We lost 3,400 mark (Shanghai Composite Index) in the morning trading. It seems that the panic will dominate the market again, and the SCI will impending the important 3,000 mark this week.

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It is no surprise that the SCI surged 4.94% to 3,580 points on Friday afternoon after it slipped to as low as 3,557 points in the early trading. News has it that the launch of index futures has entered the last stage of review by the State Council. The expectation of a lower stamp duty and the launch of index futures are the main drivers for today’s rally.

It is likely that the index may extend its rally on Monday.

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According to the latest survey by Sina.com’s financial channel, about half of those investing in funds have taken the 3,500 mark (SCI) as the boundary for them to redeem the open-ended funds they hold. The funds are apparently defending the 3,500 level. The first mutual fund among the 21 funds approved by CSRC since February entered into the phase to establish its portfolio yesterday.

However, we noticed that, the weakening market resulting in the dwindling valuation of the funds, which cumbered the issuances of new funds. The time of the new funds’ offering had extended dramatically to around a month from the previous one or to day. What’s more, according to some analysts, to a certain extend, the funds had been experienced the vicious cycle of more redemption-more selling-further slump.

With the negative fundamentals remain unchanged we expect further slumps in the A-share market. And if we lost the 3,500 level, the slump of SCI is set to accelerate.

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Recently, there was a riot in Tibet. And it is reported that the crew on a flight from Urumqi to Beijing thwarted a woman’s attempt to blow up the plane. What’s more, Taiwan will hold a referendum on how it will apply for UN membership.

As for the global markets, the news of Bear Sterns’s de facto bankruptcy scared American investors, who are driving down the major indices. The Hang Seng Index keeps heading down, resulting in a lot of investors that draw on leverage to invest received margin calls. It is terrible that the Hong Kong stock market may experience a grave slump.

However, we are holding out hope against the negative background. The Shanghai Composite Index has dropped to around 3,700 points, close to the golden section level of 6,000 points. And Financial News, the central bank-backed newspaper，published an article with the headline “The Stamp Duty’s reduction will be helpful to financial reform and stability.”

We expected a remarkable rally before the SCI broke 3,500 should there be any substantial positive news and progress. Now RDF is looking into stocks that have a strong motivity for rebound after a series of drops.

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Recent data show that the mutual funds, one of the major forces in the market, have begun to join the sellers’ camp. The investment director at a large fund management company in Shenzhen told the media that his company has been selling its holdings since the beginning of March, as the economic data for February started being unveiled. He pessimistically pointed out that, should the A-share market be in line with the valuation level of the Hong Kong market, the SCI should be around 2,000 points, and it would just be 3,000 points even if we consider some premium.

We recently read that the A-share market is moving from an initial bearish stage (”Bear Stage I”), in which sellers fought with inflexible buyers, to a second stage (creatively labeled “Bear Stage II”), where the old buyers are now the sellers and are squeezing the new buyers. We believe that the index has the momentum to drop further. The first substantial support level to be tested will be 3,500 points.

Somehow, a large number of stock analysts and critics are still boast things like “rebound” and “end of the current correction”, as if this were the second half of a bullish period instead of the pure bear that it appears to be from our end. This shouldn’t be so surprising - acknowledging the elephant (bear) in the room could well affect those experts’ employment status.

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To be continued…

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The No.1 resolution from the Chinese People’s Political Consultative Conference, which proposed to improve the tax system for the domestic capital market, has been a hot topic. While suggesting to lower the stamp duty, the resolution proposed to put a capital gains tax in place. This will hardly be good news for the equity market.

Officials at the CSRC have recently said that the issue of lowering or changing the stamp duty “needs more research and argumentation.” They also said that the CSRC had not been taking the stamp duty as a tool to manage the equity market. However, we thought that the amount of stamp duty collected last year being above the total amount of bonus to be distributed justified the move to lower the stamp duty. The CSRC’s inaction is prompting investors to speculate.

The Red Dragon Fund is waiting on the sidelines for now - we’re waiting for more slumps.

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We made a mistake by not selling Bocom earlier, which resulted in a larger loss. Ganyue Expressway reported RMB0.94 EPS on Tuesday, but the company decided to pay shareholders a dividend of merely RMB0.24 per share, which was a disappointment to us. The actual annual rate of return excluding the dividend tax is 1.22%, which is lower than the interest rate for demand deposits.

During the next stage, we will implement the short-term trading strategy we laid out in this post.

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What’s more, the CSRC’s activities also demonstrate that the market is still policy-oriented, as the new mutual funds were approved to try to control the liquidity tap of the market. At present, the equity market is stressed by three mountains: (1) the stunning amount of originally non-tradable equities, held by the major and minor stockholders, being unlocked; (2) a large number of proposed IPOs; and (3) hundreds of refinancing programs of the listed companies are under consideration and discussion. With such a background, the CSRC is still not inclined to adjust the stamp duty. We believe they will not lower the stamp duty until the SCI slipping to below 3,800. This measure, hopefully, would boost the SCI by around 1,000 points.

Yesterday afternoon the CSRC spokesman said the regulator would review the refinancing applications in a rigorous and cautious manner, suggesting the listed companies to carefully think over the size and timing of the refinancing as well as investors’ tolerance. We thus expected a moderate rebound today, and we may tap it to evacuate the positions.

To set out the investment strategy for the current bear: Forget the blue chips; focus on the mid-cap and small-cap stocks; take advantage of the possible rebound after slump, and the last one: focus on short-term trades.

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