinging on the accuracy of industrial trend judgments (for insights on identifying turning points in investment prosperity, see “Why Debate Right or Wrong?”). ⚫ I. How to Look at the Technology Adjustments: Review of Duration and Magnitude of Sector Declines In our previous report, “How to Identify a Main Trend Adjusting or Ending?”, we established a framework with moving average deviation as a core indicator. This week, the US-China friction intensified, causing various leading sectors to undergo adjustments and differentiation, with calls for style changes increasing.

This week, we primarily explored the following two questions regarding the main sectors: ① Which main trends are still strong? Which sectors may be facing consolidation? ② Referring to historical trends, how long and deep are adjustments during consolidation phases? (A) Historical Main Trends Usually Progress Through “Trend-Consolidation-Trend Continuation” To ensure consistency in our framework, we define in the main trend: ① Moving Average Deviation: ln(close)-ln(EMA20), calculating the degree to which the closing price deviates from the EMA20, reflecting the strength of the main trend; ② Trend: The main trend originates from a bottom-up rise, with more than 10 of the 20 days exceeding the EMA20, transitioning into a trend phase; ③ Consolidation: A rapid short-term decline (moving average deviation <-X%) or a slow flattening (having 10 or more days out of 20 below the moving average) typically signals a consolidation phase. A breakout past prior highs signifies a continuation of the trend.

Historically, main trends have generally followed a “trend-consolidation-trend continuation” pattern. Moving averages are the lifelines of trends; trends above moving averages usually indicate healthy movements. However, a sharp fall below the moving average in the short term or prolonged oscillations around the moving average typically lead to a consolidation phase. Still, as long as industrial trends persist, main trends can reach new highs, with “consolidation” providing a platform, from a retrospective perspective, to exchange bullish and bearish positions adequately, recharging the primary trend. This was seen in the historical trends of TMT150 from 2012-15, new energy vehicles from 2020-21, and optical modules in 2023, all of which experienced consolidation phases, often multiple times.

Reviewing detailed historical insights, the 【moving average deviation】 of the main trends mostly determines the short-term market movements, while the 【industrial trend】 is fundamentally key to whether new highs are achievable after consolidation. Based on industry patterns since 2012, a slow weakening (10 or more days out of 20 below the moving average) or a rapid short-term decline does not signify the total end of the trend; it simply represents a short-term consolidation as long as the industrial trend remains. Historical data indicates chances for main trends to reach new highs post-consolidation. In the visuals, once moving average deviation falls below -5% (indicating a sharp decline), the average returns for T+20/T+60 are -0.50%/+5.25%; for trends in consolidation (characterized by slow declines), average returns are +2.17%/+9.63%.

(B) Which Current Main Trends Are Still Strong? Which Sectors May Enter a Consolidation Phase? Referring to the historical guidance since 2012, we identified reference thresholds for entering and exiting positions: when entering, avoid chasing stocks with high deviation (>15%); pursue those with moderate deviation (5%-15%). When exiting, positions slightly above moving averages warrant confidence, while marginal breaches suggest strong resistance (deviation range of -5%~0%); significant breaches (deviation < -5%) or slow flattening signal temporary consolidation.

Following the escalation of US-China friction this week, short-term trends across the primary sectors have shown divergence. Batteries (-2.2%), innovative chips (-2.2%), and non-ferrous metals (+3.3%) remain either marginally above or slightly below the moving averages. In contrast, optical modules (-7.3%) and PCBs (-6.8%) have rapidly declined below their moving averages, while innovative drugs have been flattening since September 23rd, entering a consolidation phase. (The figures in parentheses represent the latest moving average deviation as of October 17, 2023).

For sectors approaching consolidation, we believe the primary market trends are not concluded, with subsequent potential for new highs for two reasons: ① Trends in optical modules, PCBs, and innovative drugs remain upward, and with the third-quarter report disclosures approaching, sectors with high growth prospects are more likely to see performance catalysts; ② The recent downturn is largely driven by tariff impacts, and Trump’s renewed softened stance towards China further raises the likelihood of a current “TACO trade.” Past observations on TACO trades indicate that market continuities based purely on tariff-related exchanges are not strong, presenting good entry points for fundamentally trending stocks (see “TACO trade provides renewed buying opportunities”).

(C) Reviewing Historical Main Trends: Duration and Depth of Adjustments in Consolidation In terms of understanding how long and deep adjustments could be when sectors enter consolidation, we analyzed 11 historical primary trends with 33 sampling consolidation situations and found that: ① Average adjustment durations are 20 days, with average degrees averaging 18.1%; ② Focusing strictly on technology and high-end manufacturing sectors, average adjustment durations extend to 21 days, with adjustments averaging 19.2%. (All durations are calculated in trading days).

In contrast to current trends, the optical module and PCB indices have seen rapid short-term declines since September 23. The adjustment duration has now reached 13 days, with adjustments at 17% and 16%, respectively. While the adjustment duration has not yet reached the historical average, the adjustment degree is nearing historical values. Meanwhile, the innovative drug index has shown a slow weakening trend since September 2, with an adjustment duration of 28 days and a magnitude of 11%. Compared to historical data, the adjustment duration has exceeded the average, while the adjustment magnitude remains unchecked.

From a trading perspective, in response to potential consolidating sectors, two strategies exist without inherently being superior or inferior: ① Exit first, then re-enter later upon new catalysts, price highs, or diminished divergences; ② Broaden stop-loss levels and hold out through the consolidation phase. The first approach sacrifices odds for improved win rates but presents a core question regarding portfolio adjustment post-reduction: is it advisable to hold cash or switch between sectors or into entirely different consumption/value styles? Analysis dictates that both selling and buying decisions should be aligned to generate higher excess returns; (our views on Q4 styles can be found in “How to View Q4 Calendar Effects: Two Allocation Strategies Each Year”). Contrastingly, the second option tolerates increased uncertainty to access better potential odds, fundamentally raising the question of whether one's judgment regarding industry trends is accurate — how to ensure the current market is only in a consolidation phase rather than signaling the end of the trend? Should trends marginally improve, stock prices likely breakout post-consolidation; should trends weaken, forward main trends tend to conclude without creating new highs (exploring turning points in this perspective can be found in “Why Debate Right or Wrong?”).

II. Key Changes This Week Unless specified otherwise in this section, data sources are from Wind data. (A) Macro Industry 1. Downstream Demand Real Estate: In 30 major cities, the accumulated year-on-year decline in real estate transactions is 6.03%, while on a month-to-month basis, a reduction of 8.78%, year-on-year down by 23.71%, but a week-on-week rise of 281.09%. In the first eight months, new constructions reached 398 million square meters, reflecting a year-on-year decline of 19.50%, down 0.10% from July; construction in August was 46 million square meters, down 19.84% year-on-year; for the same period, real estate development investment amounted to CNY 60,309.19 billion, accounting for a 12.90% nominal decline year-on-year, down 0.90% from July. In August, individual investments fell broadly around this timeframe. Automobiles: The national retail number of passenger vehicles from October 1 to 12 was 686,000, an 8% year-on-year decrease from October of the prior year but a 12% month-over-month increase. Cumulative retail numbers for the year stand at 1,769.4 million, reflecting an 8% growth year-on-year; for the same period, the wholesale figure reached 2,139.3 million, or up by 12% year-on-year. Regarding new energy vehicles, total retail from October 1 to 12 reached 367,000, a 1% year-on-year decline but a month-over-month increase of 1%, with a nationwide penetration rate of 53.5%. Year-to-date cumulative retail amounts to 923.6 million or a 23% increase; the wholesale figure reached 328,000 units, seeing a year-on-year growth of 1%. The national new energy vehicle wholesale has a penetration rate of 60.2%, with YTD cumulative reaching 1,077.5 million, demonstrating a 31% increase.

2. Midstream Manufacturing Steel: This week, the spot price for rebar dropped by 2.28% to CNY 3,172.00 per ton, while stainless steel fell by 1.66% to CNY 13,341.00 per ton. As of October 17, rebar futures closed at CNY 3,037 per ton, a 2.13% decline. Data from Steel Network indicated that early October recorded average daily production for major steel enterprises: 1.96 million tons, showing a decline of 8.45% from late September. In August, cumulative crude steel production reached 67.18 million tons, a year-on-year decline of 2.80%. Chemicals: As of September 30, the price of styrene decreased by 5.4% to CNY 6,884.50 per ton since September 20; methanol increased by 16.60% to CNY 2,232.50; PVC fell by 28.07% to CNY 4,796.00 per ton; and styrene-butadiene rubber decreased by 22.80% to CNY 11,435.70. International Commodities: This week, WTI down 2.44% to $57.46, Brent fell 1.72% to $61.02, while the LME metal price index rose by 1.00%. Commodity CRB Index increased 0.37% to 293.85, and the BDI index functionality shows a 6.87% week-on-week rise to 2,069.00. Coal and Iron Ore: This week's iron ore inventories increased, while coal prices slightly rose. The Qinhuangdao-Shaanxi premium mix closed at CNY 702.00 per ton up by 1.15% on October 13, 2025. The port iron ore stock saw a negligible rise of 0.17% to reach 140 million tons. August recorded raw coal production increases of 2.50% to reach 39.049 million tons.

(B) Stock Market Characteristics Market Movement: This week's Shanghai Composite Index fell by -1.47%, with banks (Shenwan) at +4.89%, coal (Shenwan) at +4.17%, and food and beverage (Shenwan) at +0.86% as the top three gainers; while electronics (Shenwan) led declines at -7.14%, followed by media (Shenwan) at -6.27%, and automotive (Shenwan) at -5.99%. Dynamic Valuation: Overall A-share PE (TTM) declined from 19.65 to 19.21 this week, while PB (LF) fell from 1.81 to 1.77; after excluding financials, PE (TTM) decreased from 29.24 to 28.17, and PB (LF) from 2.51 to 2.43. The startup board PE (TTM) dropped from 54.55 to 51.69 and PB (LF) from 4.48 to 4.16; while the Sci-Tech Innovation Board PE (TTM) increased from 104.86 to 98.70, PB (LF) dropped from 5.46 to 5.14. The CSI 300’s PE (TTM) decreased from 13.71 to 13.64, while PB remained unchanged at 1.44. By industry, PE (TTM) ratios have noted the most extensive expansion in banks, transport, and coal and the least in home appliances, automotive, and basic chemicals. From a valuation standpoint, industries such as petroleum, non-ferrous metals, construction decoration, and utilities showed rates below the historical median. Meanwhile, real estate, electronics, and computers displayed valuations above the 90th percentile. Based on PB metrics, industries like oil, chemicals, steel, building materials, electric equipment, construction, transport, and various consumer segments remained below historical median values; electronics outperformed above the 90% historical value. This week, the equity risk premium climbed from 1.57% to 1.71%, keeping market returns steady at 3.42% to 3.55%.

Margin Balance: As of October 16, total margin balance reached CNY 2,457.184 billion, indicating an increase of 0.63% week-on-week. AH Premium Index: This week, the A/H stock premium index fell to 119.74 from 118.52 last week.

(C) Liquidity Between October 12 and October 18, the central bank had 2 reverse repos due totaling CNY 10,210 billion; 5 reverse repos initiated for CNY 6,731 billion. The net withdrawal from open market operations (including treasury cash) stood at CNY 4,979 billion. As of October 17, 2025, the R007 rate increased by 6.31 BP to 0.0000%, and the overnight SHIBOR rate rose by 0.20 BP to 1.3180%. The interbank term spread narrowed by 7.30 BP to 0.3812%, while credit spread widened by 1.63 BP to 0.5000%.

(D) Overseas United States: On October 13, 2025, the U.S. reported refinery processing volume in September at 16.92 million barrels per day, down from 17.33 million previously; on October 10, crude oil inventories posted volumes of 3889 (thousand barrels) compared to the previous value of 3236 (thousand barrels). Euro Area: On Thursday, the Euro area reported August goods exports at -4.7% YoY (previously 0.5%); imports for the same month were -3.8% YoY (previously 3%). The CPI for September came in at +2.2% YoY (previously 2%), with a month-on-month CPI unchanged at +0.1%. Japan: On Tuesday, M2 growth was reported at 1.6% YoY, up from 1.3%; on Wednesday, August’s industrial production index month-on-month (seasonally adjusted) reported a decline of -1.47% compared to -1.16% previously; on Thursday, core machinery orders in August dropped by -0.89% against –4.59% previously. United Kingdom: On Thursday, August's three-month rolling GDP reported +0.3% against +0.2% previously; the industrial production index YoY was -0.71% compared to -0.1% before; and the adjusted trade deficit stood at -3.386 billion pounds, down from -3.016 billion pounds. Global Stock Markets: The S&P 500 index closed up 1.17% at 6629.07 points; the London FTSE gained 0.09% to reach 9436.09 points, the Germany DAX rose 0.13% to 24272.19 points; while the Nikkei 225 dipped 1.05% to 47582.15 points, and Hong Kong's Hang Seng followed by dropping 3.97% to 25247.10 points.

(E) Macroeconomics Price Index: China’s price index for September indicated a YoY CPI of -0.3%, previously -0.4%; PPI YoY registered -2.3%, down from -2.9%. Imports and Exports: Imports and exports for China in September recorded a YoY export rate of 8.3%, previously at 4.4%; the import index for the same period increased by 7.4%, compared to 1.3% previously. Fiscal Receipts and Expenditure: Public fiscal revenue in China for September increased by 2.58% YoY, prior was 2.03%; public fiscal expenditure during the same month showed an increase of 3.08%, previously 0.82%. Monetary Supply: In September, the M1 YoY increase stood at 7.2%, previously 6.0%; the M2 YoY figure declined slightly to 8.4% from 8.8%. Loan Growth: In September, the total balance of financial loans recorded a 6.6% increase YoY, down from 6.8%. Total Social Financing, Forex Reserves: The month's value for social financing totaled CNY 35.296 trillion; the year-on-year figure represented a -6.21% decrease; foreign currency reserves reached CNY 213.6806 billion.

III. Next Week's Data Outlook Next week, highlights include data on China’s September total retail sales of consumer goods, fixed asset investments, and industrial value-added; along with key metrics from the U.S. including September payroll changes, CPI, and PPI; October 20, Monday: China will release September's consumer good retail sales, fixed asset investment data, and industrial value-added; along with U.S. employment data, PPI, and unemployment rates; October 24, Friday: U.S. September CPI figures and Japan's CPI data for the same period.

IV. Risk Warning Geopolitical conflicts exceeding expectations could lead to higher prices for crude oil and other commodities, creating upward pressure on global inflation; Recurrent overseas inflation alongside resilience in the U.S. economy may keep global liquidity increases below expectations, particularly concerning the Fed's interest rate-cutting pace and reductions in U.S. treasury yields; Domestic growth-support policies not meeting expectations causing economic recovery to be sluggish may keep listed companies' profit levels struggling at prolonged lows, leading to further driving down market risk appetite.