No sense in forecasting the direction of a bipolar market

Let me quote Forrest Gump to describe China's stock market: "It is like a box of chocolates. You never know what you're gonna get." In just a few days, the market turned from heaven to hell.

Last week, Chinese investors were taken by surprise when the benchmark Shanghai Composite Index plunged 13.3 percent, its worst weekly performance since the global financial crisis in 2008. More than 9 trillion yuan ($1.45 trillion) in market value evaporated, which translates into a loss of 45,000 yuan for each of the country's registered 200 million stock accounts.

A bloodbath for small investors.

But just one and a half months ago, I was baffled by an unstoppable rally. Stocks were setting records every few days, hitting four-, five-, six-and seven-year highs. Although the boom wasn't based on economic fundamentals, investors were emboldened by what looked like the official endorsement of a bull run.

The headline of a People's Daily editorial declared: "4,000 points is just the beginning of China's bullish market."

Sporadic warnings that the bubble might burst were drowned out by a bullish chorus of analysts and officials. The bulls pointed to the following: the economy is undergoing a transformation, they said, and deepening reform of State-owned enterprises and national strategies, such as the "Road and Belt Initiative" to revive the ancient Silk Road trading routes, and "Made in China 2025" to upgrade the nation's manufacturing industry, will offer unlimited opportunities to Chinese enterprises and investors.

A bull market, some believed, was also a national strategy.

People's Bank of China Governor Zhou Xiaochuan strengthened that belief in March when he said capital flows into the stock market "are good for the real economy". Cuts in lenders' required reserve ratios and interest rates, meant to ease borrowing costs, were inevitably interpreted as measures to inject cash into the stock market.

No surprise, then, that the bulls were running freely, or at least until last week.

All the ostensible reasons for higher stock prices are still there. But stock prices have nosedived. Take CRRC Corp, the trainmaker behemoth formed by the merger of two previous enterprises. It was believed to best represent the Belt and Road concept, but nearly half of its value was wiped out in a couple of days, compared with its peak of 39 yuan ($6.3) per share just two months earlier.

The U-turn exemplifies the volatility in this market. Investors have become bipolar: they're either irrationally exuberant or excessively pessimistic. Many stories were told to support the rally, and many are being told to rationalize its decline.