Teaching You to Trade Stocks 66: The Food Chain of Major Capital

2007/7/30 22:42:05

Because drawing diagrams takes time, the next lesson will address line segment issues. Today, let's talk about something more macro—the food chain of major capital.

The movement of the market at every moment is composed of the resultant force at that moment. If 100 million people participate in the market and every component force is equal and independent, then the overall operation of the market would, of course, differ from reality. The reality is that some component forces are extraordinarily larger than others. In this situation, analyzing the resultant force cannot be separated from analyzing these extraordinarily large component forces.

If in a real system there is only one such extraordinarily large component force, with all other forces negligible in comparison, then the so-called resultant force of the market is essentially no different from that single component force. For example, in stocks with extremely high levels of control, this situation often manifests. And such a system where one force is far greater than all others has stability that is prone to sudden changes. The situation of individual stocks will be discussed later; here let's first talk about the relationship between the market's resultant force and its component forces.

There's a very popular yet purely imaginary notion about so-called major market capital. In this popular fallacy, it seems the market's major players are just one group of people who control market movements, drawing every minute and second of the daily intraday chart. In reality, such so-called major players have never existed. The market has always been fractured among different interest groups. So-called major capital has always been divided into factions. Between factions, there can be collaboration and tacit understanding, but also backstabbing, sabotage, and the like. The game of the oriole, the mantis, and the cicada is nothing new either.

Operations at the major capital level are, of course, not something that pure technical analysis can encompass. Using warfare as an analogy, technical analysis deals only with tactical matters, while strategic matters cannot be resolved by technical analysis. For example, if you're a retail investor and you thoroughly understand this ID's technical theory, you can navigate the market with ease. But merely understanding this ID's technical theory is not enough to operate major capital. Of course, the technical level is a foundation, but it's only one aspect. However, regardless of what kind of capital it is, from the perspective of market trends, all any capital does is construct buy and sell points at different levels. Therefore, for retail investors, you don't need to know how the pie that falls from the sky was made—you only need to know how to eat it.

What must be made clear is that no major capital, regardless of background or level, can ultimately go against the overall economic trend. Capital doesn't come in just one group. There are only so many mountains to claim. Major players from 10 years ago, if they didn't evolve with the market, are now nothing. So any major capital, regardless of background or level, has another characteristic: the need to stir things up. Without stirring, there's no standing in the market ecosystem. The only difference is what gets stirred—it's merely shifts between different markets and sectors.

Within a single stock market, capital of different styles, backgrounds, and strengths each controls different sectors. The largest few constitute the top of the food chain. Generally speaking, these several pools of capital are all old hands who know each other's backgrounds well—backgrounds that often lie outside the market, not within it. Under normal circumstances, all parties maintain their unwritten rules and won't casually go to war with any one side. But this absolutely does not mean there are no wars among the biggest players—rather, such warfare is ever-present. It's just that everyone is waiting for one party to show weakness, upon which the rest swarm in to divide and devour it. In the history of China's capital markets, such events have occurred several times—all ancient history now, not worth mentioning.

Of course, the biggest players aren't fixed either; different eras bring different packaging and new titles.

Starting from the apex of this food chain and descending level by level to the final individual retail investor, there are quite a few tiers. For the largest major players, they maintain a certain stewardship over the ecological state of the tiers below them. Generally speaking, the emergence of a new top-tier force is something nobody wants to see. Therefore, those in the next tier down who are particularly active and show particular upward momentum will be targeted for elimination. For the top-tier major players, an ecological equilibrium across all tiers is the most advantageous situation. In this sense, if there are actors that are particularly vicious toward retail investors—ones trying to drive retail investors or certain tiers to extinction—then they will certainly become targets for elimination by the top-tier major players. Such events are all too common in capital market history. Generally, these targets for elimination are all similar to nouveau riche. Top-tier major players are like aristocracy, and aristocracy naturally looks down on the nouveau riche—especially when the nouveau riche disrupts the ecological balance of the entire market. If they don't exterminate the family root and branch by guilt by association, how can they remain aristocracy? Such elimination can of course be market-based, but it isn't necessarily market-based—and that's all I'll say on the matter.