Another red flag the market is raising is
growth in margin debt levels among companies listed on the New York Stock Exchange.
The Pearson correlation for the two series is 0.39 and the R - squared statistic is 0.15, indicating that monthly
change in margin debt explains 15 % of the same - month movement in the S&P 500 Index.
The modest predictive power found above for the recent subperiod derives from strong negative momentum in stock market returns after the largest
drops in margin debt.
The unsystematic variations of average returns across quintiles undermine belief that
variations in margin debt reliably predict stock market returns.
Because the equities market has been pushed up by this additional flow of funds, any sign that investor sentiment is shifting will lead to a
pullback in margin debt, and this leads to selling pressure in the equities market.
This is what you like to see... however in the beginning of a bull market not in a late stage with extreme
readings in margin debt & numerous distribution -LSB-...]
The global «QE» has been telling us more about market direction than the struggles of Sotheby's (BID), the overvaluation extremes, the record
leverage in margin debt and the net percentage of «overweight equities» combined.
There could be structural
differences in margin debt — more hedge positions — so the charts could be misleading, but they could be an indication of rising risk.
History tends to punish bull markets when speculative frenzies hover around a narrowing list of stand - outs (e.g., Netflix, First Solar, etc.), an increasing number of initial public offerings (e.g., Twitter, Container Store, etc.) and / or a dramatic
rise in margin debt.
Again, however, the important feature to observe is not so much the absolute level, but the cyclical tendency for
spikes in margin debt to accompany overvalued, overbought, overbullish market peaks.
The 12 - month
trend in margin debt slipped into negative terrain in December 2000 and then did it again in April 2008.
However, long - time market watchers find it disconcerting that previous
peaks in margin debt on the NYSE occurred in 2000 and 2007, a few months before U.S. stocks embarked on major corrections.
After adjusting for the size of the two markets, is about double that of the roughly $ 500 billion
in margin debt in the U.S.
Much of the recent
growth in margin debt has reflected an increase in the average loan size, which has risen by around $ 13,000 to $ 107,000 over the past year.
About $ 551 million
in margin debt was reported to the NYSE in August, compared to about $ 471 million last year.
«The growth
in margin debt has not reached exorbitant levels yet, as was the case just before the 2000s and 2007s market crashes,» he said.