Industrial: Pay attention to the direction of improvement in mid-year performance after shrinking the circles at both ends of the dumbbell.

One, after both ends of the dumbbell simultaneously "contract," how should we view these two types of assets? Since April, the "dumbbell strategy" of "small micro-disc+dividend" has once again outperformed, and at the same time, we have also discovered a rare phenomenon: both ends of the dumbbell are simultaneously contracting. Based on our "dividend contraction index" constructed based on the 40-day rolling returns difference between banks and CSI Dividend Index, and the "small micro-disc contraction index" constructed based on the 40-day rolling returns difference between micro-disc and CSI 2000, both have reached historical highs recently, indicating that both ends of the dumbbell have reached extremely high levels of contraction. Historically, it is rare for both ends of the dumbbell to simultaneously contract, the last time being in July-August of 2024. Behind the continued evolution of the dumbbell style in this round, on one hand, as uncertainties increase under tariff disturbances and the predictability of macroeconomic fundamentals weakens, the market is moving towards "small micro-disc+dividend" assets that are weakly correlated with macro logic to avoid. On the other hand, the style of the market is determined by incremental funds, and recently, incremental funds have mainly concentrated on configuration-type funds represented by insurance funds and trading-type funds represented by quantitative and speculative capital. As the market consensus on this style continues to solidify, the phenomenon of "grouping" continues to intensify, pushing these two types of assets towards more extreme levels of contraction. So how should we view these two types of assets at the current position? In the short term, after the extreme contraction, the probability of fluctuations at both ends of the dumbbell is also increasing. However, due to the differences in the attributes of the assets at both ends, the significance of the "contraction index" for the stock prices of the two may also be different. It can be seen that when the "contraction index" reaches a high threshold, micro-disc stocks tend to adjust in a way to digest the crowding of short-term trading (such as in January 2024 and December 2024), while for bank stocks, they are more likely to complete adjustments through oscillations (such as in January 2024 and January 2025), without leading to a systematic end of the market. Essentially, the "contraction index" we constructed is a type of sentiment index, more suitable for trading-type assets driven by liquidity and emotion, such as micro-disc stocks, while for configuration-type assets like banks, one needs to pay more attention to fundamentals, value indicators, and the like. As further evidence, whenever the "micro-disc contraction index" rises to a high level, the trading proportion of micro-disc stocks tends to increase simultaneously. At this time, the trading sentiment for micro-disc stocks is more extreme, and if the market wants to continue to push up, it will need more liquidity support. Once there is a lack of sufficient liquidity support in the future and the hotness of micro-disc stocks cannot be sustained, the risk of systemic adjustments in the short term will increase. Currently, with the trading proportion of micro-disc stocks reaching historical highs again, if there is a lack of sufficient liquidity support in the future, the pressure for short-term adjustments will also increase. For configuration-type assets like bank stocks, liquidity and sentiment are not the main contradictions determining their configuration value. The main factor triggering market adjustments is the decrease in configuration value. Measuring the configuration value of bank stocks using the difference between bank stock dividend yield and 10-year government bond yield, historically, when rising stock prices lead to a narrowing of the dividend yield to around 2.5%, it often triggers a significant market correction, while when falling stock prices lead to an expansion of the dividend yield, increasing the configuration value once again, bank stocks often continue their momentum and reach new highs. Currently, the difference between bank stock dividend yield and 10-year government bond yield is still at a high level of over 3.5%, and the core logic of the market momentum has not been significantly disrupted. With the mid-year report season approaching, one can continue to pay attention to changes in fundamentals, dividend rates, and other value indicators. In the medium term, before major macro changes occur, the dumbbell strategy still has configuration value. With domestic fundamentals and policies entering a period of stagnation, uncertainties such as external tariff disturbances and geopolitical conflicts still exist. Although the dumbbell strategy faces short-term adjustment pressure after the "contraction," after undergoing internal structural optimization, it may still be a high-consensus structural opportunity in the market. Two, after the "contraction," how will the market break the deadlock? The continuous evolution of the dumbbell style in the past was also because after the disclosure of first-quarter reports, the market entered a period of no earnings, and under tariff disturbances, the fundamental logic of many industries had changed, leaving the market lacking effective fundamental clues to guide it. As the period of disclosure of mid-year earnings forecasts approaches, it is expected to provide more prosperity clues for the market, consolidating new consensus, and may become a key lever for the market to break the deadlock. With the continuous disclosure of mid-year earnings forecasts, during the period from June to mid-July, prosperity investment may be more effective. We have calculated the correlation between the market's rise and fall rankings by month and the earnings growth rankings, and we can see that as the mid-year earnings forecasts are disclosed, the effectiveness of prosperity investment increases from June to mid-July, with the focus on current earnings in the first half of July only second to the latter half of April (annual report & first quarter report). In the coming period, earnings may once again become the key to excess returns. Looking at the performance of individual stocks, during the period of continuous disclosure of mid-year earnings forecasts and quick reports, the impact of earnings on the performance of individual stocks is very significant. Over the past two years, stocks that led the way from June to July mostly have higher mid-year earnings forecast and quick report growth rates, creating an environment where alpha can be mined from the bottom up. Three, "real gold is not afraid of the test of fire," paying attention to mid-year clues By screening the changes in profit expectations in various industries since the second quarter, the direction of improvement in mid-year earnings is mainly concentrated in some areas such as the export chain, price increase chain, AI, and finance, including: Motorcycles, lighting equipment, batteries, engineering machinery benefiting from global export competitiveness; White goods, passenger cars benefiting from consumer subsidies + export advantages; Non-ferrous metals, glass fiber, oilfield services, agrochemical products benefiting from price increases; Electronic components, electronic chemicals benefiting from the increase in AI computing power; In addition, there are financial sectors such as rural commercial banks and securities firms. Based on the match between stock price and performance, the direction of low positioning excellence includes the export chain (motorcycles, lighting equipment, batteries, passenger cars, engineering machinery), the price increase chain (glass fiber, industrial metals, energy metals, agrochemical products), electronics (components, electronic chemicals), securities firms, etc. This article is reprinted from the "XYSTRATEGY" WeChat public account; GMTEight editor: Xiao Yi Chen.