Following the significant surge in A-shares yesterday, today's Central Huijin continued to aggressively purchase shares, initiating massive buying to lift the index shortly after the market opened slightly lower. As the index strengthened, Huijin reduced its purchasing intensity but maintained a continuous flow, and when A-shares experienced a late-afternoon dip, Huijin increased its volume again, leading the index to recover and close near its daily high. This action is clearly aimed at fostering an atmosphere conducive to a prosperous New Year for everyone. In contrast, the Hong Kong stocks, which did not have Huijin's support, still saw a decline today.
Looking at the announcement from Huijin yesterday: It fully recognizes the current allocation value of the A-share market and has recently expanded the range of exchange-traded funds (ETFs) it is increasing its holdings in, with a commitment to continuously intensify and expand the scale of these increases to firmly maintain the stable operation of the capital market. The use of the word "allocation" indicates that Huijin's increase in holdings is not a short-term trading action. It is not merely a simple support for liquidity but an active allocation, somewhat akin to the Bank of Japan's long-term increase in ETF holdings. This announcement has been well reflected in Huijin's operations over the past two days. We had previously criticized the national team's hesitant market intervention, which failed to prevent the liquidity crisis from worsening, but this announcement conveys Huijin's determination.
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We discovered yesterday, while browsing various stock forums, that many retail investors only became aware of the national team's ongoing market support after the announcement was made. It's a poignant reminder that, despite being fellow investors, there are significant information and cognitive barriers among different investors. If you were not aware of the national team's market support before the announcement, it suggests that you may not be a qualified investor. If you were aware, you could have reduced many losses during this liquidity crisis.
Why do we say that?
Firstly, the national team's market intervention can be inferred from two pieces of information: First, as early as October 23rd last year, Huijin stated that the Central Huijin Company had purchased ETFs and would continue to increase its holdings in the future. This information told us that in addition to directly buying into the four major banks, Huijin also began to support the market by purchasing ETFs. The second piece of information came on January 16th, when the four major CSI 300 ETFs and the SSE 50 ETF saw a significant increase in volume. It's improbable that normal retail investors would concentrate their purchases on just a few ETFs, especially during market declines. Such operational traces can only be attributed to large capital.
Of course, there were also whispers and speculations, and we tacitly began to regard this large capital as the national team. However, since Huijin did not issue an announcement, and major media outlets did not explicitly state it, the first significant volume increase in the CSI 300 ETF was on January 16th, the same day we mentioned in our closing review article that the national team had entered the market to support it.
Subsequently, our first action every morning upon opening our trading software was to check the ETF quotes, sort them by transaction volume, and open the intraday charts of the CSI 300 ETF and the SSE 50 ETF. An increase in volume was a clear indication that market support had begun. We also analyzed our detailed observations of Huijin's purchases in our closing reviews, such as our article on Monday, where we directly indicated that Huijin had started buying ETFs for the Zhongzheng 500, Zhongzheng 1000, and the ChiNext index, followed by Huijin's announcement on Tuesday about expanding the range and intensity of ETF purchases.If everyone has followed the Central Huijin's buying strategy, then the operation becomes simple. On January 16th, one could focus on investing in the CSI 300 ETF and the SSE 50 ETF, thus avoiding the subsequent collapse of small and medium-sized stocks. Then on Monday, we noted that Huijin began purchasing the CSI 500, CSI 1000, and ChiNext ETFs. At that time, due to the liquidity crisis, small and medium-sized stocks had plummeted to an unbearable level, with many good stocks being mistakenly sold off. After Huijin's purchase, it could alleviate the liquidity crisis, presenting a heaven-sent opportunity for a rebound from oversold conditions, which can be considered a classic risk-free arbitrage. The ChiNext index bottomed out on Monday and rebounded by more than 11% in three days, while the CSI 500 surged by over 14% in two days.
Today, we would like to share another detail: the recent surge in the CSI 500 and CSI 1000 is related to the quantitative funds' massive sell-off.
As you know, before the Spring Festival of 2021, the core asset style in the A-share market reached its peak, with everything being cyclical. After the peak comes the fall from the altar. After the Spring Festival of 2021, the small-cap style began to strengthen, and quantitative funds, which specialize in small-cap stocks, once again reproduced the "core asset group buying" bull market. The small-cap stocks strengthened, quantitative funds made huge profits, their scale expanded, and the small-cap stocks continued to strengthen, forming a spiral reinforcement. The final result was that small-cap stocks inflated into a bubble, and the scale of quantitative funds grew rapidly.
As the saying goes - everything is cyclical, and the market always repeats the cycle of rising too much leads to falling, and falling too much leads to rising. We predicted last year during the "dragon and phoenix dance" speculation that the bull market for small and micro stocks would eventually end, and the style of large-cap blue-chip stocks would eventually arrive. However, we did not expect it to come so violently and almost dragged the entire market into the abyss.
It can be seen that the index has been in a bull market before, which is in stark contrast to the bear market of core assets. But the heavens have their own cycle, and no one is spared. The Wind Micro-cap Index has fallen by 45% in the past four weeks, directly giving up the gains of two years.
Quantitative funds are long on small and micro-cap stocks, and then hedge through short selling to achieve a de facto T+0, as well as through futures on the CSI 500 and CSI 1000. However, short selling has been shut down by the China Securities Regulatory Commission (CSRC), and the CSI 500 and CSI 1000 have started to rebound due to Huijin's purchases. Quantitative funds are facing the plunge of the micro-cap stocks in their hands, and at the same time, they are also losing money on the CSI 500 and CSI 1000. Quantitative funds have to change their strategy and go long on the CSI 500 and CSI 1000 to hedge against the plunge of the micro-cap stocks in their hands. This is equivalent to the short position being forced to cover their positions, which is why the rebound of the CSI 500 and CSI 1000 is so violent.
Of course, all of the above is speculation. Finally, let's look at the market. As of the close, the Shanghai Composite Index rose by 1.44%, recovering the 2800 point level, and the ChiNext Index rose by 2.37%, with the total turnover of the two markets breaking through one trillion for the first time. The Hong Kong stock market fell today, as it was relatively resilient during the liquidity crisis of A-shares, and there is no Huijin support in the Hong Kong stock market, indicating that capital only recognizes the rebound from oversold conditions, not a reversal.
For the future market, we believe that the liquidity crisis of the index stocks such as the SSE 50, CSI 300, CSI 500, and CSI 1000 purchased by Huijin should be over, but the micro-cap stocks are still collapsing. Just like the bear market of core assets in recent years, the bear market for micro-cap stocks has just begun, until the next cycle. In addition, although the CSI 500 and CSI 1000 have rebounded sharply due to Huijin's support and quantitative funds' covering, there is no need to look at them except for those with logical reasons. We believe that the market style will gradually return to the large-cap style.We can consider that the A-share market has preliminarily completed the clearing of its chips, with both valuable and valueless stocks lying on the floor. One can draw an analogy to post-disaster reconstruction; if you were the one rebuilding, which people would you choose first: those who are physically strong and hardworking, or those who are flamboyant and frivolous? It is believed that most would opt for the former. The stock market is no different; after experiencing a major bear market, the market's risk appetite is relatively low, and the funds will first choose stocks with high dividends and stable operations, with typical representatives being large-cap blue-chip stocks. Only after the foundation is laid and the house is built will one think about decoration and fulfilling spiritual needs, which is when those stocks that tell stories will take the stage, hence the saying that blue chips set the stage and growth stocks perform.
As for which style will be stronger in the short term, it depends on who the incremental capital is. Currently, it is quite clear that large funds such as Central Huijin, insurance funds, and social security funds are the main players. Both public and private funds have been severely impacted and need time to recover and rebuild. The most elastic incremental capital is still foreign investment.