The dynamics of the securities market are intensely intricate, and at the forefront of this complexity are two fundamental parameters: volume and priceInvestors have long relied on well-established principles, such as the adage "volume precedes price," to guide their trading decisionsHowever, the relationship between volume and price is rife with complications, necessitating a contextual understanding for accurate interpretationIn this article, we will explore the volume-price dynamics observed over the past four months in the market, seeking to untangle some of these complexities.

Prior to the significant market shift on "September 24" last year, trading activity was relatively subdued, with the combined daily trading volume of the Shanghai and Shenzhen markets dwindling to around 500 billion yuanWhen compared to the market capitalization of freely tradable shares in these two exchanges and previous trading data, this was indicative of a lack of vigor in transactions—enforcement of quantity constraints was apparent

Advertisements

However, following the "September 24" event, a series of collaborative initiatives introduced by relevant authorities aimed at invigorating the market catalyzed a swift resurgence in activityNotably, the implementation of new policies surrounding central bank swap facilities and relending emerged as a significant morale booster for investors, sparking an ascension in both the volume and prices of securities.

Initial observations indicate that while there was not a significant influx of fresh capital into the market at the outset, existing funds began to flow more rapidly across various sectorsAs hot topics were ignited one after another, trading activity surged dramatically, rapidly soaring to levels exceeding one trillion yuan in daily transactionsAdditionally, retail investors acted swiftly to capture emerging trends, pushing indices higherNevertheless, it is crucial to remember that the pool of funds—primarily driven by individual investors—was inherently limited and showcased a degree of volatility

Advertisements

With indices climbing, there was a shift in the distribution of shares at these elevated levels, leading to a peak in trading volume on October 8, when transactions reached 3.4 trillion yuanSubsequently, a cap on further volume expansion was established, solidifying that peak as a crucial turning point in the market.

From mid-October, the nature of the market dynamics shifted significantlyThe one-sided rally was coming to an end, leading to increased market turbulence and a retreat of some short-term tradersConcurrently, however, long-term investors began to strategically enter the fray, driven by policy incentives; this flow included approximately 100 billion yuan that entered the A-share market via swap operations introduced by the central bank in the fourth quarter, as stated by authoritiesAlthough the diversification of market hot spots began, an overarching cooling trend was evident, which led indices to oscillate within specific ranges while achieving a more stable daily transaction volume of around 1.5 trillion yuan

Advertisements

During this phase, the indices fluctuated relatively smoothly, indicative of a rough balance between bullish and bearish forcesThis stability was largely attributed to the inflow of long-term funds, whereas the contraction of trading space for short-term investors resulted in diminished activity for individual stocks, restricting the market's ability to generate significant upward momentum.

In scenarios where the inflow of long-term capital begins to decelerate and divergences arise in related markets, such as the bond market, a cascading effect can occur that diverts investment away from stocksThis situation typically culminates in a contraction of transaction volumes, leading stock indices to gravitate toward the lower bounds of their recent rangeRecently, daily trading volumes have fallen below one trillion yuan, and indices have frequently tested support levels around 3,150 points, which exemplifies a pattern of declining prices coinciding with decreasing volumes—a notable concern for market stability.

In the current financial landscape, retaining a semblance of balance often necessitates that daily trading volumes do not dip below one trillion yuan

For any substantial upward movement in the markets, additional increases in trading volume are essentialRecently, trading volumes have returned to the trillion yuan mark, yet the surge remains relatively modestTherefore, the indecision exhibited by indices is not unexpectedIf the market is to witness a significant rally in the future, it is likely that corresponding increases in trading volumes will be paramount.

Interestingly, liquidity is not lacking in the current environment, as evidenced by long-term treasury yields remaining below 2%, reflecting a very low risk-free rate of return for investorsGiven these conditions, one might speculate that equity markets should flourish under such circumstances, as historical precedents suggestNonetheless, the present environment is fraught with complexities; mere low interest rates and sufficient liquidity are insufficient drivers for a major market surge

alefox