Tech Stocks at a Crossroads: Why the First Major Top May Still Be Months Away

The market is asking the wrong question. Instead of "is the AI bull market over?", investors should be asking "which top are we at right now?" The New Ning portfolio and ChiNext index have surged dramatically in Q2, creating a stark divide with other sectors. But Lin Rongxiong, a strategist at Guotou Securities, cut through the noise on June 4 with a straightforward answer: the first top hasn't arrived yet.

The M-Shaped Pattern That Wall Street Loves to Ignore

History rhymes louder than it repeats. Industry trend stocks almost never peak in a clean, sharp top. The dominant shape — across new energy (2020–2022), consumption upgrade (2019–2021), and the 2013–2015 tech bull — is the M-shaped double top:

• First peak = trading top (sentiment-driven, fundamentals still glowing)
• Second peak = fundamental top (earnings growth peaks, valuation stretches become untenable)

"Don't get hung up on calling the first top. The real selling opportunity is the second one." — Lin Rongxiong

The first top is insidious precisely because conditions still look excellent when it forms. Year-over-year earnings growth is near its peak, headlines stay bullish, and market participants extrapolate strength linearly. The second top typically arrives 1–2 quarters later — and historically sits only 10–15% below the first, not the dramatic crash retail investors expect.

Historical examples:

High-to-Low Rotation: Warning Sign or False Alarm?

When the AI theme cools and money rotates into laggards, bears start circling. But rotation alone is not confirmation of a top. It becomes dangerous only when combined with:

1. Moving average breakdown — Short-term rotation historically spares the 120-day MA. Breaking below the 60-day MA with the 20-day turning south changes everything.
2. Macro black rhinos — The 2021 "Mao Index" collapse coincided with regulatory tightening and rising Treasury yields. The early 2022 Ning Portfolio correction aligned with the Fed's aggressive rate hikes.
3. Leadership breakdown — If the leading stock itself starts cracking while low-tier sectors rally, you're closer to confirming the first top.

Five Red Flags That Precede the First Top

1. Peak brightness — Reported earnings are the most impressive they've been in the cycle (think CATL and Kweichow Moutai at their best during 2021).
2. Extreme crowding — Valuation percentiles, institutional holdings, and turnover ratios all spike simultaneously.
3. Extended valuation premium — Historical peak: 3–4 years of forward earnings baked in. When stocks price in half a decade of growth, margin of error evaporates.
4. Big-Small-Big rhythm — Core leader rises first, spreads to secondary names, then the leader peaks again with secondary stocks following. This pattern preceded every major new energy and consumption sector top.
5. Capital absorption — The main theme draws money from every other index. When CSI 500 and CSI 1000 weaken as the main theme peaks, it's a classic red flag.

What AI Is Showing Right Now

Several warning signals are present. The A-share high-to-low rotation index has reached its upper limit, signaling increasing probability of sector rebalancing. Capital absorption into AI has accelerated. But the critical confirmation is still missing:

• AI indices haven't broken below their 60-day moving average
• No macro black rhino has materialized
• Other sectors lack clear fundamental catalysts to sustain a leadership transition

The bottom line: What we're seeing looks more like overheating rotation pressure than the death of the AI industry trend. The first top is not confirmed — but it is being actively signaled. Monitor the 60-day MA, watch for macro surprises, and track whether leading stocks begin to crack under their own valuation weight.