Market Activity Surges, Key Indicators Near Historical Highs

Analysts have identified eight key indicators to monitor the market's "temperature," providing a framework to assess market conditions and identify potential overheating signals. The indicators include turnover rate, market leverage ratio, and the proportion of margin trading, which are considered core metrics for gauging market sentiment and risk levels.

According to the report, the market's activity level is significantly increasing, with some key indicators approaching or reaching historical levels that could trigger market adjustments. The annualized turnover rate, which measures market activity, has risen from 467% in July to 560% in August, nearing historical highs. The report highlights that if this rate remains above 600% for 2-3 consecutive months, it could indicate an overheated market.

Leverage funds are also a critical focus. The current proportion of margin trading to total trading volume is 12%, a level similar to the early stages of the 2014 bull market. Historical experience suggests that when this ratio exceeds 12-13%, regulatory authorities may intervene to cool the market, potentially leading to adjustments.

The report emphasizes that if the turnover rate remains above 600% for 2-3 consecutive months or the market leverage ratio exceeds 7.5%, it could signal market overheating. The market leverage ratio, calculated as the ratio of margin balance to total market value, is currently at 6.8%, up from 6.5% at the end of July but still below the 7.0-9.8% range seen from December 2014 to June 2015. The report notes that given the experience of 2015, investors and regulators are closely monitoring leverage levels, as exceeding 7.5% could indicate high market leverage and overheating risks.

Secondary indicators include trading volume and margin balance size. While these absolute values are approaching or exceeding historical highs, their relevance must be considered in the context of relative indicators due to changes in overall market size. The daily trading volume in the past week reached 2.7 trillion yuan, significantly higher than the 1.6 trillion yuan in July and 1.4 trillion yuan in the first half of the year. The report suggests that a daily trading volume of 2 trillion yuan is the minimum threshold for the market to continue rising. However, analysts caution that direct comparisons of absolute trading volumes may not provide clear information due to the market's much larger size compared to 2015.

The current margin balance in the market is 2.17 trillion yuan, nearing the historical peak of 2.27 trillion yuan in 2015. Since over 80% of margin loans are used by individual investors, this indicator is crucial for observing retail participation. However, similar to absolute trading volumes, the report advises focusing on relative indicators, such as the market leverage ratio.

Tertiary and quaternary indicators, while not providing immediate market insights, are important for observing long-term trends in fund inflows. These include new fund issuances, new account openings, and changes in household deposits. In the first three weeks of August, the weekly average issuance of stock and mixed-type mutual funds was 1.1 billion yuan, consistent with the year's average but significantly higher than the 2022-2024 period. The report notes that during strong market conditions, retail investors tend to increase their market participation through funds.

In July, the Shanghai Stock Exchange saw 1.96 million new account openings, consistent with the monthly average for the year but far below historical highs. This data has a one-month lag. The report suggests that if the current uptrend continues for 2-3 months, this figure may accelerate, warranting further attention. The concept of "deposit migration"—where funds move from the banking system to the stock market—is a hot topic. Recent data from the central bank shows a slowdown in household deposit growth, while non-bank financial institutions' deposit growth is accelerating. This trend supports the idea of funds flowing into the stock market, although seasonal factors may influence the data. If this trend continues, the stock market could see more incremental funds in the coming months.