[Investment Tips 24] Margin Balance and Advance-Decline Ratio. Measuring the Limits of Supply and Demand from Market "Margin Balance"

The "Invisible Inventory" and "Market Temperature" That Move Stock Prices

Hello everyone! This is FP Mitchy. I am in my 50s, single, and thoroughly enjoying the second half of my life with delicious wine, travel, and intelligent asset management.

This week started with the basics of charts, and in yesterday's "Investment Tips 23," we learned how to interpret "Volume," which is the energy that never lies. Have you started to get a feel for seeing the real heat of the market without being distracted by just the price fluctuations?

Today is the long-awaited advanced lesson. The theme is "Margin Balance," which uncovers the "invisible inventory" hidden in the market,and the "Advance-Decline Ratio," which measures the irregularities in the market's overall breathing.

You might think, "More difficult technical terms are appearing," but once you understand this, you will be able to grasp as concrete "numerical values" how much of a "future selling bomb" market participants are holding, and how much it has been overbought to the limit relative to its liquidation value or actual strength.

The "Reality of Supply and Demand" Seen in 25 Years of Financial Career and Risk Management

I have been in the financial industry for 25 years, and what I value most in loan screening and risk management is "whether the lent money will be returned properly," in other words, the "certainty of the exit."

Stock investment is exactly the same. When I once invested in Vietnam, I only looked at the entrance of "local growth potential" and completely ignored the market's "supply and demand (balance between sellers and buyers)" and "exit liquidity." To become an advanced investor, you need to be able to calculate the "limits of supply and demand" behind the market.

Margin Balance That Uncovers Future Selling Pressure

First, I will explain "Margin Balance." In the stock market, there is not only "cash trading" where you invest cash to buy, but also "margin trading" where you borrow money or stocks from a securities company to trade.

The outstanding balance of these margin trades is called "Margin Balance," and data is released weekly by the Japan Exchange Group (JPX).

• Margin Buying Balance: Inventory of buyers who "must sell" within 6 months in the future.

• Margin Selling Balance: Inventory of sellers who "must buy back" within 6 months in the future.

Stocks with too much "Buying Balance" have heavy upside

What we should pay attention to here is the "Margin Buying Balance," which becomes future selling pressure. No matter how good a company's performance is (we did this in the 3rd week!), stocks that have a large accumulation of "buying balance" from people who bought on margin thinking "it's cheap!" while the stock price was falling will not easily rise. This is because as soon as the stock price rises even a little, the margin buying force that was suffering from unrealized losses will all at once pour out selling, saying "phew, let's escape at break-even."

Advanced investors check the "Margin Ratio (Buying Balance ÷ Selling Balance)" of stocks they are interested in, and if this is unnaturally high (for example, 10 times or more), they decide to hold off on buying for a while, judging that the supply and demand for the stock has deteriorated.

Advance-Decline Ratio that quantifies the "frenzy and despair" of the entire market

Next is the "Advance-Decline Ratio," a powerful indicator for measuring market overheating. This is calculated by dividing the number of stocks that rose by the number of stocks that fell on exchanges like the Tokyo Stock Exchange Prime Market, expressing the overall market momentum as a percentage. Generally, a 25-day moving average is used.

The usage is surprisingly clear, and it measures the limits of supply and demand as follows.

• Advance-Decline Ratio of 120% or higher: The entire market is "overbought (euphoria zone)." Almost all sectors have risen to their peak, and chasing further buys from here is dangerous. This is a phase to quietly consider taking profits.

• Advance-Decline Ratio of 70% or lower: The entire market is "oversold (despair zone)." Even high-quality stocks with good performance are being unreasonably sold off as collateral damage. This is a great opportunity for mature investors.

Hitting the Limits of Supply and Demand! A Smart Preemptive Strategy for Mature Investors

By combining these two weapons, we wise investors in our 50s can execute highly expected-value maneuvers like the following.

1. Wait for the big bargain sale when the Advance-Decline Ratio is 70% or lower When the entire market is in total despair and the Advance-Decline Ratio drops below 70%, I spend my weekend drinking delicious wine while looking at the list of "excellent stocks with top-tier financials" that I carefully selected in the first and third weeks.

2. Target stocks with low margin buying balances from that list I look for stocks where the margin buying balance has not accumulated much (meaning no future selling pressure has built up), even though the whole market is crashing. Such stocks, the moment a wind of rebound blows through the market, will climb in price like a rocket because there is no selling pressure to suppress the upside.

3. Diversify your portfolio to solidify your defenses In asset management for those in their 50s looking toward retirement, single-point breakthrough gambling is strictly prohibited. I combine not only Japanese spot stocks but also All Country funds, gold ETFs, and even bear funds that shine during market downturns. While increasing the win rate by hitting supply and demand distortions, always keeping a "risk management" net in place is the secret to surviving and winning the second half of life without getting bored.

Summary: Let's Decipher the "Investor's Anguish" Behind the Numbers

Advanced stock investment is not about building sophisticated AI programs. It is about coolly deciphering, from public data like margin balances and the Advance-Decline Ratio, "the psychology of investors who are currently suffering from unrealized losses and are being chased by deadlines on the other side of the market."

Quietly wait for the limit of supply and demand known as their "fire sale," and smartly reach out (buy) when everyone else is terrified. This is the most elegant way for a mature investor to win.

Tomorrow's "Investment Tip 25" is the final day of the 5th-week market indicator investment, the professional edition. I will talk about the ultimate strategy to see through the true "market bottom" signal by outsmarting hedge fund positions using the "VIX Index," which quantifies market fear, and distortions in the options market. Please look forward to it!