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Margin Debt, part II

We mentioned earlier the recent rise in Margin. Have a look at the following chart:

NYSE Member Firm Margin Levels

Sources: Bloomberg, RR&A

The raw numbers are not what actually matter -- and adjusting for inflation isn't significant.

The reason Margin matters is that it is potentially revealing of extreme sentiment and/or speculation (margin clerks can do major damage in a downturn).

There are a few ratios I would like to identify and convert to oscialltors relative to Margin:

Total Margin / Total Market Cap

NYSE Margin / Account Assets

Margin / Trading Volume

Total Margin / Market Volatility

The idea would be to test these versus historical tops and bottoms . . .

Thursday, January 18, 2007 | 11:44 AM | Permalink | Comments (32) | TrackBack (0)
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Comments

I agree with your suggestion to look at changes. From a casual observation it looks like the pattern of margin debt growth and decline is simmilar to the 1999 late-cycle bull market. Notice the drop in margin debt during the market decline March - June 2006. This suggests that the market decline was potentially driven by a winding-up of margin debt. This decline appears to have been larger than other declines in margin debt since the current bull market began in 2002. Moreover, this drop in margin debt appears to have approached the drop that occurred in the wake of the 1998 Asian crisis. Interestingly also, the increase in margin debt since July 2006 has been probably the most rapid of this bull market and looks similar in rate of increase (almost vertiginous) to the increase in late 1999. So the character of the two markets looks similar on first inspection. My guess is that having entered a late cycle explosive growth period, margin debt will continue to rise rapidly to a peak, which given the current rate of increase would not be far off. I would add that give that P/E ratios are still substantially lower than they were in 1999 there is scope for quite a large increase in margin debt. The extent to which stock market averages rise depends strongly on insider selling. To the extent that insiders have been selling heavily into this rally, the gains in the indexes have been more muted. Put another way the rapid growth in margin debt is another sign of the disconnect between corporate insiders and the general stock buying public. The key turning point will be when this reaches an exteme which might be seen in flat index averages combined with rapid margin debt growth - which may not be far off.

Posted by: Alex Grey | Jan 18, 2007 12:14:16 PM