Regarding the introduction of stock index futures, many people simply base their views on conjectures such as "stock index futures will increase the demand for large-cap stock resources" and "they will stimulate the market trend of large-cap stocks." In fact, these conjectures are very immature and quite superficial. The introduction of stock index futures highlights an important point: the main players in the market are starting to diversify their profit-making methods. They no longer need to make money solely by pushing up stock prices or indexes through a bullish strategy; they can also make money by going short. This view has been repeatedly discussed in earlier blog posts.
Last Friday, on the first trading day of the stock index futures, the May contract saw very active trading. However, there was still no sign of institutional investors, with most participants being individual investors transferred from the futures market. Judging from the competition between bulls and bears, these funds were very experienced. From the high opening and subsequent low closing of the four main contracts, to the end of trading at the close, IF1005's short side achieved a decisive victory, silently taking away substantial profits from the longs. As for the spot market on Friday, many people saw the significant high opening of the four futures contracts and assumed that the futures' rally would lead to strength in the spot market. Therefore, some funds eagerly bought into the spot market early in the session, waiting to harvest bullish profits. However, the futures followed their own path while the spot market followed its own course. As the four contracts approached the close, due to the main funds avoiding weekend risks, there was a rush to liquidate positions, leaving the longs utterly defeated. Spot market funds, already in a weak position, accelerated their decline even further.
Yesterday, while playing a certain online game, I had the pleasure of meeting a fellow blogger. I told him: one must be cautious when operating in the stock market and not invest too heavily. Currently, it is only appropriate to operate on stocks that exhibit four reliable technical patterns. Most small and medium-sized funds are accustomed to making money by going long and expecting bullish trends, unaware that such methods may become less common in the future. Because the main players can make more money by going short through both futures and spot markets. This is a blind spot in public understanding. As for why our futures index and spot index don't rise and fall synchronously like foreign markets, it is actually the result of the main players practicing reverse arbitrage models.
In "The Wide Amplitude Seismic Movements of the Stock Market Are Worth Noting," I mentioned: "For stock index futures to truly mature in China's stock market, it will take at least two to three years. In the interim, situations contrary to expectations may arise, and a significant amount of market capital will have to pay a heavy price."
For small and medium-sized funds, it is crucially emphasized in "Two Transformations Are Imperative" that investors need to change their entrenched mindset. Regardless of whether the main players go long or short, they can make money. And in the future, at least (within a certain period), the probability of going short will be greater than going long. This is key to understanding the essence of the market. Avoid single-minded thinking and ensure your mind remains open.
Which stocks are suitable for making money by going short? What are the four scenarios that easily cause margin calls?
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