August 2025 Market Memo

Performance:

Please contact us to inquire about our performance.

August Investment Summary:

In August, we maintained a cautious stance. Facing increased market volatility and randomness, we focused our efforts on a few relatively certain opportunities. One was trading in the gold mining and agriculture sectors. Additionally, we conducted two swing trades in the Chinese market. Overall, we maintained at least 50% cash position, while shortening our trading time cycles to cope with market uncertainty.

Market Overview, Analysis, and Outlook:

Macro Environment

September is historically the weakest month on record, often leading the market to exhibit seasonal weakness during this period. However, this year is different from the past; with market risk factors unaddressed (USD, Treasuries), the market is charging ahead on the AI track. NVIDIA (NVDA) is capturing an increasingly larger market share, and the semiconductor sector is exerting a growing influence on the market. So, how do we view this wave of AI trends? On this issue, we conducted in-depth research. In semiconductor hardware, most companies' profits rely excessively on the capital expenditures of a few super tech giants, yet the "arms race" among big tech persists. We believe this trend will reverse at some point in the very near future. Factors include whether chip demand growth is unsustainable (fatigue is already evident in upstream semiconductor companies' performance) and the impact of China's accelerated domestic substitution amid US-China competition. (Note that AMD's trajectory in this process will differ from NVIDIA's.)

Another market hotspot is the Chinese market, an index we have remained bullish on during this period. Due to the high volatility of US listed Chinese stocks, our fund's position is not too large to control the risks.

Our view of the U.S. market remains unchanged—we continue to approach it with patience and respect. However, several important factors are being overlooked by many investors:

1. The market is exhibiting high divergence and low volatility characteristics. We can see that IWM, the Russell 2000, has clearly strengthened, but its continuity and stability are insufficient. The market is constantly switching between AI and small caps, growth and value, with funds displaying very high randomness. The index is slowly trending upward, but internal divergence is ongoing—these are all precursors to the market starting to tear apart. Our fund's investment logic and philosophy remain unchanged: avoid overly pursuing returns, seek stability, be pragmatic, and emphasize low drawdown and low volatility trading.

2. U.S. Treasury yields remain persistently high, but with the Fed's so-called loosening, market expectations for rate cuts are optimistic. However, this contrasts with the trends in precious metals and commodities, highlighting market divergence: on one side, large funds are heavily betting on rate cuts; on the other, large funds are betting on inflation.

3. Beyond seasonality, current market volatility has reached a low point (refer to the chart below). We expect volatility to return imminently.

4. Economic indicators are deteriorating, and we are also monitoring job market data, which plays a key role in our assessment of market risks.

5. U.S. stock valuations are nearing historical highs. Whether this constitutes a bubble is highly controversial, but what we observe is large tech stocks in a winner-takes-all scenario, with investor allocations overly concentrated and index composition too focused on a few stocks. Once a pullback occurs, it could easily trigger a snowball effect.

Capital Flows and Market Behavior:

1. Market participants, especially institutions, generally hold large positions. Whether mutual funds or hedge funds, their market bets are quite full—particularly hedge funds, aligning with our current expectations. Positions betting on AI are substantial, accompanied by concentrated investments where most funds target a few giants, lacking sufficient diversification.

2. Amid low volatility, funds shorting volatility hold significant positions. This is evident not only in VIX futures bets but also in CTA-type funds being essentially fully invested.

3. Narratives like "U.S. stocks can't fall," "U.S. stocks won't go down," and "Trump won't let U.S. stocks fall" are rampant. It is precisely here that we must maintain respect and caution toward the market.

U.S. Stock Market Outlook

We were bearish on the U.S. stock market last month, and this month's memo reinforces that view. As Warren Buffett said, "Be fearful when others are greedy." How do we quantify true greed? All the indicators we see point to greed: the market has been in risk-on mode for over a month, valuations are severely overextended, hot themes are being rotated frantically, retail sentiment is fervent, and leverage is high. This all points to a simple conclusion—we should exercise caution.

Future Outlook and Strategy:

Next month, we will continue to maintain a cautious stance and will not alter our own rhythm and plans due to localized euphoria in the market. At all times, we will proceed along paths that we can control.

Wei Cheng
CEO and Chief Investment Officer

Tranquil Tide Wealth

Written on August 31, 2025