Passive Index Funds and Active Capital Resonance Trends
Industrial and Commercial Bank of China (ICBC) experienced a sharp decline in May 2023 and another in August 2024, both of which were strikingly similar to each other when compared to the past year.
The stock prices of banks, especially large state-owned banks, exhibited two identical patterns, both characterized by a sudden and rapid drop after a period of continuous rise.
Looking back at these two processes, we find their similarities to be almost 100%, as if they were cast from the same mold.
Is such a high degree of similarity coincidental or non-coincidental?
If it is non-coincidental, what causes it?
Here is the process and conclusion of Ling Tong Sheng Tai's thinking on this issue.
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We have conducted a simple retrospection and comparison of these two processes: the commonalities of both processes are as follows: a rapid decline after continuous rise, with a quick and fierce drop, and a significant increase in turnover during the decline.
Before the decline, there was a continuous unilateral rise that lasted for a relatively long time, so first, there was capital-driven, and second, it was sustainable.
A large concentration of selling led to a sharp decline, and there was no capital maintenance buying.
Therefore, we need to think about who is driving the rise?
Who is selling in concentration?
We have tabulated the holding volume and holding amount of ICBC from the beginning of 2023 from active funds and passive index funds.
1.
At the end of 2022, 750 million shares held by active funds were held during a downturn, which is relatively rational and generally not short-term capital.
We consider this as stable holding, most of which do not fluctuate with the stock price.
2.
At the end of the second quarter of 2023, 960 million shares held by active funds were held after experiencing a rapid decline.
We infer that the holding before the decline was 960+X million shares, with an estimated X of 200-300 million shares of speculative capital, equivalent to the increase in the first half of 2024, because in the first half of 2024, the increase in ICBC's stock price was roughly the same as before May 2023, and the attractiveness to speculative capital was similar.
3.
In May 2023, during the sharp decline of ICBC, the transaction volume was nearly 30 billion yuan in 10 days, and then the stock price stabilized.
We believe this is the total scale of speculative capital exiting during the stock price fluctuation process, which requires a transaction volume of 30 billion yuan to digest.
4.
The background of the decline at the end of August 2024, the increase before the decline, and various aspects are all similar to May 2023.
Therefore, the digestion of speculative capital that leaves frantically due to fear also requires a transaction volume of 30 billion yuan.
Currently, this transaction volume has been realized, and the declining trend is also similar.
Ling Tong Sheng Tai believes that the past year and a half of two completely identical stock price changes contain regular patterns.
We call this trend the "passive index fund and active capital resonance trend."
This trend is the inevitable regular trend of passive index funds rising to become the mainstream capital in the market process.
Banks have repeated two completely identical total processes in the past year and a half, which is just a manifestation of this regular trend.
The same trend process will appear in the future.
We have seen in the table of active funds and passive funds of ICBC that from the end of 2022 to June 2024, the holding volume of passive funds has almost doubled, increasing from 1.4 billion shares to 2.6 billion shares, and the market value has increased by nearly 10 billion.
During the same period, the holding volume of active funds only increased by 350 million shares, and the market value increased by 3 billion.
After the decline in May 2023, the stock price of ICBC fell into a mixed horizontal position, and the purchase volume of active funds decreased.
Passive index funds have been increasing.
Since passive index funds themselves do not redeem after buying, the selling volume in the decline must not come from index funds, but from actively managed funds.
Therefore, the process of ICBC's stock price rise is actually mainly driven by passive index funds, with actively managed funds following behind, increasing or decreasing with the rise and fall of the stock price.
We can conclude that the main driving force of ICBC's stock price rise is passive index funds, and the main force of fluctuation comes from actively managed funds and other passively managed funds.
Policies have adopted the method of buying index funds led by the CSI 300 in the process of market collapse to save the market.
This active way of buying index funds to save the market has historically ended the dilemma of no capital buying for ICBC, coupled with no trapped chips, and few sell orders.
As the continuous index fund buying continues to rise, after a period of time, a certain increase is formed.
Under the influence of some specific factors, especially factors that can cause changes in investor psychology, the active funds that have already made a profit sell quickly.
This forms the two cycles we see, rising for a period of time and a certain range, and then suddenly falling sharply, and then repeating this trend, all because of this mechanism.
We call it a type of "passive index fund and active capital resonance trend," in which passive index funds continuously and continuously buy, becoming the dominant driving force for stock price rise, and active funds become a supporting role that creates fluctuations with a hesitant mentality.
After studying ICBC, Ling Tong Sheng Tai has summarized the general rules of the "passive index fund and active capital resonance trend" as follows:
1.
Stable passive index funds continue to add positions.
The reason for adding positions may be that policy funds save the market by buying index funds, or the market has entered the process of index funds surpassing active funds.
After the 2008 financial crisis, the U.S. market saw through the face of active management funds, and index funds grew on a large scale, eventually surpassing the scale of passive management funds and becoming the largest fund in the market, thus triggering a long bull market in the U.S. market's index-weighted stocks.
The long bull market of the seven U.S. technology giants is closely related to the growth of index funds and obtaining market dominance.
Currently, the four major banks have seen index fund-driven valuation repair, and the reason is policy funds saving the market.
2.
In a longer period of stable rise, because index funds do not sell during the existence period.
However, the continuous rise to a certain level will trigger active funds to take profits.
Since the rise is driven by passive index funds, when the profit-taking is strong, index funds will not provide more buying to offset the decline, thus forming a short-term overselling.
Overselling triggers a rapid decline, rapid decline leads to panic, panic stimulates overselling, forming an inevitable sharp decline, until the panic selling is digested.
In the valuation repair process driven by non-index funds, when the profit-taking is concentrated, active funds can increase buying to avoid panic selling breaking the upward trend.
In the trend driven by non-index funds, sharp declines are relatively rare.
When index funds drive, sharp declines are inevitable.
When the panic selling is eliminated, index funds continue to add positions, which will trigger a continued rise.
Interested investors can look at the trend of the U.S. stock market.
3.
Before the Chinese stock market actually gets out of difficulty, policy intervention is necessary, and it is impossible not to adopt an index-based approach.
In this case, ICBC will enter a new cycle of rising.
After the market stabilizes, in fact, an increasingly obvious rise of index funds has already occurred in China.
Actively managed funds have lost credibility and cannot raise funds.
The top fund-raising model has aroused public anger and can no longer continue to exist.
Therefore, index funds are the new life-saving straw for public funds, and they are very likely to develop low-valuation, dividend, and bank index funds, thus relaying policy-based index funds.
Next, let's look at the "passive index fund and active capital resonance trend" included in the Yangtze River Power.
In the data table of Yangtze River Power, we see that passive index funds and actively managed funds are pushing at the same time, and active and passive are working together to promote.
This is why Yangtze River Power has a continuous unilateral stable rise, because passive index funds and active funds are working together, and there is no dismantling after pushing up together, and active funds do not adopt a speculative mentality, and active funds also participate in value discovery, and continue to promote valuation rise.
The fundamental reason for the sharp decline of the four major banks after a period of rise is that active funds do not recognize the value of the four major banks and do not work together with index funds to promote valuation repair.
In the unilateral strong rise without adjustment in the stock price trend of Yangtze River Power, behind it is the joint promotion of valuation repair by two active and passive, and ICBC has not yet seen active funds recognizing the value of ICBC and actively participating.
Passive funds are also increasing positions on Pien Tze, but active funds have completely fled.
Due to the continuous, stable, and unilateral reduction of active funds, the stock price of Pien Tze has completely broken down.
Although the holding of active funds at the end of 2022 plus the holding of passive index funds is the same as the holding in the second quarter of 2024, it can be understood that all the Pien Tze sold by active funds have been bought back by passive funds, but the stock price has collapsed, because not only active public funds are selling, but also a large amount of other funds.
In the background of high valuation, everyone is selling in panic.
In this case, the increase of passive funds cannot stop the decline.
Therefore, the increase of passive funds due to market intervention cannot stop the decline.
Pien Tze is also a "passive index fund and active capital resonance trend," and its characteristic is that active funds sell a large amount, and the continuous buying of passive index funds is not enough to absorb the huge selling orders to form a decline.
In fact, most tracks are in this situation, because track stocks are actually the main components of the CSI 300, and the proportion of index funds they get is not inferior to ICBC, but they are cut in half.
We see the same in the data of CATL, where index funds are obviously continuously increasing their holdings, but active funds are continuously reducing their positions.
Under the condition of continuous reduction, the stock price is collapsing.
This collapse actually indicates that there are more reductions in other subjects, and the amount of reduction is very large, and the main and passive index funds cannot be symmetrical.Here is the English translation of the provided text:
Regardless of Pien Tze Huang or CATL (Contemporary Amperex Technology Co., Limited), when index funds stop increasing their holdings, their prices will continue to fall.
In the current situation where these two stocks have experienced significant drops, they still include purchases by index funds.
Once index funds stop buying, they will make up for the decline.
Industrial and Commercial Bank of China, along with the four major state-owned banks and the general banking sector, have benefited the most from index funds entering the market because they do not have as much existing sell pressure.
Their stock prices have significantly surpassed other stocks, not because they have received more funds, but because they lack sell pressure.
In other words, policy funds have completely resolved the long-term dilemma of banks having no funds by buying into the market through index funds.
During the process of policy funds buying indexes to rescue the market, when the four major banks' stock prices have increased by more than 50%, the purchases by active funds have been limited.
They have not bought in sync with index funds like they did with Yangtze Power.
From a negative perspective, bank stocks still need time to form active capital buying and actively buying.
Before active capital actively buys banks and promotes valuation repair in a value-discovery posture, only index funds continue to buy, which will lead to a slow rise followed by a sharp drop.
From a positive perspective, the future is actually a process of forming active capital returning to banks.
The past tracks in this market, whether it's Pien Tze Huang or CATL, have proven that index funds' purchases of them are no less than those of bank leaders, but their sell pressure is too great, and they simply cannot afford to buy.
The facts have shown that even if there is money to buy, these old tracks cannot be bought, and this is during the transition from the peak to the trough of their fundamental cycle.
Once index funds stop buying, these stocks will continue to fall.
The market's occasional rumors that track stocks will lead the stock market again have no objective basis.
After the market was rescued in February 2024, why didn't track stocks continue to lead?
This is closely related to the huge amount of sell pressure included in its holding structure, which requires more funds to push up traditionally.
Another reason is that Chinese society has been deeply hurt by speculation and group buying, and administrative agencies regulate and control fund behavior.
From a policy perspective and from the market's own laws, the hope and way out of leading the stock market out of the predicament is to buy banks and buy undervalued stocks; no other path can be taken.
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