Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

NYSE Margin Debt Raise Stock Market Key Questions

Stock-Markets / Stock Markets 2015 Sep 22, 2015 - 04:11 PM GMT

By: Ashraf_Laidi

Stock-Markets

It's happening again. The amount of margin debt balances at New York Stock Exchange member firms fell to $473,412 billion in August, down 2.9% from September. It is the 2nd consecutive monthly decline and the first back-to-back monthly drop since December-January.


Margin Debt and S&P500 Monthly Charts

The importance of these figures is highlighted by the historical relationship between peaks in margin debt, and tops in the stock market, typically measured by the S&P500.

Margin calls & forced selling

As markets enter the early stages of a rally, smart money (hedge funds, index funds) usually leads the ascent until it is joined by retail players to trigger the next buying wave. As the rally sustains itself to higher levels, existing and new payers add on to positons with varying use of leverage (buying on margin). Once markets peak out and/or start to pull back, buyers on margin are obliged to close or pare long positions as margin calls creep in. Clients' losses at member firms escalate especially as soaring volatility triggers the cascading of stops, prompting further market downside.

The high correlation between margin debt and equities reflects the increasing use of debt in purchasing stocks by institutional and retail investors, shedding important light on the circular loop between price performance and the use of margin debt.

1-3 month lags

July 1998 - The stock market top of July 1998 coincided with the peak in margin debt before the decline was propagated by the EM fallout & LTCM collapse.

March 2000 - The peak in margin debt of March 2000 coincided with the market high in the S&P500 right before the burst of the dotcom bubble, which was intensified by a new generation of margined trading, made easy by online trading.

July 2007 - The peak in margin debt of July 2007 occurred three months prior to the pre-crisis top in the market.

The 1-month lag has reappeared as the latest margin debt figures show leverage has fallen 7% from its April peak -- one month prior to the record high in the S&P500 and the Dow.

Margin buying & forced selling

The escalation and subsequent decline in margin debt highlights the risks of speculative stock buying at a time when equities are increasingly vulnerable to contracting earnings growth, slowing global trade, deepening China macro retreat, plunging commodities, falling capex and +$1.5 trillion in cancelled oil projects. The other risk to equities is the back-up of bond yields in an increasingly thin global bond market.

This will not help stock valuations, especially as chest-thumping reminders from Fed hawks fuel the risk of higher yields. And the last thing that's needed is a bout of forced redemptions from hedge funds and margin calls by retail investors.

How I used margin debt in January 2008 and October 2008 to forecast further damage in equities

Margin debt can best be utilized for continuation patterns during selloffs rather than timing of turning points. On January 2008, margin balance helped me make the case for an additional 25% decline after equities had already fallen by 14% from their peak.

Then in October 2008, as stocks had plunged 25% from their 2007 peak, we remained negative on stocks to the extent of predicting further Fed easing against the prevailing market consensus, which leaned towards US rates reaching a bottom at 2.0%.

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi CEO of Intermarket Strategy and is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice.

Copyright © 2015 Ashraf Laidi

Ashraf Laidi Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in