Bull Market Has Not Walked Away

Caifu Magazine | by Caifu Global


The spring of 2015 was a season in which the Chinese investors' expectations of a bull market were so high that they simply forgot what fear was.  The summer of 2015, especially after mid-June, was a season that the Chinese investors feared so much that they forgot bull market has ever existed.

Huge fluctuation has been a common characteristic in the Chinese stock market, where joining en masse and quitting en masse have always been the historical cycle.  "CAIFU" has always been seeking the traces before the stock market is filled with zealous investors and discovering opportunities before the stock prices are at the peak of the bull market, and this has always been the secret to success in the stock market.

The stock analysis section of "CAIFU" last year clearly indicated that entering the stock market at 2,000 points and leaving at 5,000 points is not a miracle.  In the stock analysis section of "", the August 2014 issue of  "CAIFU", stated that "with the decline of the real estate market, an interest rate and bank reserve requirement ratio cut become inevitable, which would lead to a new wave of market."   On the other hand, when everyone was daydreaming for a bull market at 4,500 points, the articles in April to July issues of the "CAIFU" were warning the investors about the potential risks in the stock market.

The China stock market has fallen to 3,000 points today, and the investors lost not only their capital but also their confidence comparing to May, therefore not many people still believe that the bull market still exists.  The ultimate question is that whether  the bull market has already walked away, as the answer to this question would determine our investment behavior in the future, especially under such an irrational atmosphere.

The unfavorable factors are not only exposed in the stock market, aside from the loss of confidence in the capital market after the plummet, the Chinese economy is also under great pressure.  Especially since the devaluation of RMB against the US dollar on August 11th, the fall of RMB will cause the capital to flow out, which would severely impact the Chinese economy, particularly the stock market.

An active devaluation of RMB led to the out flow of the fund, which exerted negative influence to the stock market in the short term.  However, this is not entirely disadvantageous in the long term.  If the RMB had not depreciated against the US dollar, it would have been not only very unfavorable for the Chinese economy, but would also also restricted the flexibility of the domestic monetary policies.  If protecting the currency rates were to set as the main objective of the policy, the country would have a very difficult time to implement flexible interest rates and monetary policies, and would be even more difficult to save the stock market.  The process of depreciation is the process of relieving pressures, despite the expectations of the deprecation will cause the capital to out flow.

With the fear of the stock market crash, people already forgot how  the first wave of the bull market started.  The main reason for the bull market was the fall of the interest rates, and the trigger of the first wave of market rise can be dated back to November 21, 2014 when the interest rates fell.  Furthermore, there is still room for further cut in interest rates.  In addition, as the funds outstanding for foreign exchange decreased, the chance for central bank to cut the bank reserve requirement ratio also got higher.  With the slowing down of the economic growth, more proactive fiscal policies will be implemented in the future.

Many people have not yet realized the most decisive power in the market, which would come from the companies that are going to be listed, rather than the capital from outside.  After the impact of  stock liquidation on the market evaluation, the real driving forces towards a long-term bull market are those big shareholders who do not speculate the market and have the desire to create a bigger market value.

We have just experienced a man-caused catastrophic stock market crash, and we are about to unveil the truth as investigation continues.  The search of the shady deals behind the curtain has already began, and we might witness the rebirth of a brand new market after the storm.

Leveraged funds were one of the main reasons that caused the market to rise and fall like a roller coaster over the past year.  Nowadays the investigation on the large amount of suspicious funds would cause the hot money to leave the market, which constitutes enormous downward pressure towards stock prices in the short term.  On the other hand, the capital injected by the government is already working, and the powerful institutional investors would become stronger if they survive in the market.  A large number of private equity funds suffered great losses during this wave of the market crash, and in the next few years many of them would be eliminated while some others would become giants.  Sooner or later people would realize that the stock market is no place for individual investors, and individual investors switching to institutional investors would become a future trend, which would also change the stock market operation mode in the future Chinese stock market.

There is not much difference in the Chinese economy today compared with the beginning of the bull market, but the forces behind the stock market are totally different, and the mentality of the investors has changed.  The stock analysis section of "CAIFU" in 2012 mentioned that the bull market in the future would be "turning out to be different from the bull market in 2005, but it is bull market after all, and we could only notice it until after it is over."

If the stock market falls to 2,500 points and bounces back to 3,000 points and then goes up, the Chinese stock market is still in the cycle of the bull market in the long term.  Although the Chinese stock market has experienced major set-back, the bull market has not walked away.