In an incredibly important story that no one is talking about, Margin Debt is at an all time high. In fact, it is at dizzying levels of $451 Billion as investors continue to speculate in the stock market on margin. By comparison,this same margin debt was at $275 Billion at 2000 and $390 Billion at 2007 tops. By using this simple measure one can easily figure out what the stock market is going to do over the next few years.
If you can’t, you don’t belong in the stock market.
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Margin Debt. Just Another Scary Bear Market Confirmation. Google
NYSE Margin Debt Hits Record $451 Billion; Watch Out If Rate Drops
Margin debt hit a record $451 billion on the New York Stock Exchange in January, as investors borrowed more money than ever to buy into the post-financial-crisis bull market.
And that’s a good thing, for now. But rapidly rising margin debt can also signal a market top, especially if the rate of borrowing starts to drop below its 12-month average. That was a strong signal to get out of the stock market in late 1999 and 2007 — if 0nly investors had been able to see the data in real time. The NYSE margin statistics are released after a six-week delay.
“You can’t use this for timing, but you can use it to be prepared for trouble,” says Ricardo Ronco, head of technical analysis at Aviate Global in London who shared the charts here with me. The net level of margin debt “gives you an important color on the mentality of the market,” he told me.
The chart below shows the level of the Standard & Poor’s 500 Index, with the trend in NYSE margin debt below it. The important line in the middle panel is the 12-month moving average. As long as margin debt remains above its 12-month moving average, Ronco says, the market is probably “safe.” When it dips below the 12-month average, investors are using less of the rocket fuel needed to keep stocks aloft.
The bottom panel shows the trend in net margin debt, or credit minus debt. History doesn’t always repeat itself, but the parallels to 1999 and 2007 are obvious.
The chart below adds detail to Ronco’s analysis. The bottom panel shows the ratio between the Wilshire 5000 Index and NYSE margin debt to strip out the inflationary effect of rising stock prices. “This ratio tells us how much equities are running away from borrowing levels,” Ronco says. “Spikes in this ratio are associated with euphoria peaks driven by speculative excesses.”
Another indicator is the 12-month rate of change of the Wilshire and margin debt. When the margin debt ROC exceeds 40% (the red line in the middle panel), the market is in the territory of a top. More important is the combination of the two indicators. When the rates of change of equities (the blue line in the middle panel) and margin debt (the red line) diverge, watch out. Investors are still borrowing money to buy stocks that are no longer going up in value. They get the picture eventually and give up.
Margin Debt is still rising and well above its 12-month m.a. confirming the uptrend in prices; it is rising at 20%+ rate in line with stocks and there are some signal of important divergences developing between the rate of increase in stocks vs debt.
Investors are still partying like it’s 1999 — or maybe 2007 — but if you believe in technical indicators the charts might be showing signs of vulnerability. And remember, when the trend really turns, you won’t see it until 6 weeks later.
Ronco’s advice:Prepare your strategy for a market reversal, including stop-loss protection. And this: “If you want to jump on a bull market and see the margin debt is below the 12-month average, you should hold your horses.”