After two weeks of consecutive declines, many are asking, "Is the bull market still here?"

No one can make such predictions, but one thing I am certain of is that incremental capital determines the market direction.

Many people like to talk about logic; expectations gaps are indeed important, but no matter what logic will eventually be priced through trading. Incremental capital determines the market direction, and the style preferred by incremental capital will most likely dominate the market.

After September 24th, who are the incremental capitals that lead the market?

Before the holiday, it was mainly institutions and foreign hedge funds that dominated, with retail investors and speculators following. This round of market movement started with significant meetings from the central bank, China Securities Regulatory Commission, and other departments, then was reinforced by significant meetings such as the Politburo meeting and the Ministry of Finance press conference, significantly improving the market's medium and long-term expectations for the economy.

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After the holiday, the direction was led by speculative capital and retail investors represented by margin financing. The expectations from several significant meetings were fully digested, and institutions and foreign capital began to wait for new expectations, but the market sentiment had been thoroughly activated. Coupled with the management's advocacy for restructuring, speculative capital and retail investors represented by margin financing continued to increase their positions. As shown in the chart below, although the market was volatile after the holiday, the margin balance rose rapidly, and margin financing, as incremental capital, dominated the market style. Speculative capital and retail investors like to trade on themes, so it is understandable that there were many speculative stocks flying around after the holiday.

After such a significant rise, both forces are a bit hesitant. However, there is a consistent incremental capital, which is the ETF that has net bought over a trillion this year. We can regard ETFs as funds that are more rational and have a medium to long-term style. Among the net purchase of over a trillion, the national team alone contributed more than five hundred billion, so it can be said that ETF funds were the left-side funds that were already laying out before the start of this bull market.

By the way, there is a symbolic event that means the influence of ETFs on the market has reached an unprecedented level. By the end of the third quarter, domestic passive index funds held a market value of 3.17 trillion yuan in A-shares, while active funds held a market value of 3.02 trillion yuan in A-shares, which is the first time in history that the market value held by passive investment funds has exceeded that of active funds.

This also means that the balance of A-share pricing has tilted towards passive funds. This is the first time, but I believe it is just the beginning. The vast majority of ETFs are weighted by market value, and ETFs corresponding to broad-based indices such as the CSI 300, SSE 50, and A500 account for most of the scale, which means that large-cap stocks and weighted stocks will benefit more.

Back to the main topic, it can be observed that after the National Day, ETFs began to flow out slightly. Although the outflow is not significant, the trend of inflow before the holiday has clearly slowed down. Combined with the increase in margin financing, it is easy to understand why large-cap stocks were weak and small-cap stocks were strong after the holiday.

However, although ETFs showed a slight net outflow after the holiday, the structural details are more important. According to Wind data, in the past month, the inflow of the CSI A500 ETF exceeded 96 billion, while the outflow of the CSI 300 exceeded 48.6 billion, with the CSI 1000, CSI 500, and CSI A50 outflows ranging from tens to hundreds of billions.

Here, it may be that funds do not look good on the large-cap market and redeem the CSI 300 ETF, or it may be that funds redeem the CSI 300 and subscribe to the CSI A500 ETF, but in any case, there is a clear trend that the CSI A500 has become an important direction for incremental funds to enter the market.

According to reports, as of November 17th, less than two months after the release of the CSI A500 index, the scale of fund products related to the CSI A500 has exceeded 210 billion yuan, approaching 220 billion yuan, setting the fastest growth record for the scale of index-related products.

Finally, we can also find that as A-shares have recently retraced, ETF funds have begun to flow back in, indicating that funds are not bearish on A-shares but are waiting for a retracement to enter the market. Among them, the A500 ETF is the main "channel" for incremental funds to enter the market.

What's so good about the CSI A500?

The main difference from the previous broad-based indices is balance. The top five weighted industries are electronics, power equipment, banking, food and beverages, and pharmaceuticals, with the configuration ratio not being too different, possessing both value and growth styles, and not having too high a risk exposure in a single style or industry. The same is true for individual stock weights; unlike some broad-based indices that are either overly weighted in Kweichow Moutai or CATL, it has the flavor of the S&P 500.